September 3, 2024 • 64 mins
The venture capital industry in the United States is a crucial driver of innovation and economic growth, providing early-stage funding and guidance to transform ideas into groundbreaking technologies and companies. Recent years have seen record levels of investment and dealmaking, fueling a wave of innovation across the country. However, the industry faces challenges from a complex policy environment and uncertainties arising from shifts in regulations and economic conditions.
Bobby Franklin of the National Venture Capital Association (NVCA) highlighted the historical growth of venture capital, emphasizing key policy shifts in the 1970s that spurred its significant expansion. Venture-backed companies have demonstrated outsized economic impact, with over 50% of public companies since the 1970s having venture capital backing. Despite this, there remains a disconnect between policymakers and the unique needs of venture-backed companies, particularly regarding regulatory challenges such as mergers and acquisitions and antitrust regulations.
The NVCA's mission is to foster rational policy discussions to preserve and enhance the nation's innovative capacity. Franklin emphasized the importance of engagement with venture-backed companies and highlighted the significance of seed and pre-seed investments as indicators of the entrepreneurial ecosystem's health. Despite short-term fluctuations in investment stages and sectors, long-term indicators remain positive, indicating continued confidence in high-potential ventures. Rational public policy, including targeted programs like startup visas, will be crucial in maintaining U.S. leadership in innovation and ensuring the growth of the venture capital industry well into the future.
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Dr. Matt Waller (00:10):
Welcome to the Matt Waller podcast, where we
look at success at theintersection of technology,
logistics, supply chain, retailand CPG, also known as the
retail value chain.
I want to clarify that thispodcast is distinct from my
responsibilities as a professorin the Sam M Walton College of
Business.
Nonetheless, it aligns with myaspiration to provide practical
(00:31):
insights to professionals andbusiness by showcasing companies
and people that can enhanceyour ability to manage, lead and
strategize and marketeffectively and the retail value
chain.
Before we dive into today'sexciting episode, I'd like to
thank our sponsor, new RoadCapital Partners.
New Road invests in proventechnology services and products
(00:54):
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They look for companies insupply chain and logistics, as
well as consumer-orientedcompanies.
For more information, go tonewroadcpcom.
I would also like to disclosethat I am a strategic advisor to
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I'd also like to recognizepodcastvideoscom for the
(01:18):
services they provide for thesepodcasts.
I'm very pleased with theirservices and now, without
further ado, let's get into theexciting episode.
I have with me today BobbyFranklin, who is the president
and CEO of the National VentureCapital Association, and if
(01:39):
you're interested in alternativeinvestments and venture capital
, I think you're really going toenjoy this.
We talk about so manyinteresting topics, but Bobby
has incredible experience.
He has been in this positionhe's been with the National
Venture Capital Association formore than 10 years but he has
(02:00):
all kinds of other experiencesthat are related to that and I
think you're really going toenjoy this conversation.
We talk about all kinds ofthings associated with venture
capital policy issues howventure capital spurs on
innovation and what innovationdoes to our country, how
(02:22):
important it is for our country.
We even talk about the role ofuniversities in this process a
little bit.
We talk about number of deals,size of deals.
We talk about unicorn activity,mega rounds a wide range of
topics and so I think if you'rean investor, you should probably
(02:48):
listen to this.
If you're a high tech inventoror early stage company founder,
you should probably listen tothis.
It's definitely worth listeningto.
I learned a great deal fromlistening to Bobby and I think
you will too.
(03:08):
Bobby, thank you so much forjoining me today.
I'm really excited to visitwith you.
Bobby Franklin (03:14):
It's great to be here with you, matt.
Dr. Matt Waller (03:16):
So one thing I'd like to start out with is
talking about VC deal activityin the United States, including
things like the number of dealsand the value of the deals and
how that's really changed overthe past 10 years.
Would you mind speaking to that?
Bobby Franklin (03:38):
I'd be happy to, and I can now speak to Tenure
Time Horizon, since I have nowpassed my 10-year anniversary as
the president and CEO of theNational Venture Capital
Association.
But it's also helped that ourfriends at Pitchbook have data
going back that far and we cantake a look at it like we do
each quarter.
What I look at when I look atthese numbers over a decade is I
(04:05):
see a continual increase indeal activity over a 10-year
period and sure, 21 and 22,.
We set records and all thatstuff.
But at the end of the day,whether we're reverting back to
the mean or not, I look at thisas a positive for our country to
(04:25):
say that there is still capitalbeing formed to invest in
entrepreneurs that are startingand growing great companies here
in the United States, and aslong as that is a healthy line
and we would like to see itincrease gradually over time.
Things come in cycles and so,like I said, we set records in
(04:50):
21 and 22 in terms of the totalnumbers, but as long as you see
that solid line going up and tothe right over a period of time,
to me that is a great story forthe entrepreneurial ecosystem
here in our country.
So I look at that line and I'mproud of that line and I think
that more people I wishunderstood what that line
(05:14):
represents and means, whetherit's the competitiveness of our
country, whether or not it's theopportunity for places like
Arkansas or elsewhere in thecountry to create new jobs at a
much faster rate thannon-VC-backed companies, whether
it's creating anchor tenantslike Scott Dorsey built a
(05:37):
company in Indianapolis, sold itto Salesforce and now he's got
a thriving venture studio andoperations in Indiana.
I mean those are what makesAmerica great.
And I love the deal activityline because to me that's kind
of a barometer of the overallhealth of the ecosystem.
Dr. Matt Waller (05:57):
Absolutely.
And you know, bobby, I know youknow Ross DeVall, the CEO of
Heartland Forward, and of courseI've known him a long time,
even when he was with the MilkenInstitute, and he's done a lot
of research over the years.
You know that drills down intoregions or even cities.
That shows that new ventureformation is one of the best
(06:23):
predictors of economicwell-being of a region, not just
the country.
Bobby Franklin (06:31):
I love the work that Ross does and we try to
amplify it every chance we get.
They often will share.
When they're coming out with areport, we try to send it out to
our contacts and channels tomake sure more people pick it up
.
And you're absolutely right,he's doing very important work
and it is it's great work.
It should show parts of thecountry that always feel like
(06:55):
they're left behind or they'reenvious of what happens on the
coast.
It really should be shared morebroadly, because any place that
has the right ingredients cancreate an ecosystem that can do
wonders for not only the peoplethat are there, but the people
(07:17):
that they will continue toattract.
Much like Northwest Arkansashas done Well, Bobby.
Dr. Matt Waller (07:24):
I know you have done a really terrific job over
the past 10 years of trying toeducate lawmakers and people
involved in regulation of theindustry about the importance of
venture capital to our countryand to our well-being, and
really it's important from adefense perspective too, not
(07:46):
just from the health of oureconomic growth and so forth.
Would you mind speaking alittle bit about how you have
done that and what you see inthe future in that regard?
Bobby Franklin (08:00):
Absolutely.
Thanks for the question.
I think you know one thing thata lot of folks don't stop and
think about is all right, wehave great companies, we have
great innovation, we have thesewonderful products and services,
(08:22):
and a lot of people don't stopto think well, where did those
come from?
How is it that an entrepreneuris now providing a service to me
?
What happened in that growthjourney and the one commonality
that so many successfulcompanies, and therefore
products and services, have, isthat they had venture capital
(08:43):
backing in the beginning.
And when we sit down withpolicymakers, we try to tell the
story about how venture reallygot going in the 70s.
And it got going after twoimportant public policy changes
happened.
One was the Orissa rules, whichallowed pension funds to be
(09:04):
investors in alternative assets,and two was a significant
lowering of the capital gainstax rate to incentivize longer
term investing.
And when you put those twothings together that happened in
the 70s coincidentally aroundthe same time that the National
Venture Capital Association wasfounded, which was 1973, you saw
(09:26):
this increase in companiesbeing formed that were venture
backed.
Now some scholars, academics,have gone back and looked at all
the companies that were formedsince that time that have gone
to be public companies and itturns out over half of those
(09:48):
companies have venture backing.
And when you look at the subsetof venture backed companies
compared to non venture backedcompanies, they're really
interesting characteristics.
First of all, a venture backedcompany the growth rate of
venture backed companies from1990 to 2020 over a 30 year
(10:10):
period, compared to totalprivate sector growth rate in
employment venture backed 960%growth rate compared to 40%
growth rate of non venturebacked companies.
So these are it's this high.
(10:32):
We call it high growth.
You know blitz scaling I mean,this is where folks like New
Road Capital come in.
At that growth stage whensomebody's ready, they prove the
concept, they know they've gotsomething to sell and they
really need to scale up and getmore sales people and get more
engineers to go to the nextlevel to service bigger
(10:53):
customers and so forth.
So you know the annualizedgrowth rate of VC backed
companies 8.2% over that 30 yearperiod, compared to 1.1% of
total sector.
Those are the types of thestories that we talk to
policymakers about so that theyhave interest in what are
(11:14):
important public policies thathelp support the venture,
investing into entrepreneurs,and what can we get more of and
what bad things can go we getless of.
Unfortunately, in Washingtonthere's both good and bad.
Dr. Matt Waller (11:32):
Well, you know, bobby, this elevation to
product, to growth, that, thatcycle of the life cycle of a
farm, really, which requires,especially for high-tech
companies, you, if you reallywant to scale, you've got to
(11:55):
have Venture capital.
It's rare to be able togenerate enough Revenue and
profit to be able to do thatwithout it, especially when
you're talking about things thatrequire a lot of programming,
expensive equipment, maybe evenexpensive regulatory hurdles to
(12:18):
overcome and and then to scaleyou need, as you said, you need
people, you need processes, youneed technology.
There's just so much that hasto go in doing that, but it's
one of the things our country isstill unequivocally the leader
and, and it seems you know, I Ialways, when I, when I hear
(12:43):
presidential candidates talk,being aware of this myself, I
always wish I would hear themtalk more about the importance
of that and how they would Tryto even facilitate it further.
Bobby Franklin (12:58):
I Couldn't agree more.
I think it's too important tothe success of our country and
our country's future For therenot to be a better understanding
by Anybody that has a role toplay.
That could be at the federallevel, for sure, but it all goes
also could be at the statelevel, yeah, and even the city
(13:20):
or region level, people having agreater understanding of the
risks that it takes, the capitalit requires, the talent
necessary for these companies togrow quickly, because it's it's
different than a mom-and-pop,it's different than an already
(13:40):
established company.
In fact, many times we inWashington have difficulty as
we're talking to policymakers,because they they understand
full well what a large fortune500 company wants or needs.
There are legions of people,lobbyists and Representatives of
those companies that everysingle day are telling
(14:01):
policymakers what's important tothe largest companies in our
country, and there's even a lotof advocates Talking to
policymakers from themom-and-pop perspective.
