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At Vator Splash LA 2015, Francisco on private markets equivalent to public markets circa 1980's
At Vator Splash LA 2015, Bambi Francisco Roizen, Founder and CEO of Vator, talked about how the private market is similar to where the public markets were circa 1980s, and the similar tailwinds that will expand the percent of US households owning startups.
I hope you bear with me with this talk. This is the first time I’ve given it and I’ve just pulled it together but I think it’s something that is important for entrepreneurs to keep in mind.
Anyway, I’ll start with a story. I have a friend who’s an attorney and he does a lot of legal formation work for venture funds so as you can imagine he’s quite busy. And over the summer, he gave me this incredulous look and said, “I don’t know how long this can keep going? How many more venture funds could I possible work on?” And I said, “Well, I don’t think they will all survive but I think that we’re just getting started.” Now that may sound contrarian to many of you particularly because we’re in a very overheated market. It feels like there’s just way too many funds out there and some people are—“Okay, I know how to work the computer. I think. Great.”
So this is an article that a friend of mine wrote. Paul Martino from Bullpen and this is pretty recent. And he writes about a microVC shake out and he recalls the days of the internet bubble circa 2000 when they are about 4000 venture funds that were formed. And several thousand venture funds formed only to see 10% of those existing today.
And you probably see a lot of stories about the rise of zombie funds. I don’t like zombie faces so I had to look at this power point a lot and I kinda’ circled it. My husband thought that was kinda’ silly but I actually don’t like looking at the zombie face but anyway, the rise of zombie funds and those are funds that are active. There are many that have emerged over the last 5 years, they’ll be active but they just won’t -- I mean they’ll be around but they won’t be active. And they won’t active because they just don’t have the returns to go out there and raise new funds. So they will exist and I think that we will see a shakeout but I think, we’re also going to see a number of new venture funds. And so the net of that is that is actually a net positive of funds out there.
So what I want to talk about is the expansion of venture funds but also at the same time the expansion of the ownership of US households owning private companies. And what this means for startups and entrepreneurs and how to think about the financial landscape given this perspective. So let’s start with the expansion of US households investing in startups. How many here own public stocks either directly or indirectly? These are public stocks. It’s quite common. How many own private stocks, startups? Here you would have a little bit more but if you were in Kansas or somewhere or Idaho you probably wouldn’t have access to a lot of startups but I think that’s going to change. And the reason I think it’s going to change is because I see a lot of similarities between what’s happening in the private sector and what happened in the public market circa in the nineteen eighties. Who was around 1980s? Who was born? Okay.
Let’s go back to the eighties and what was going on? Ronald Reagan was president. It was a decade of bad hair and bad fashion. The basketball shorts were definitely way too short for my liking and the mobile entertainment, Sony was just invented. If I gave that Walkman to my teenagers, they would absolutely be shocked. “This is supposed to keep me entertained?” But that was what was happening in the eighties.
But also something else was happening in the eighties. Basically, it was a start of a bull market. And it was a start of an 18 year bull market actually. And what would happen at that time between 1980 and 1999 is you would start seeing the expansion of ownership by US households owning these stocks. Basically what was happening was a democratization of the public stock market. Heretofore or prior to eighties, owning public stocks actually was confined to the wealthy. So you had to be really rich to own public stocks. What was happening in the 1980s is that was changing. Now, more and more of the average investors was owning a piece of the stock market.
And if you look at what was going on with mutual funds, you can see, I estimate in 1980s circa 80s, there was about 400 to 500 mutual funds. During that bull market, it actually quadrupled to about 8000 mutual funds. And you can see, actually 1949 it’s quite surprising because actually there was only 75 mutual funds. It’s hard to believe that it was that small. And then you can also see what happened during this bull market, what you saw that the assets under management grew a 1000% percent due to the increase of the stock prices, this but it was also due to the more contribution from more household getting into the game and that’s because you have a lot of these mutual funds forming.
So what happened in that period was you started off with 17% of US households owning stock that doubled to 35% by 1999 and in fact that would go up to 50% today and so you can see how it grew over the last 50 years. That was actually 1949, it was actually 4% and it’s hard to believe that it’s only 4% of US households actually owned US stocks, public stocks and what was going on? And why did this happened? Well basically high returns sort of a siren song, right