So the small business that'snot trying to scale up and be a
national business, but it's justdoing what it does.
Well, it's a restaurant, it's adry cleaner, it's a independent
(14:24):
coffee shop, it's something inthat community, there are
pillars in that community.
The policymakers understandwhat's important to them, but
what they really lack andunderstanding, I find, when
we're talking to them is butwhat about the company?
That's small by definition butits desire is to be a fortune
(14:45):
500 company and it's desires tobe a fortune 500 company really
fast.
You know, folks at the KaufmanFoundation have done wonderful
studies and They've come to theconclusion and there are many of
their reports that all net newjob creation Comes from these
sorts of high, hyper growth,fast scaling Companies.
(15:10):
That's where net new jobcreation comes from.
If you look at the largecompanies, they expand and
contract Depending on where weare in an economic cycle, and
mom and pops they come intobusiness and some of them go out
of business, unfortunately, andif you look at those over time,
they are about equal and theystay relatively the same.
(15:33):
But the net new job creationcomes from industries, companies
, products and services wedidn't even know about ten years
ago, where some entrepreneursaid here's a new idea, here's
something that I think will beimportant, and they get a
venture capitalist who's beenthrough this cycle with
entrepreneurs They've probablybeen an entrepreneur themselves
(15:57):
so they can help them be ontheir team, help them grow the
right way to be successful andto create jobs frankly out of
thin air.
Dr. Matt Waller (16:07):
You know, and the innovation that venture
capital feeds For these kinds offirms is so important to our
economy.
You know, the one of the bestways to try to deal with
inflation is through innovation,and a lot of research has shown
this to be true.
It it can do things that no onewould ever imagine.
(16:32):
You know, bobby, I'm right nowI'm reading Walter Isaacson's
biography of Elon Musk.
I love Walter Isaacson, I justlike how he writes.
But and this is the second bookbiography of Elon's I've read
the first one was Can't rememberwho the author was, but it was
called Elon Musk colon, tesla,spacex and the quest for a
(16:55):
fantastic future.
It's a good book, but this oneis terrific and I was, you know.
The book is talking about howElon Musk got involved in.
One of the first companies thatgot involved in them was zip to
newcom, and I was an earlyadopter of that and I remember
back then I tried it out, youknow I I used it on my computer
(17:18):
and then I would print it out onmy printer, because we didn't
have smartphones yet, and Iliked it.
I thought this is really neat,you know, and it gave additional
information.
I had never heard the storyabout how they were funded and
how they Really developed this,this technology.
(17:43):
But one thing that struck metoo about reading this book,
bobby, is that you know some ofthe people that were involved in
zip to, which became afoundation for lots of other GPS
kinds of solutions that we,even the ones we use today, you
know.
(18:03):
You know Elon made a lot ofmoney selling zip to, and then
he was a co-founder of PayPal.
Now some people might argue,was he a co-founder or not?
But he went into that next and.
But you know there's a wholeseries of things that, as you're
reading the book Well, eveneven like, for example, reading
(18:27):
about PayPal and seeing DavidSacks was involved in that I
didn't know that.
You know, I knew Peter Thielwas involved in it and some
other people.
But when you, when you look atthis, Not only does venture
capital seed innovation in aparticular company.
I actually think it seedsinnovation in people.
Bobby Franklin (18:53):
That is so true.
And I also.
I'm listening to the audiobookthat you're talking about,
walter Isaacson's Biography onElon Musk, and when I read or
heard, listen to the chapterthat you're talking about with
zip to, I thought, okay, he hada payout and then he went on to
do other things and I Wonderedout loud if, what if he couldn't
(19:20):
sell that company, what he havegone on to do, the other things
?
My guess is, just, given whatwe all have started to learn
about him, probably so, but it'san interesting question.
And what if?
And it's interesting when itcomes to public policy, because
right now we are facing acurrent administration that is
(19:44):
not Not.
Let me start over.
Let me start over.
Right now we're facing a lot ofheadwinds when it comes to
mergers and acquisitions, whenit comes to antitrust, we have a
current chair of the federaltrade community, federal trade
(20:05):
Commission, that doesn't believea company buying another
company is a good idea,buy-in-large, and they're
challenging almost everythingand that is already having a
chilling effect.
So, if you think about the, thelife cycle of many of these
innovative companies, someCompanies are destined to become
(20:27):
a public company and an IPO.
Unfortunately, in this riskybusiness, a heck of a lot of
early-stage companies fail andthey don't make it, and the most
likely outcome is a A merger oran acquisition, and so public
policy has a lot of impact onthe success of this ecosystem.
(20:50):
And and it's another area thatwe talked to policy makers about
, and you're hitting on it whenyou're describing this because
it's important for Entrepreneursand their investors and don't
forget who the investor is right, it's, yes, it's the VC, but
it's the limited partner thatmade the investment in that
(21:12):
venture, absolutely, and thoseare university endowments and
their pension funds.
Like I mentioned, that publicpolicy changed back in the 70s
that allowed pension funds to beinvestors their family offices.
There are others, but thosefolks need a return.
The entrepreneur needs a return, and most of the time, that
(21:33):
entrepreneur becomes a serialentrepreneur, and a lot of times
it's the third or fourthcompany that they founded that
ends up being the life-changingproduct or service that we all
come to love.
Dr. Matt Waller (21:48):
Absolutely.
You know, I think, what you'retalking about too, regarding
some of the regulatoryenvironment that we face.
You know, regulators a lot oftimes don't understand that if
you just look at the history ofregulation, you see the
unintended consequences areAbounding, they're everywhere
(22:13):
and unfortunately we're notsmart enough to know.
Well, if I do this, you know, ifI make it harder for a company
to go public, or if I make itharder for a firm to merge or
acquire another firm, thenthat's eventually going to make
it harder for investors to sayI'll invest in venture capital,
(22:37):
and that makes it harder forentrepreneurs to get capital to
build their ideas.
And all of that leads tostagnation in the economy,
because if Innovation is thething that keeps us alive and it
can also hurt us from a defenseperspective.
But it seems like a lot oftimes regulators, if you look at
(23:01):
their backgrounds, they don'thave a lot of experience in this
and they are looking at what Iwould call a first level effect,
not a secondary or tertiaryeffect.
Because when you start lookingat the compounding effects of
some of these decisions, it'sjust it.
(23:23):
It's stifling, it's actuallyscary, it could hurt our country
pretty seriously.
Bobby Franklin (23:29):
One we're dealing with right now and it's
just a couple weeks old.
Ever since the buy dole act waspassed and you increased the
activity with universityresearch and commercialization
and tech transfer in taxpayermoney going to universities
(23:51):
which leads to groundbreakingresearch, instead of there being
a white paper that sits onsomebody's shelf, there have
actually been lots of greatproducts and services that have
served humankind.
And when you think about thefact that there's this political
argument that we need to use,mark chin writes into federally
(24:17):
funded research that may havebeen a small part of something,
and this is all about the costof pharmaceutical drugs, but
there is an effort now toessentially undo what has worked
so well for 40 years and useMarch in rights to go on some
(24:39):
political scavenger hunt about asolution that they think will,
you know, solve some problemthat they have identified.
Yet they have no idea what theywould be doing to the
entrepreneurial ecosystem intoinnovation, because investors
(25:00):
would not want to touch any sortof university research that had
any federal funds attached toit, because they called into
question whether or not thatintellectual property is
actually intellectual propertythat is protected.
So we are now faced with thisissue where we're gonna have to
(25:23):
go and combat these efforts and,to your point, it's like
they're.
They're narrowly focused, theyhave their blinders on, they
have this one goal in mind andthey don't understand, or,
perhaps even worse, don't care,what the collateral damage is.
But it will be significant ifthis is allowed to happen and
(25:45):
all of the and and even thinkingabout it in the wake of what's
happened over the last couple ofyears, which have been positive
, where you had the chips andscience bill, which will
increase funding that NSF andothers can use along with
universities to create morebreakthroughs.
I mean we were stagnant on alot of the R&D funding by the
(26:08):
government as a percentage ofGDP over the last several
decades, and other countriesthat's where they started
becoming much more competitivebecause they were using
government dollars in researchand we haven't at the same level
that we did 30, 40 years ago.
And now you look at a possiblechange in public policy.
(26:34):
That going forward then wouldcall into question capital
allocators, inventors and therights that they have.
It would be drastic it'shorrible, I did not know about
that it's just a few weeks old,but it's one that we're trying
(26:55):
to get prepared for, and we'regonna have to go to battle well.
Dr. Matt Waller (26:59):
Thank you, bobby, for going to battle for
us.
I appreciate that.
You know, having seen,especially when you look at a
lot of people don't understandthe importance of, you know,
university STEM research inparticular.
But it's true, like what you'resaying is important.
(27:21):
There's IP that's createdthat's really valuable and can
turn into incredible companieseventually, and, and so
personally, I think thatuniversities need to be very
generous and allowing inventors,students and faculty to run
with the ball.
(27:42):
It's in the best interest ofour country, you know.
But, but also, bobby, the otheraspect of this.
I don't think a lot of peoplesee and I've seen it because
I've been in higher ed for 35years but being able to work in
a lab and learning how toconduct research and invent new
(28:12):
products or or concept, that isso valuable and we don't want to
do anything to stymie that,because people come out of these
experiences in working at labssometimes they start their own
business, or sometimes they goto work for an early-stage
company and then they mayeventually, you know, start
(28:35):
their own business, but thatlearning how to do scientific
research in a lab is extremelyimportant.
I think sometimes universitiesare getting attacked for some of
the research that people thinkis not very helpful to society,
maybe, but they're not lookingat the STEM research that's
(28:56):
going on.
They're looking at some obscure, esoteric thing that isn't
really funded in a big way.
But when it comes to STEMresearch, you know, I know like
here at the University ofArkansas they have there's a guy
named Alan Mantuth that hasdone incredible amounts of
research and they're doing a lotof research on things like an
(29:22):
alternative to silicon,traditional silicon chips that
could revolutionize processing.
So you know, and they also donea lot of work on nanotechnology
.
But yeah, you have some ofthese professors that are doing
incredible work along thoselines, but people often forget
(29:44):
oh, there's a bunch of studentsthere working on all this stuff
and then they go out intosociety and have a huge impact
it.
Bobby Franklin (29:55):
It's great to bring light to this issue, and
one of the things that I've hadthe privilege over the last
decade is to be on the front rowand see universities across the
country that do this really,really well.
And what do I mean by that?
I mean they encourage, like yousuggested, their faculty and
(30:15):
their students to get engaged.
They make it easy for facultyto take a break from teaching
and to go into a startup and forsuccessful entrepreneurs and
others to then come back intoteaching, and it's, you know,
one could say, well, it's a bitof a revolving door, yes, and
everyone is benefiting from that.
(30:36):
And you see universities thatencourage their IP and encourage
there to be some product orservice that comes out of that
research that happened.
And sometimes you seeuniversities that are on the
opposite end of that spectrumand many times they have with
(30:57):
all due respect to lawyers who Ihave a bunch of friends who are
lawyers who feel like it'stheir job to protect the
interest of the university ifthat happened there and
therefore they actually smotheran idea from ever becoming
something real, instead of theother way around, where the
(31:17):
universities that are doingeverything they can to help that
idea become a successfulcompany and when you do it that
way, a the university ends upgetting a lot more on the back
end.
Then they do on, you know,higher percentage of zero is
still zero and and they shouldbe Encouraging new company
(31:38):
formation.
They should be encouraging newideas, new products, new
services, encouraging people totake a chance and go run with
something they're gonna learnfrom that the.
The great thing about the UnitedStates, compared to a lot of
cultures around the world, isthat Failure is not some shame
on the family that then theyhave to go into hiding.
(32:00):
Failure is one step closer tosuccess.
They have learned how not to dosomething.
That means they're one stepcloser to actually doing what it
is that they want to accomplish.
And and the US has had thisgreat Culture around it's okay
if you don't succeed, try, try,get, and I think that's some of
(32:25):
the ingredients that have helpedus become the innovative leader
.
But we can't take it for granted, and other countries have been
Studying us.
They have been modelingpolicies after us, they have
been forming capital, they havecreated venture capital
(32:45):
ecosystems in their countriesand they're doing their darned
us to outcompete us and If we'renot careful, we're gonna make
some bad decisions along the waythat make it easier for them to
do that, and so part of what Ifeel our responsibility, the
NVCA, is, is to make sure Policymakers and others are aware of
(33:10):
how important this crown jewelthat we created and invented Is,
how delicate it is, how baddecisions can greatly influence
it, although it it does so overlong periods of time, and so
decisions made now may not havethe positive or negative impact
(33:31):
for some time, but we have to beable to have rational
conversations with one anotherabout what those impacts are.
Dr. Matt Waller (33:38):
We know some universities Allow their
professors, even encourage theirprofessors, to be consulting
with companies, whether they beearly-stage companies or
late-stage companies or startingtheir own companies.
Others have really restrictivepolicies to where I've known of
cases, where I've known of caseswhere an early-stage company
(34:02):
asked a professor to do someConsulting for them.
It was a stem stem type of deal.
The attorneys looked at theuniversity's policy and said we
do not want this personconsulting with us, this
professor, because Universitywill have claimed to any
innovations that we create.
(34:23):
And and when you look at a,especially a public university
that's supposed to be doing thepublic good, even though you
know you could say, well, theprofessor is making money on
this, but they are.
But that's great, you know, ifthey, if a company wants to
compensate them for helping Toinnovate or develop a technology
(34:47):
, then more power to them.
Bobby Franklin (34:49):
You know, and it's going to make the professor
that much better.
Dr. Matt Waller (34:53):
Absolutely yeah , because then the professor,
when he here she is teaching,they have more practical
insights Into what's going oncurrently at industry.
Bobby Franklin (35:07):
Well, let me give you another stat.
So, according to some academicresearch that looked at
companies and their type ofbacking in other words, where
they were V, whether they wereVC backed or non VC backed, if
you look at the VC backedcompanies from 1975 to 2015 so
(35:28):
40 year span Point one eightpercent of those companies
receive venture backing.
Point one, eight percent.
Yet when you look at thecurrent this is of a few years
ago the current total market capof Public companies, the point
(35:52):
one eight percent of companiesrepresented 57 percent of market
cap.
So it that the value that theVC back companies Created was
greater than the non VC backcompanies, even though it was
let barely over one tenth of onepercent.
(36:15):
And what you're talking aboutand the opportunity for
professors and others To beinvolved with as many companies
as possible that create suchvalue in our country is Is
something that we shouldencourage.
Each and every opportunity weget and that's that's kind of
(36:40):
the story of us talking topolicymakers is helping them
understand how important it isfor VC back companies to thrive
and For the policies that helpencourage new company formation
for them to happen.
(37:00):
So you know another stat toprove the point and and the one
that You're talking about, justabout how important it is for
universities being caged here.
Dr. Matt Waller (37:13):
That's great, you know, bobby, let's.
I want to talk to you aboutsome trends Now, but before we
do, I want to talk a little bitabout the structure of a venture
capital firm or Alternativeinvestment type of a company in
general.
But you know, you've gotgeneral partners and they're
(37:35):
very much responsible for theManaging the company, the, the
firm and the finances and doingdue diligence and Raising
capital, etc.
Then you've got the limitedpartners.
That are the investors and theydon't really have much saying
what's invested in, but they,they're, they're investing in
(37:58):
the firm, the venture capitalfirm.
Sometimes those Limitedpartners will invest in the
venture firm and Simultaneously,in some cases, also invest,
invest in certain investmentsalongside the venture capital
firm and the that.
(38:21):
And so this gets into a conceptthat you had, you and I had
talked about before we were.
We got on the recordingcrossover investors, and would
you mind speaking to what ismeant by crossover investors?
And then let's talk about thetrend we see there.
Bobby Franklin (38:44):
Yeah.
So the way we think aboutcrossover investors is when we
look at venture data our friendsat Pitchbook, who is NVCA's
exclusive data provider when wetalk about crossover investing,
what we're sort of talking aboutis capital coming from not
(39:05):
coming from a venture capitalfirm, but making investments
into venture backed companies.
So you have differentdefinitions of investors, you
have different definitions ofcompanies and whether they're VC
backed or not.
But what crossover investing?
The way we think about it isfirms that don't hold themselves
(39:28):
out to be a venture firm, butthey do make investments, many
times in the public markets,many times in, you know,
wherever they can, and they seeopportunities.
And certainly that's what wesaw in late 2020, all through
2021 and part of 22, where theTiger Globals of the world, or
(39:51):
some mutual funds, or even somehedge funds and others, looked
around and they said we seeopportunity in these venture
backed companies that are latestage, they haven't gone for an
IPO, they haven't had a mergerand acquisition yet, but they
might be ripe for that.
We see opportunities there andwe want to go into investing
(40:16):
into that asset class.
And when you're looking at theindustry, you realize that wait
a minute, there's a ton ofcapital coming in from outside
the venture industry, outside offirms that went out and raised
a specific venture fund, and soI think it's important to keep
(40:37):
track of that, because as fastas sometimes crossover investors
come in, many times crossoverinvestors leave and it's
important to kind of keep trackof that.
So what we see now in the datais that a lot of those crossover
investors that were here in2020, 2021, beginning of 22 have
(40:59):
largely left the asset class,and so now we're left to more
traditional how much has beenraised by venture capital firms?
How much dry powder is there?
In other words, they raised afund last year.
They haven't yet committed thatcapital, it's still on the
(41:19):
books and they can call it fromthe LPs to make investments when
they're ready.
And it's important tounderstand the industry by
understanding when crossoverinvestors come in and when
crossover investors leave.
Dr. Matt Waller (41:31):
Bobby, what do you think is the reason for a
lot of crossover investorsleaving?
Bobby Franklin (41:39):
I think it coincided with when the markets,
when interest rates started togo up, when public markets were
hit, when they had to look atthe other obligations they had
when they were in the venturespace, a lot of the valuations
of those venture backedcompanies started to shoot up.
(42:02):
In fact, one thing we talked toour board today they talk about
some of their portfoliocompanies who haven't.
They can't understand why theyhave to do a down round or they
can't understand why the valuethat they had the last time they
raised money shouldn't be thesame or higher value they have
(42:23):
today.
And part of that has to do withsupply and demand and market
circumstances.
And so I think that crossoverinvestors came in when there was
opportunity and now they haveleft because the other economic
circumstances have impactedtheir business so that they have
to look elsewhere.
Dr. Matt Waller (42:45):
And, if you would mind, I'd also like to
talk about seed and pre-seed andthe trends you're seeing there.
But first of all, speak alittle bit about seed and
pre-seed and then let's talkabout the trends you see.
Bobby Franklin (43:00):
Sure.
So seed and pre-seed and thesedefinitions continually change.
And what I mean by that is ifyou meet somebody, if you go to
a cocktail party with allventure capitalists, the way
they introduce themselves to oneanother is to describe what
(43:20):
stage they invest in and todescribe what sort of verticals
they invest in.
That's sort of commonplace.
So common conversation betweentwo VCs is well, we invested
seed stage series, a averagecheck size X and we're in
(43:42):
consumer or we're in AI, orwe're in life sciences or we're
in whatever.
That's how people identifythemselves to one another inside
the venture industry.
And so seed and pre-seed arereally those very early stages.
Maybe they've done a friendsand family round, like they've
got this idea it's two or threepeople, a dog in a garage,
(44:05):
proverbially but they're reallylooking for some capital to see
if they can get this idea offthe ground.
And I think about what's animportant barometer for the
entrepreneurial ecosystem.
There are different steps alongthe way.
(44:25):
I sort of look at first timefinancings, which is we can kind
of look at that as okay.
These are the very firstinstitutional checks that went
to an entrepreneur, and I thinkit's important that that's
always at a healthy level.
Just like you know, we talkabout overall deal activity, as
long as it's, you know, overtime, up into the right.
(44:46):
That says that there are stillentrepreneurs that are able to
come to the venture industry andget their very first checks,
and that's a good and positivething.
And a lot of times, those can bethose seed rounds or pre-seed
rounds that we're talking abouthere, although there are over
(45:07):
the last several years, andcertainly when we were hitting,
you know, the records over 21and 22, those definitions
started to really change and getvery specific and people would
say, well, I do pre-pre-seed orI do dirt investing, or they
come up with all sorts ofterminology in it.
And when you look at the seedand pre-seed, I think to me it's
(45:32):
just like what's the health ofthe industry, what's the health
of the opportunities that theecosystem has for entrepreneurs
to take chances?
And if you look at theinformation in terms of deal
activity as well, as you know,either by deal count or by deal
value, it's still higher Now.
(45:53):
It's lower than the last twoyears, but it's higher than 2020
.
And to me, that's a verypositive sign.
Dr. Matt Waller (46:02):
So, bobby, if you wouldn't mind speaking to
early stage activity as well anddifferentiating that from seed
and pre-seed?
Bobby Franklin (46:13):
So early stages just passed that right.
The early stages sort of thoseseries A rounds is still a young
company.
I forget off the top of my headexactly how Pitchbook defines
early stage, but you can go toPitchbook's website and they can
give you all that information.
And the interesting thing, justas an aside, when you think
(46:36):
about pre-seed, seed, earlystage growth rounds and then
when you're getting closer intowhat people typically start to
refer to as growth activity oreven private equity and some of
the things that happened inprivate equity distinguished
from venture capital, you cansee differences in the different
(46:58):
cycles and economic cycles.
So, for example, when thepublic markets go down, that
greatly impacts the later stagegrowth investors because they're
closer to that public market,whereas the stock market can go
up, the stock market can go down.
(47:20):
You can have all these thingshappening over here.
That doesn't usually impactseed stage or early stage
investing.
It takes longer for that totrickle down to impact that.
So when you have this line anddifferent stages of investing,
you understand that differentinputs impact what's happening
(47:44):
at those different stages ofinvestment and hitting a given
point in time.
So you look at early stageinvesting not unlike what we saw
in seed and pre-seed and againwe see that there was a lot of
it the two years prior comparedto this year, and even this year
(48:06):
is lower than we saw in 2018,2019, and 2020.
But if you plotted that lineand you looked at it, it feels
like we're reverting back to themean and it feels like it's
still healthy.
It's still higher than it wasin 2017, higher than it was in
2016.
(48:28):
And the other thing when you'relooking at data with regard to
venture capital, you have toremind yourself all right, a
venture capital firm, a venturecapital fund, the LPs that
invest in it, it's a closed fund.
It's not like a hedge fund orsomething else where you've got
redemption rights, etc.
(48:48):
Those LPs are signing up for a10-year period with this fund
and oftentimes.
In fact, at our CFO task forcemeeting back in November,
somebody asked a question hasanybody actually ever closed
down a fund that was exactly 10years and hardly any hand went
(49:09):
up in the air, meaning thatalmost every 10-year venture
fund has provisions in the LPA,the limited partner agreement,
that extends it for another fiveyears and many times even
longer, if there are stillportfolio companies that are
backed by that fund and goodreasons why you wouldn't want to
kind of shut it down yet,because you still have some
(49:31):
harvesting of those investmentsto do, then there's no reason to
.
So I lay that out there becauseit's important.
Whenever you're looking at anydata with regard to venture
capital, you have to keep thatin mind and you have to think
about vintage years.
So even though, for example,this year's data looks a lot
(49:55):
less than the previous two years, a lot of people that have been
around this industry a lotlonger than I have get excited
because they know that, okay,the last two years had
valuations that were really highand some of those are going to
have to come down.
And investing now means more duediligence and it means more
(50:19):
finding the price that probablyis the right valuation of that
company.
It means more discipline in howthat company grows and many
times the investments that arehappening right now will turn
out, in an average, seven oreight years from now, to be the
(50:39):
better investments than the onesthat happened in 21 and 22 when
we were setting these datarecords in terms of the amount
of capital in the industry.
But again, you're at differentvaluations and you don't know
how that company is going toturn out until several years
from now.
So you have to think about okay, this is a really good time to
(51:00):
invest because typically afteryou come off these record
numbers you're into the reallyreally good vintage years for an
investment fund.
Dr. Matt Waller (51:13):
This reminds me of a famous quote from Warren
Buffett.
You know he is known for sayingwhen everyone's greedy, be
cautious, when everyone'scautious, be greedy.
That may not be exactly it, butsomething along those lines.
Bobby Franklin (51:34):
I well, I think it's.
There's a lot to it, right, andwe will most likely see a lot
of that bear out when we look atreturns five, seven years from
now.
Dr. Matt Waller (51:47):
If you would mind, let's talk just briefly
about what they call mega rounds, where the deal size for a
round is greater than a hundredmillion dollars.
Just from looking at and I knowthe mega deal rounds are not
(52:12):
like they were during 2021 and2022, but judging from the news
just things that I read I getthe sense there's still, you
know, in terms of the bigpicture over the last decade,
there's a lot of you know, megadeals, mega rounds occurring.
(52:33):
Is that right?
Bobby Franklin (52:35):
Well, there is.
I mean, according to the pitchbook data, you look at the mega
deal activity and you look at2014, 2015, 2016, 2017, and that
was, I call that, one sort ofplateau and then 2018, it more
than doubled, and the next threeyears it stayed almost twice as
high as it did the previousthree years.
(52:56):
Then you had what we've beentalking about this 2021, 2022,
which are kind of abnormal years, and you look at what we are
seeing as a result of 2023, andit's higher than that plateau of
2018, 2019, and 2020.
So you're absolutely right thenumber of deals, the value of
(53:17):
those deals, is still veryhealthy.
It's just not as much as it wasthe previous two years.
And again, that to me coincideswith those crossover investors,
those non-traditional ventureinvestors coming in and making
investments in certain companiesat high valuations, which
(53:39):
really drive these sorts of datanumbers right.
I mean you can have one dealthat makes a big difference in
what we see in this data,because many times one mega
round in some well-known startupat a later stage can make up
(53:59):
for almost the rest of theindustry.
If you look at the dollars, Imean that's so much activity is
happening in these mega roundsthat.
It's far bigger than what wesee in traditional venture space
.
Dr. Matt Waller (54:14):
And I'd like to get your thoughts just a little
bit on life sciences versustech, because you know and I
know there's all kinds of lifesciences investing, but I also
know that from a deal countperspective, tech is about an
order of magnitude above lifesciences in terms of number of
(54:34):
deals.
But you know, and a lot of thelife sciences investing requires
FDA approval or some kind ofregulatory hurdle that you know,
the other the tech invest, techinvesting is not facing and it
really increases the length oftime it takes to for a fund to
(54:59):
recover, to have a realizationof any of the deal.
But would you mind speaking tothat?
What do you see going on?
Again, I know 2021 and 2022 arekind of different, but in terms
(55:21):
of the past 10 years, how doyou see those trends going?
Life sciences versus tech.
Bobby Franklin (55:28):
Well, they look very similar, albeit they're a
different scale.
Right To your point, a lot ofinvestment in venture happens in
software tech companies becauseit's easier, cheaper, sometimes
you can get your return quickerthan you can, to your point, in
a life science company.
But when we think about lifesciences, it's you know, there
are new categories that seem topop up each and every year.
(55:50):
You have your pharma, your bio,you have your medical devices,
you have your digital health.
Now you're gonna have a subsetof AI companies that are focused
in the life science space.
I mean, there are a lot ofcategories within the life
sciences grouping.
(56:10):
And back to what we talked aboutwith regard to public policy,
it matters, and I would givecredit over the last couple of
decades to changes that weremade at the FDA that have helped
us get to a better place, sothat venture-backed companies
which, by the way, areresponsible for about half of
(56:34):
the new drugs that are approvedat the FDA each and every year.
So people think about bigpharmaceutical companies are the
ones that are creating all thedrugs.
That's just not true, and inmany cases, the pharmaceutical
industry has outsourced theirR&D to the venture-backed new
(56:56):
companies that are creating newdrugs.
So you have this ventureindustry creating new drugs.
You have a venture industrycreating medical devices.
One challenge between the twoof those in public policy is
that once you get FDA approvalfor a new drug, then CMS
(57:16):
automatically reimburses forthat drug, unlike medical
devices where, once you get FDAapproval, you didn't have to
start additional clinical trialsto prove the cost savings, and
so you have vastly increased theamount of time.
(57:37):
People must make investments andcontinue to support companies,
whether or not they actually, atthe end of the day, get to a
place where they can bereimbursed for that, and that
has had a significant drag oninvestment in medical devices.
So it's another area that wetalked to policymakers about.
If we could follow the modelthat we did with regard to
(58:01):
pharmacological products, thenmaybe we can see an increase in
investment and new products andmedical devices that are coming
to market that can save livesand save money.
You've got the digital health,you've got the AI, you've got a
lot of areas where people arefocused on in life sciences, but
(58:22):
it like many other categories.
You see this steady increaseover time.
Again, we may be reverting backto the mean, considering the
last two years, but you stillsee kind of an increase,
certainly over 2019, and we'rehappy to see that.
Dr. Matt Waller (58:40):
I'd also like to talk a little bit about
unicorn deal activity.
One thing that brought this tomind was yesterday, or day
before yesterday.
I ran across an article thatwas quite interesting and it was
looking at universities whohave graduated students, alumni
(59:01):
that eventually got one toco-found or found a unicorn.
And when we say unicorn atleast the way I understand it,
unicorns are firms that have avalue of over a billion dollars.
And the number two university,I mean and the world, is Tel
(59:25):
Aviv University in Israel, andit's a small university and in a
small country, surrounded byits enemies, suffering a lot of
times, all kinds of challenges,yet that little university, tel
Aviv University, has created thesecond most number of graduates
(59:50):
who go on to co-found unicorns.
That's pretty amazing.
I had read a book a while backit seems like it was 10 years
ago, maybe more, I'm not surecalled Startup Nation, talking
about Israel having lots ofthese high tech startups, but
(01:00:10):
that got me to.
When I read that article Ithought well, I have noticed
again in the news.
It seems like quite a fewunicorn deals going on Again.
I could be wrong, but that's myperception.
Bobby Franklin (01:00:27):
Well, I know you're exactly right.
In fact, I think, in terms ofvalue and even in number, where
we were in 2018, 2019 and 2020,we've come down from 21 to 22,.
These what I would call outlieryears, but we are still at that
same level, just before we hitthose crazy numbers that we hit
(01:00:49):
in 21.
So, yes, there's still lots ofactivity in the unicorn, and it
is a billion dollars or more.
The other thing you point outby making the observation about
what's happening in Israel iswhat we see as we talk about
immigration policy here in theUnited States, and that is,
(01:01:13):
there have been studies thatlooked at unicorns here in the
United States and found thathalf or more than half of those
companies were founded orco-founded by an immigrant, and
that shows you that there's alot of talent around the world
that wants to come to the UnitedStates and start companies, yet
(01:01:37):
we have no visa pathway for anentrepreneur to do that.
It's ridiculous, and when youtalk to Republicans and
Democrats alike, they bothsupport this concept We've been
pushing for for nearly a decadeand a half, called a startup
(01:01:57):
visa, and what it means is ifthere is a brilliant
entrepreneur somewhere aroundthe world that wants to come to
the United States to start andgrow the company here with
creating new US jobs.
And you talk to policy makersand they say, well, why aren't
we rolling out the red carpetfor them?
(01:02:18):
And the answer is becausethere's no visa category and,
even though it's supported byboth sides, it gets caught up in
all of the debates around allthe issues related to
immigration, including those atthe southern border and those
around Dreamers and DACA andeverything else, and so we can't
get it across the goal line.
But I think it's important forus as a country to recognize
(01:02:43):
that we have created and builtthis great venture capital
ecosystem.
There are other countries thatare figuring out how to model it
and if there starts to be acompetition among countries to
(01:03:04):
attract the entrepreneurs tocome to their country and grow
it, we better get our acttogether and we better have a
way for those folks, whetherthey're coming out of Tel Aviv
University, whether they'recoming out of some place in
Europe, we better have a clearpathway for them to come and be
in the US to start and grow thatcompany on US soil.
(01:03:27):
That's about competition,that's about innovation, that's
about making sure we continue tostay a leader that we have so
enjoyed.
Dr. Matt Waller (01:03:38):
Well, bobby, it's really been a true honor
and privilege to visit with youabout venture capital and
funding of these early stagecompanies.
Thank you so much.
This has been very informative.
I really appreciate it.
Bobby Franklin (01:03:54):
Matt, it's been great to be with you once again.
I've enjoyed it as well.
Dr. Matt Waller (01:03:58):
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mattwallerpodcastcom.
I'll see you next time.
Welcome to the Matt Waller podcast, where we
look at success at theintersection of technology,
logistics, supply chain, retailand CPG, also known as the
retail value chain.
I want to clarify that thispodcast is distinct from my
responsibilities as a professorin the Sam M Walton College of
Business.
Nonetheless, it aligns with myaspiration to provide practical
(00:31):
insights to professionals andbusiness by showcasing companies
and people that can enhanceyour ability to manage, lead and
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Before we dive into today'sexciting episode, I'd like to
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services they provide for thesepodcasts.
I'm very pleased with theirservices and now, without
further ado, let's get into theexciting episode.
I have with me today BobbyFranklin, who is the president
and CEO of the National VentureCapital Association, and if
(01:39):
you're interested in alternativeinvestments and venture capital
, I think you're really going toenjoy this.
We talk about so manyinteresting topics, but Bobby
has incredible experience.
He has been in this positionhe's been with the National
Venture Capital Association formore than 10 years but he has
(02:00):
all kinds of other experiencesthat are related to that and I
think you're really going toenjoy this conversation.
We talk about all kinds ofthings associated with venture
capital policy issues howventure capital spurs on
innovation and what innovationdoes to our country, how
(02:22):
important it is for our country.
We even talk about the role ofuniversities in this process a
little bit.
We talk about number of deals,size of deals.
We talk about unicorn activity,mega rounds a wide range of
topics and so I think if you'rean investor, you should probably
(02:48):
listen to this.
If you're a high tech inventoror early stage company founder,
you should probably listen tothis.
It's definitely worth listeningto.
I learned a great deal fromlistening to Bobby and I think
you will too.
(03:08):
Bobby, thank you so much forjoining me today.
I'm really excited to visitwith you.
Bobby Franklin (03:14):
It's great to be here with you, matt.
Dr. Matt Waller (03:16):
So one thing I'd like to start out with is
talking about VC deal activityin the United States, including
things like the number of dealsand the value of the deals and
how that's really changed overthe past 10 years.
Would you mind speaking to that?
Bobby Franklin (03:38):
I'd be happy to, and I can now speak to Tenure
Time Horizon, since I have nowpassed my 10-year anniversary as
the president and CEO of theNational Venture Capital
Association.
But it's also helped that ourfriends at Pitchbook have data
going back that far and we cantake a look at it like we do
each quarter.
What I look at when I look atthese numbers over a decade is I
(04:05):
see a continual increase indeal activity over a 10-year
period and sure, 21 and 22,.
We set records and all thatstuff.
But at the end of the day,whether we're reverting back to
the mean or not, I look at thisas a positive for our country to
(04:25):
say that there is still capitalbeing formed to invest in
entrepreneurs that are startingand growing great companies here
in the United States, and aslong as that is a healthy line
and we would like to see itincrease gradually over time.
Things come in cycles and so,like I said, we set records in
(04:50):
21 and 22 in terms of the totalnumbers, but as long as you see
that solid line going up and tothe right over a period of time,
to me that is a great story forthe entrepreneurial ecosystem
here in our country.
So I look at that line and I'mproud of that line and I think
that more people I wishunderstood what that line
(05:14):
represents and means, whetherit's the competitiveness of our
country, whether or not it's theopportunity for places like
Arkansas or elsewhere in thecountry to create new jobs at a
much faster rate thannon-VC-backed companies, whether
it's creating anchor tenantslike Scott Dorsey built a
(05:37):
company in Indianapolis, sold itto Salesforce and now he's got
a thriving venture studio andoperations in Indiana.
I mean those are what makesAmerica great.
And I love the deal activityline because to me that's kind
of a barometer of the overallhealth of the ecosystem.
Dr. Matt Waller (05:57):
Absolutely.
And you know, bobby, I know youknow Ross DeVall, the CEO of
Heartland Forward, and of courseI've known him a long time,
even when he was with the MilkenInstitute, and he's done a lot
of research over the years.
You know that drills down intoregions or even cities.
That shows that new ventureformation is one of the best
(06:23):
predictors of economicwell-being of a region, not just
the country.
Bobby Franklin (06:31):
I love the work that Ross does and we try to
amplify it every chance we get.
They often will share.
When they're coming out with areport, we try to send it out to
our contacts and channels tomake sure more people pick it up
.
And you're absolutely right,he's doing very important work
and it is it's great work.
It should show parts of thecountry that always feel like
(06:55):
they're left behind or they'reenvious of what happens on the
coast.
It really should be shared morebroadly, because any place that
has the right ingredients cancreate an ecosystem that can do
wonders for not only the peoplethat are there, but the people
(07:17):
that they will continue toattract.
Much like Northwest Arkansashas done Well, Bobby.
Dr. Matt Waller (07:24):
I know you have done a really terrific job over
the past 10 years of trying toeducate lawmakers and people
involved in regulation of theindustry about the importance of
venture capital to our countryand to our well-being, and
really it's important from adefense perspective too, not
(07:46):
just from the health of oureconomic growth and so forth.
Would you mind speaking alittle bit about how you have
done that and what you see inthe future in that regard?
Bobby Franklin (08:00):
Absolutely.
Thanks for the question.
I think you know one thing thata lot of folks don't stop and
think about is all right, wehave great companies, we have
great innovation, we have thesewonderful products and services,
(08:22):
and a lot of people don't stopto think well, where did those
come from?
How is it that an entrepreneuris now providing a service to me
?
What happened in that growthjourney and the one commonality
that so many successfulcompanies, and therefore
products and services, have, isthat they had venture capital
(08:43):
backing in the beginning.
And when we sit down withpolicymakers, we try to tell the
story about how venture reallygot going in the 70s.
And it got going after twoimportant public policy changes
happened.
One was the Orissa rules, whichallowed pension funds to be
(09:04):
investors in alternative assets,and two was a significant
lowering of the capital gainstax rate to incentivize longer
term investing.
And when you put those twothings together that happened in
the 70s coincidentally aroundthe same time that the National
Venture Capital Association wasfounded, which was 1973, you saw
(09:26):
this increase in companiesbeing formed that were venture
backed.
Now some scholars, academics,have gone back and looked at all
the companies that were formedsince that time that have gone
to be public companies and itturns out over half of those
(09:48):
companies have venture backing.
And when you look at the subsetof venture backed companies
compared to non venture backedcompanies, they're really
interesting characteristics.
First of all, a venture backedcompany the growth rate of
venture backed companies from1990 to 2020 over a 30 year
(10:10):
period, compared to totalprivate sector growth rate in
employment venture backed 960%growth rate compared to 40%
growth rate of non venturebacked companies.
So these are it's this high.
(10:32):
We call it high growth.
You know blitz scaling I mean,this is where folks like New
Road Capital come in.
At that growth stage whensomebody's ready, they prove the
concept, they know they've gotsomething to sell and they
really need to scale up and getmore sales people and get more
engineers to go to the nextlevel to service bigger
(10:53):
customers and so forth.
So you know the annualizedgrowth rate of VC backed
companies 8.2% over that 30 yearperiod, compared to 1.1% of
total sector.
Those are the types of thestories that we talk to
policymakers about so that theyhave interest in what are
(11:14):
important public policies thathelp support the venture,
investing into entrepreneurs,and what can we get more of and
what bad things can go we getless of.
Unfortunately, in Washingtonthere's both good and bad.
Dr. Matt Waller (11:32):
Well, you know, bobby, this elevation to
product, to growth, that, thatcycle of the life cycle of a
farm, really, which requires,especially for high-tech
companies, you, if you reallywant to scale, you've got to
(11:55):
have Venture capital.
It's rare to be able togenerate enough Revenue and
profit to be able to do thatwithout it, especially when
you're talking about things thatrequire a lot of programming,
expensive equipment, maybe evenexpensive regulatory hurdles to
(12:18):
overcome and and then to scaleyou need, as you said, you need
people, you need processes, youneed technology.
There's just so much that hasto go in doing that, but it's
one of the things our country isstill unequivocally the leader
and, and it seems you know, I Ialways, when I, when I hear
(12:43):
presidential candidates talk,being aware of this myself, I
always wish I would hear themtalk more about the importance
of that and how they would Tryto even facilitate it further.
Bobby Franklin (12:58):
I Couldn't agree more.
I think it's too important tothe success of our country and
our country's future For therenot to be a better understanding
by Anybody that has a role toplay.
That could be at the federallevel, for sure, but it all goes
also could be at the statelevel, yeah, and even the city
(13:20):
or region level, people having agreater understanding of the
risks that it takes, the capitalit requires, the talent
necessary for these companies togrow quickly, because it's it's
different than a mom-and-pop,it's different than an already
(13:40):
established company.
In fact, many times we inWashington have difficulty as
we're talking to policymakers,because they they understand
full well what a large fortune500 company wants or needs.
There are legions of people,lobbyists and Representatives of
those companies that everysingle day are telling
(14:01):
policymakers what's important tothe largest companies in our
country, and there's even a lotof advocates Talking to
policymakers from themom-and-pop perspective.
So the small business that'snot trying to scale up and be a
national business, but it's justdoing what it does.
Well, it's a restaurant, it's adry cleaner, it's a independent
(14:24):
coffee shop, it's something inthat community, there are
pillars in that community.
The policymakers understandwhat's important to them, but
what they really lack andunderstanding, I find, when
we're talking to them is butwhat about the company?
That's small by definition butits desire is to be a fortune
(14:45):
500 company and it's desires tobe a fortune 500 company really
fast.
You know, folks at the KaufmanFoundation have done wonderful
studies and They've come to theconclusion and there are many of
their reports that all net newjob creation Comes from these
sorts of high, hyper growth,fast scaling Companies.
(15:10):
That's where net new jobcreation comes from.
If you look at the largecompanies, they expand and
contract Depending on where weare in an economic cycle, and
mom and pops they come intobusiness and some of them go out
of business, unfortunately, andif you look at those over time,
they are about equal and theystay relatively the same.
(15:33):
But the net new job creationcomes from industries, companies
, products and services wedidn't even know about ten years
ago, where some entrepreneursaid here's a new idea, here's
something that I think will beimportant, and they get a
venture capitalist who's beenthrough this cycle with
entrepreneurs They've probablybeen an entrepreneur themselves
(15:57):
so they can help them be ontheir team, help them grow the
right way to be successful andto create jobs frankly out of
thin air.
Dr. Matt Waller (16:07):
You know, and the innovation that venture
capital feeds For these kinds offirms is so important to our
economy.
You know, the one of the bestways to try to deal with
inflation is through innovation,and a lot of research has shown
this to be true.
It it can do things that no onewould ever imagine.
(16:32):
You know, bobby, I'm right nowI'm reading Walter Isaacson's
biography of Elon Musk.
I love Walter Isaacson, I justlike how he writes.
But and this is the second bookbiography of Elon's I've read
the first one was Can't rememberwho the author was, but it was
called Elon Musk colon, tesla,spacex and the quest for a
(16:55):
fantastic future.
It's a good book, but this oneis terrific and I was, you know.
The book is talking about howElon Musk got involved in.
One of the first companies thatgot involved in them was zip to
newcom, and I was an earlyadopter of that and I remember
back then I tried it out, youknow I I used it on my computer
(17:18):
and then I would print it out onmy printer, because we didn't
have smartphones yet, and Iliked it.
I thought this is really neat,you know, and it gave additional
information.
I had never heard the storyabout how they were funded and
how they Really developed this,this technology.
(17:43):
But one thing that struck metoo about reading this book,
bobby, is that you know some ofthe people that were involved in
zip to, which became afoundation for lots of other GPS
kinds of solutions that we,even the ones we use today, you
know.
(18:03):
You know Elon made a lot ofmoney selling zip to, and then
he was a co-founder of PayPal.
Now some people might argue,was he a co-founder or not?
But he went into that next and.
But you know there's a wholeseries of things that, as you're
reading the book Well, eveneven like, for example, reading
(18:27):
about PayPal and seeing DavidSacks was involved in that I
didn't know that.
You know, I knew Peter Thielwas involved in it and some
other people.
But when you, when you look atthis, Not only does venture
capital seed innovation in aparticular company.
I actually think it seedsinnovation in people.
Bobby Franklin (18:53):
That is so true.
And I also.
I'm listening to the audiobookthat you're talking about,
walter Isaacson's Biography onElon Musk, and when I read or
heard, listen to the chapterthat you're talking about with
zip to, I thought, okay, he hada payout and then he went on to
do other things and I Wonderedout loud if, what if he couldn't
(19:20):
sell that company, what he havegone on to do, the other things
?
My guess is, just, given whatwe all have started to learn
about him, probably so, but it'san interesting question.
And what if?
And it's interesting when itcomes to public policy, because
right now we are facing acurrent administration that is
(19:44):
not Not.
Let me start over.
Let me start over.
Right now we're facing a lot ofheadwinds when it comes to
mergers and acquisitions, whenit comes to antitrust, we have a
current chair of the federaltrade community, federal trade
(20:05):
Commission, that doesn't believea company buying another
company is a good idea,buy-in-large, and they're
challenging almost everythingand that is already having a
chilling effect.
So, if you think about the, thelife cycle of many of these
innovative companies, someCompanies are destined to become
(20:27):
a public company and an IPO.
Unfortunately, in this riskybusiness, a heck of a lot of
early-stage companies fail andthey don't make it, and the most
likely outcome is a A merger oran acquisition, and so public
policy has a lot of impact onthe success of this ecosystem.
(20:50):
And and it's another area thatwe talked to policy makers about
, and you're hitting on it whenyou're describing this because
it's important for Entrepreneursand their investors and don't
forget who the investor is right, it's, yes, it's the VC, but
it's the limited partner thatmade the investment in that
(21:12):
venture, absolutely, and thoseare university endowments and
their pension funds.
Like I mentioned, that publicpolicy changed back in the 70s
that allowed pension funds to beinvestors their family offices.
There are others, but thosefolks need a return.
The entrepreneur needs a return, and most of the time, that
(21:33):
entrepreneur becomes a serialentrepreneur, and a lot of times
it's the third or fourthcompany that they founded that
ends up being the life-changingproduct or service that we all
come to love.
Dr. Matt Waller (21:48):
Absolutely.
You know, I think, what you'retalking about too, regarding
some of the regulatoryenvironment that we face.
You know, regulators a lot oftimes don't understand that if
you just look at the history ofregulation, you see the
unintended consequences areAbounding, they're everywhere
(22:13):
and unfortunately we're notsmart enough to know.
Well, if I do this, you know, ifI make it harder for a company
to go public, or if I make itharder for a firm to merge or
acquire another firm, thenthat's eventually going to make
it harder for investors to sayI'll invest in venture capital,
(22:37):
and that makes it harder forentrepreneurs to get capital to
build their ideas.
And all of that leads tostagnation in the economy,
because if Innovation is thething that keeps us alive and it
can also hurt us from a defenseperspective.
But it seems like a lot oftimes regulators, if you look at
(23:01):
their backgrounds, they don'thave a lot of experience in this
and they are looking at what Iwould call a first level effect,
not a secondary or tertiaryeffect.
Because when you start lookingat the compounding effects of
some of these decisions, it'sjust it.
(23:23):
It's stifling, it's actuallyscary, it could hurt our country
pretty seriously.
Bobby Franklin (23:29):
One we're dealing with right now and it's
just a couple weeks old.
Ever since the buy dole act waspassed and you increased the
activity with universityresearch and commercialization
and tech transfer in taxpayermoney going to universities
(23:51):
which leads to groundbreakingresearch, instead of there being
a white paper that sits onsomebody's shelf, there have
actually been lots of greatproducts and services that have
served humankind.
And when you think about thefact that there's this political
argument that we need to use,mark chin writes into federally
(24:17):
funded research that may havebeen a small part of something,
and this is all about the costof pharmaceutical drugs, but
there is an effort now toessentially undo what has worked
so well for 40 years and useMarch in rights to go on some
(24:39):
political scavenger hunt about asolution that they think will,
you know, solve some problemthat they have identified.
Yet they have no idea what theywould be doing to the
entrepreneurial ecosystem intoinnovation, because investors
(25:00):
would not want to touch any sortof university research that had
any federal funds attached toit, because they called into
question whether or not thatintellectual property is
actually intellectual propertythat is protected.
So we are now faced with thisissue where we're gonna have to
(25:23):
go and combat these efforts and,to your point, it's like
they're.
They're narrowly focused, theyhave their blinders on, they
have this one goal in mind andthey don't understand, or,
perhaps even worse, don't care,what the collateral damage is.
But it will be significant ifthis is allowed to happen and
(25:45):
all of the and and even thinkingabout it in the wake of what's
happened over the last couple ofyears, which have been positive
, where you had the chips andscience bill, which will
increase funding that NSF andothers can use along with
universities to create morebreakthroughs.
I mean we were stagnant on alot of the R&D funding by the
(26:08):
government as a percentage ofGDP over the last several
decades, and other countriesthat's where they started
becoming much more competitivebecause they were using
government dollars in researchand we haven't at the same level
that we did 30, 40 years ago.
And now you look at a possiblechange in public policy.
(26:34):
That going forward then wouldcall into question capital
allocators, inventors and therights that they have.
It would be drastic it'shorrible, I did not know about
that it's just a few weeks old,but it's one that we're trying
(26:55):
to get prepared for, and we'regonna have to go to battle well.
Dr. Matt Waller (26:59):
Thank you, bobby, for going to battle for
us.
I appreciate that.
You know, having seen,especially when you look at a
lot of people don't understandthe importance of, you know,
university STEM research inparticular.
But it's true, like what you'resaying is important.
(27:21):
There's IP that's createdthat's really valuable and can
turn into incredible companieseventually, and, and so
personally, I think thatuniversities need to be very
generous and allowing inventors,students and faculty to run
with the ball.
(27:42):
It's in the best interest ofour country, you know.
But, but also, bobby, the otheraspect of this.
I don't think a lot of peoplesee and I've seen it because
I've been in higher ed for 35years but being able to work in
a lab and learning how toconduct research and invent new
(28:12):
products or or concept, that isso valuable and we don't want to
do anything to stymie that,because people come out of these
experiences in working at labssometimes they start their own
business, or sometimes they goto work for an early-stage
company and then they mayeventually, you know, start
(28:35):
their own business, but thatlearning how to do scientific
research in a lab is extremelyimportant.
I think sometimes universitiesare getting attacked for some of
the research that people thinkis not very helpful to society,
maybe, but they're not lookingat the STEM research that's
(28:56):
going on.
They're looking at some obscure, esoteric thing that isn't
really funded in a big way.
But when it comes to STEMresearch, you know, I know like
here at the University ofArkansas they have there's a guy
named Alan Mantuth that hasdone incredible amounts of
research and they're doing a lotof research on things like an
(29:22):
alternative to silicon,traditional silicon chips that
could revolutionize processing.
So you know, and they also donea lot of work on nanotechnology
.
But yeah, you have some ofthese professors that are doing
incredible work along thoselines, but people often forget
(29:44):
oh, there's a bunch of studentsthere working on all this stuff
and then they go out intosociety and have a huge impact
it.
Bobby Franklin (29:55):
It's great to bring light to this issue, and
one of the things that I've hadthe privilege over the last
decade is to be on the front rowand see universities across the
country that do this really,really well.
And what do I mean by that?
I mean they encourage, like yousuggested, their faculty and
(30:15):
their students to get engaged.
They make it easy for facultyto take a break from teaching
and to go into a startup and forsuccessful entrepreneurs and
others to then come back intoteaching, and it's, you know,
one could say, well, it's a bitof a revolving door, yes, and
everyone is benefiting from that.
(30:36):
And you see universities thatencourage their IP and encourage
there to be some product orservice that comes out of that
research that happened.
And sometimes you seeuniversities that are on the
opposite end of that spectrumand many times they have with
(30:57):
all due respect to lawyers who Ihave a bunch of friends who are
lawyers who feel like it'stheir job to protect the
interest of the university ifthat happened there and
therefore they actually smotheran idea from ever becoming
something real, instead of theother way around, where the
(31:17):
universities that are doingeverything they can to help that
idea become a successfulcompany and when you do it that
way, a the university ends upgetting a lot more on the back
end.
Then they do on, you know,higher percentage of zero is
still zero and and they shouldbe Encouraging new company
(31:38):
formation.
They should be encouraging newideas, new products, new
services, encouraging people totake a chance and go run with
something they're gonna learnfrom that the.
The great thing about the UnitedStates, compared to a lot of
cultures around the world, isthat Failure is not some shame
on the family that then theyhave to go into hiding.
(32:00):
Failure is one step closer tosuccess.
They have learned how not to dosomething.
That means they're one stepcloser to actually doing what it
is that they want to accomplish.
And and the US has had thisgreat Culture around it's okay
if you don't succeed, try, try,get, and I think that's some of
(32:25):
the ingredients that have helpedus become the innovative leader
.
But we can't take it for granted, and other countries have been
Studying us.
They have been modelingpolicies after us, they have
been forming capital, they havecreated venture capital
(32:45):
ecosystems in their countriesand they're doing their darned
us to outcompete us and If we'renot careful, we're gonna make
some bad decisions along the waythat make it easier for them to
do that, and so part of what Ifeel our responsibility, the
NVCA, is, is to make sure Policymakers and others are aware of
(33:10):
how important this crown jewelthat we created and invented Is,
how delicate it is, how baddecisions can greatly influence
it, although it it does so overlong periods of time, and so
decisions made now may not havethe positive or negative impact
(33:31):
for some time, but we have to beable to have rational
conversations with one anotherabout what those impacts are.
Dr. Matt Waller (33:38):
We know some universities Allow their
professors, even encourage theirprofessors, to be consulting
with companies, whether they beearly-stage companies or
late-stage companies or startingtheir own companies.
Others have really restrictivepolicies to where I've known of
cases, where I've known of caseswhere an early-stage company
(34:02):
asked a professor to do someConsulting for them.
It was a stem stem type of deal.
The attorneys looked at theuniversity's policy and said we
do not want this personconsulting with us, this
professor, because Universitywill have claimed to any
innovations that we create.
(34:23):
And and when you look at a,especially a public university
that's supposed to be doing thepublic good, even though you
know you could say, well, theprofessor is making money on
this, but they are.
But that's great, you know, ifthey, if a company wants to
compensate them for helping Toinnovate or develop a technology
(34:47):
, then more power to them.
Bobby Franklin (34:49):
You know, and it's going to make the professor
that much better.
Dr. Matt Waller (34:53):
Absolutely yeah , because then the professor,
when he here she is teaching,they have more practical
insights Into what's going oncurrently at industry.
Bobby Franklin (35:07):
Well, let me give you another stat.
So, according to some academicresearch that looked at
companies and their type ofbacking in other words, where
they were V, whether they wereVC backed or non VC backed, if
you look at the VC backedcompanies from 1975 to 2015 so
(35:28):
40 year span Point one eightpercent of those companies
receive venture backing.
Point one, eight percent.
Yet when you look at thecurrent this is of a few years
ago the current total market capof Public companies, the point
(35:52):
one eight percent of companiesrepresented 57 percent of market
cap.
So it that the value that theVC back companies Created was
greater than the non VC backcompanies, even though it was
let barely over one tenth of onepercent.
(36:15):
And what you're talking aboutand the opportunity for
professors and others To beinvolved with as many companies
as possible that create suchvalue in our country is Is
something that we shouldencourage.
Each and every opportunity weget and that's that's kind of
(36:40):
the story of us talking topolicymakers is helping them
understand how important it isfor VC back companies to thrive
and For the policies that helpencourage new company formation
for them to happen.
(37:00):
So you know another stat toprove the point and and the one
that You're talking about, justabout how important it is for
universities being caged here.
Dr. Matt Waller (37:13):
That's great, you know, bobby, let's.
I want to talk to you aboutsome trends Now, but before we
do, I want to talk a little bitabout the structure of a venture
capital firm or Alternativeinvestment type of a company in
general.
But you know, you've gotgeneral partners and they're
(37:35):
very much responsible for theManaging the company, the, the
firm and the finances and doingdue diligence and Raising
capital, etc.
Then you've got the limitedpartners.
That are the investors and theydon't really have much saying
what's invested in, but they,they're, they're investing in
(37:58):
the firm, the venture capitalfirm.
Sometimes those Limitedpartners will invest in the
venture firm and Simultaneously,in some cases, also invest,
invest in certain investmentsalongside the venture capital
firm and the that.
(38:21):
And so this gets into a conceptthat you had, you and I had
talked about before we were.
We got on the recordingcrossover investors, and would
you mind speaking to what ismeant by crossover investors?
And then let's talk about thetrend we see there.
Bobby Franklin (38:44):
Yeah.
So the way we think aboutcrossover investors is when we
look at venture data our friendsat Pitchbook, who is NVCA's
exclusive data provider when wetalk about crossover investing,
what we're sort of talking aboutis capital coming from not
(39:05):
coming from a venture capitalfirm, but making investments
into venture backed companies.
So you have differentdefinitions of investors, you
have different definitions ofcompanies and whether they're VC
backed or not.
But what crossover investing?
The way we think about it isfirms that don't hold themselves
(39:28):
out to be a venture firm, butthey do make investments, many
times in the public markets,many times in, you know,
wherever they can, and they seeopportunities.
And certainly that's what wesaw in late 2020, all through
2021 and part of 22, where theTiger Globals of the world, or
(39:51):
some mutual funds, or even somehedge funds and others, looked
around and they said we seeopportunity in these venture
backed companies that are latestage, they haven't gone for an
IPO, they haven't had a mergerand acquisition yet, but they
might be ripe for that.
We see opportunities there andwe want to go into investing
(40:16):
into that asset class.
And when you're looking at theindustry, you realize that wait
a minute, there's a ton ofcapital coming in from outside
the venture industry, outside offirms that went out and raised
a specific venture fund, and soI think it's important to keep
(40:37):
track of that, because as fastas sometimes crossover investors
come in, many times crossoverinvestors leave and it's
important to kind of keep trackof that.
So what we see now in the datais that a lot of those crossover
investors that were here in2020, 2021, beginning of 22 have
(40:59):
largely left the asset class,and so now we're left to more
traditional how much has beenraised by venture capital firms?
How much dry powder is there?
In other words, they raised afund last year.
They haven't yet committed thatcapital, it's still on the
(41:19):
books and they can call it fromthe LPs to make investments when
they're ready.
And it's important tounderstand the industry by
understanding when crossoverinvestors come in and when
crossover investors leave.
Dr. Matt Waller (41:31):
Bobby, what do you think is the reason for a
lot of crossover investorsleaving?
Bobby Franklin (41:39):
I think it coincided with when the markets,
when interest rates started togo up, when public markets were
hit, when they had to look atthe other obligations they had
when they were in the venturespace, a lot of the valuations
of those venture backedcompanies started to shoot up.
(42:02):
In fact, one thing we talked toour board today they talk about
some of their portfoliocompanies who haven't.
They can't understand why theyhave to do a down round or they
can't understand why the valuethat they had the last time they
raised money shouldn't be thesame or higher value they have
(42:23):
today.
And part of that has to do withsupply and demand and market
circumstances.
And so I think that crossoverinvestors came in when there was
opportunity and now they haveleft because the other economic
circumstances have impactedtheir business so that they have
to look elsewhere.
Dr. Matt Waller (42:45):
And, if you would mind, I'd also like to
talk about seed and pre-seed andthe trends you're seeing there.
But first of all, speak alittle bit about seed and
pre-seed and then let's talkabout the trends you see.
Bobby Franklin (43:00):
Sure.
So seed and pre-seed and thesedefinitions continually change.
And what I mean by that is ifyou meet somebody, if you go to
a cocktail party with allventure capitalists, the way
they introduce themselves to oneanother is to describe what
(43:20):
stage they invest in and todescribe what sort of verticals
they invest in.
That's sort of commonplace.
So common conversation betweentwo VCs is well, we invested
seed stage series, a averagecheck size X and we're in
(43:42):
consumer or we're in AI, orwe're in life sciences or we're
in whatever.
That's how people identifythemselves to one another inside
the venture industry.
And so seed and pre-seed arereally those very early stages.
Maybe they've done a friendsand family round, like they've
got this idea it's two or threepeople, a dog in a garage,
(44:05):
proverbially but they're reallylooking for some capital to see
if they can get this idea offthe ground.
And I think about what's animportant barometer for the
entrepreneurial ecosystem.
There are different steps alongthe way.
(44:25):
I sort of look at first timefinancings, which is we can kind
of look at that as okay.
These are the very firstinstitutional checks that went
to an entrepreneur, and I thinkit's important that that's
always at a healthy level.
Just like you know, we talkabout overall deal activity, as
long as it's, you know, overtime, up into the right.
(44:46):
That says that there are stillentrepreneurs that are able to
come to the venture industry andget their very first checks,
and that's a good and positivething.
And a lot of times, those can bethose seed rounds or pre-seed
rounds that we're talking abouthere, although there are over
(45:07):
the last several years, andcertainly when we were hitting,
you know, the records over 21and 22, those definitions
started to really change and getvery specific and people would
say, well, I do pre-pre-seed orI do dirt investing, or they
come up with all sorts ofterminology in it.
And when you look at the seedand pre-seed, I think to me it's
(45:32):
just like what's the health ofthe industry, what's the health
of the opportunities that theecosystem has for entrepreneurs
to take chances?
And if you look at theinformation in terms of deal
activity as well, as you know,either by deal count or by deal
value, it's still higher Now.
(45:53):
It's lower than the last twoyears, but it's higher than 2020
.
And to me, that's a verypositive sign.
Dr. Matt Waller (46:02):
So, bobby, if you wouldn't mind speaking to
early stage activity as well anddifferentiating that from seed
and pre-seed?
Bobby Franklin (46:13):
So early stages just passed that right.
The early stages sort of thoseseries A rounds is still a young
company.
I forget off the top of my headexactly how Pitchbook defines
early stage, but you can go toPitchbook's website and they can
give you all that information.
And the interesting thing, justas an aside, when you think
(46:36):
about pre-seed, seed, earlystage growth rounds and then
when you're getting closer intowhat people typically start to
refer to as growth activity oreven private equity and some of
the things that happened inprivate equity distinguished
from venture capital, you cansee differences in the different
(46:58):
cycles and economic cycles.
So, for example, when thepublic markets go down, that
greatly impacts the later stagegrowth investors because they're
closer to that public market,whereas the stock market can go
up, the stock market can go down.
(47:20):
You can have all these thingshappening over here.
That doesn't usually impactseed stage or early stage
investing.
It takes longer for that totrickle down to impact that.
So when you have this line anddifferent stages of investing,
you understand that differentinputs impact what's happening
(47:44):
at those different stages ofinvestment and hitting a given
point in time.
So you look at early stageinvesting not unlike what we saw
in seed and pre-seed and againwe see that there was a lot of
it the two years prior comparedto this year, and even this year
(48:06):
is lower than we saw in 2018,2019, and 2020.
But if you plotted that lineand you looked at it, it feels
like we're reverting back to themean and it feels like it's
still healthy.
It's still higher than it wasin 2017, higher than it was in
2016.
(48:28):
And the other thing when you'relooking at data with regard to
venture capital, you have toremind yourself all right, a
venture capital firm, a venturecapital fund, the LPs that
invest in it, it's a closed fund.
It's not like a hedge fund orsomething else where you've got
redemption rights, etc.
(48:48):
Those LPs are signing up for a10-year period with this fund
and oftentimes.
In fact, at our CFO task forcemeeting back in November,
somebody asked a question hasanybody actually ever closed
down a fund that was exactly 10years and hardly any hand went
(49:09):
up in the air, meaning thatalmost every 10-year venture
fund has provisions in the LPA,the limited partner agreement,
that extends it for another fiveyears and many times even
longer, if there are stillportfolio companies that are
backed by that fund and goodreasons why you wouldn't want to
kind of shut it down yet,because you still have some
(49:31):
harvesting of those investmentsto do, then there's no reason to
.
So I lay that out there becauseit's important.
Whenever you're looking at anydata with regard to venture
capital, you have to keep thatin mind and you have to think
about vintage years.
So even though, for example,this year's data looks a lot
(49:55):
less than the previous two years, a lot of people that have been
around this industry a lotlonger than I have get excited
because they know that, okay,the last two years had
valuations that were really highand some of those are going to
have to come down.
And investing now means more duediligence and it means more
(50:19):
finding the price that probablyis the right valuation of that
company.
It means more discipline in howthat company grows and many
times the investments that arehappening right now will turn
out, in an average, seven oreight years from now, to be the
(50:39):
better investments than the onesthat happened in 21 and 22 when
we were setting these datarecords in terms of the amount
of capital in the industry.
But again, you're at differentvaluations and you don't know
how that company is going toturn out until several years
from now.
So you have to think about okay, this is a really good time to
(51:00):
invest because typically afteryou come off these record
numbers you're into the reallyreally good vintage years for an
investment fund.
Dr. Matt Waller (51:13):
This reminds me of a famous quote from Warren
Buffett.
You know he is known for sayingwhen everyone's greedy, be
cautious, when everyone'scautious, be greedy.
That may not be exactly it, butsomething along those lines.
Bobby Franklin (51:34):
I well, I think it's.
There's a lot to it, right, andwe will most likely see a lot
of that bear out when we look atreturns five, seven years from
now.
Dr. Matt Waller (51:47):
If you would mind, let's talk just briefly
about what they call mega rounds, where the deal size for a
round is greater than a hundredmillion dollars.
Just from looking at and I knowthe mega deal rounds are not
(52:12):
like they were during 2021 and2022, but judging from the news
just things that I read I getthe sense there's still, you
know, in terms of the bigpicture over the last decade,
there's a lot of you know, megadeals, mega rounds occurring.
(52:33):
Is that right?
Bobby Franklin (52:35):
Well, there is.
I mean, according to the pitchbook data, you look at the mega
deal activity and you look at2014, 2015, 2016, 2017, and that
was, I call that, one sort ofplateau and then 2018, it more
than doubled, and the next threeyears it stayed almost twice as
high as it did the previousthree years.
(52:56):
Then you had what we've beentalking about this 2021, 2022,
which are kind of abnormal years, and you look at what we are
seeing as a result of 2023, andit's higher than that plateau of
2018, 2019, and 2020.
So you're absolutely right thenumber of deals, the value of
(53:17):
those deals, is still veryhealthy.
It's just not as much as it wasthe previous two years.
And again, that to me coincideswith those crossover investors,
those non-traditional ventureinvestors coming in and making
investments in certain companiesat high valuations, which
(53:39):
really drive these sorts of datanumbers right.
I mean you can have one dealthat makes a big difference in
what we see in this data,because many times one mega
round in some well-known startupat a later stage can make up
(53:59):
for almost the rest of theindustry.
If you look at the dollars, Imean that's so much activity is
happening in these mega roundsthat.
It's far bigger than what wesee in traditional venture space
.
Dr. Matt Waller (54:14):
And I'd like to get your thoughts just a little
bit on life sciences versustech, because you know and I
know there's all kinds of lifesciences investing, but I also
know that from a deal countperspective, tech is about an
order of magnitude above lifesciences in terms of number of
(54:34):
deals.
But you know, and a lot of thelife sciences investing requires
FDA approval or some kind ofregulatory hurdle that you know,
the other the tech invest, techinvesting is not facing and it
really increases the length oftime it takes to for a fund to
(54:59):
recover, to have a realizationof any of the deal.
But would you mind speaking tothat?
What do you see going on?
Again, I know 2021 and 2022 arekind of different, but in terms
(55:21):
of the past 10 years, how doyou see those trends going?
Life sciences versus tech.
Bobby Franklin (55:28):
Well, they look very similar, albeit they're a
different scale.
Right To your point, a lot ofinvestment in venture happens in
software tech companies becauseit's easier, cheaper, sometimes
you can get your return quickerthan you can, to your point, in
a life science company.
But when we think about lifesciences, it's you know, there
are new categories that seem topop up each and every year.
(55:50):
You have your pharma, your bio,you have your medical devices,
you have your digital health.
Now you're gonna have a subsetof AI companies that are focused
in the life science space.
I mean, there are a lot ofcategories within the life
sciences grouping.
(56:10):
And back to what we talked aboutwith regard to public policy,
it matters, and I would givecredit over the last couple of
decades to changes that weremade at the FDA that have helped
us get to a better place, sothat venture-backed companies
which, by the way, areresponsible for about half of
(56:34):
the new drugs that are approvedat the FDA each and every year.
So people think about bigpharmaceutical companies are the
ones that are creating all thedrugs.
That's just not true, and inmany cases, the pharmaceutical
industry has outsourced theirR&D to the venture-backed new
(56:56):
companies that are creating newdrugs.
So you have this ventureindustry creating new drugs.
You have a venture industrycreating medical devices.
One challenge between the twoof those in public policy is
that once you get FDA approvalfor a new drug, then CMS
(57:16):
automatically reimburses forthat drug, unlike medical
devices where, once you get FDAapproval, you didn't have to
start additional clinical trialsto prove the cost savings, and
so you have vastly increased theamount of time.
(57:37):
People must make investments andcontinue to support companies,
whether or not they actually, atthe end of the day, get to a
place where they can bereimbursed for that, and that
has had a significant drag oninvestment in medical devices.
So it's another area that wetalked to policymakers about.
If we could follow the modelthat we did with regard to
(58:01):
pharmacological products, thenmaybe we can see an increase in
investment and new products andmedical devices that are coming
to market that can save livesand save money.
You've got the digital health,you've got the AI, you've got a
lot of areas where people arefocused on in life sciences, but
(58:22):
it like many other categories.
You see this steady increaseover time.
Again, we may be reverting backto the mean, considering the
last two years, but you stillsee kind of an increase,
certainly over 2019, and we'rehappy to see that.
Dr. Matt Waller (58:40):
I'd also like to talk a little bit about
unicorn deal activity.
One thing that brought this tomind was yesterday, or day
before yesterday.
I ran across an article thatwas quite interesting and it was
looking at universities whohave graduated students, alumni
(59:01):
that eventually got one toco-found or found a unicorn.
And when we say unicorn atleast the way I understand it,
unicorns are firms that have avalue of over a billion dollars.
And the number two university,I mean and the world, is Tel
(59:25):
Aviv University in Israel, andit's a small university and in a
small country, surrounded byits enemies, suffering a lot of
times, all kinds of challenges,yet that little university, tel
Aviv University, has created thesecond most number of graduates
(59:50):
who go on to co-found unicorns.
That's pretty amazing.
I had read a book a while backit seems like it was 10 years
ago, maybe more, I'm not surecalled Startup Nation, talking
about Israel having lots ofthese high tech startups, but
(01:00:10):
that got me to.
When I read that article Ithought well, I have noticed
again in the news.
It seems like quite a fewunicorn deals going on Again.
I could be wrong, but that's myperception.
Bobby Franklin (01:00:27):
Well, I know you're exactly right.
In fact, I think, in terms ofvalue and even in number, where
we were in 2018, 2019 and 2020,we've come down from 21 to 22,.
These what I would call outlieryears, but we are still at that
same level, just before we hitthose crazy numbers that we hit
(01:00:49):
in 21.
So, yes, there's still lots ofactivity in the unicorn, and it
is a billion dollars or more.
The other thing you point outby making the observation about
what's happening in Israel iswhat we see as we talk about
immigration policy here in theUnited States, and that is,
(01:01:13):
there have been studies thatlooked at unicorns here in the
United States and found thathalf or more than half of those
companies were founded orco-founded by an immigrant, and
that shows you that there's alot of talent around the world
that wants to come to the UnitedStates and start companies, yet
(01:01:37):
we have no visa pathway for anentrepreneur to do that.
It's ridiculous, and when youtalk to Republicans and
Democrats alike, they bothsupport this concept We've been
pushing for for nearly a decadeand a half, called a startup
(01:01:57):
visa, and what it means is ifthere is a brilliant
entrepreneur somewhere aroundthe world that wants to come to
the United States to start andgrow the company here with
creating new US jobs.
And you talk to policy makersand they say, well, why aren't
we rolling out the red carpetfor them?
(01:02:18):
And the answer is becausethere's no visa category and,
even though it's supported byboth sides, it gets caught up in
all of the debates around allthe issues related to
immigration, including those atthe southern border and those
around Dreamers and DACA andeverything else, and so we can't
get it across the goal line.
But I think it's important forus as a country to recognize
(01:02:43):
that we have created and builtthis great venture capital
ecosystem.
There are other countries thatare figuring out how to model it
and if there starts to be acompetition among countries to
(01:03:04):
attract the entrepreneurs tocome to their country and grow
it, we better get our acttogether and we better have a
way for those folks, whetherthey're coming out of Tel Aviv
University, whether they'recoming out of some place in
Europe, we better have a clearpathway for them to come and be
in the US to start and grow thatcompany on US soil.
(01:03:27):
That's about competition,that's about innovation, that's
about making sure we continue tostay a leader that we have so
enjoyed.
Dr. Matt Waller (01:03:38):
Well, bobby, it's really been a true honor
and privilege to visit with youabout venture capital and
funding of these early stagecompanies.
Thank you so much.
This has been very informative.
I really appreciate it.
Bobby Franklin (01:03:54):
Matt, it's been great to be with you once again.
I've enjoyed it as well.
Dr. Matt Waller (01:03:58):
If you're finding value in this podcast.
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Additionally, following us onApple and Spotify and leaving up
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We welcome any feedback orquestions related to the podcast
, as well as suggestions forfurther topics and guests.
(01:04:18):
You can leave your comments onour YouTube channel and rest
assured that I will read eachand every one of them.
Please also take a moment tocheck out our podcast sponsors,
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For more information onspecific topics, timestamps or
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(01:04:40):
mattwallerpodcastcom.
I'll see you next time.
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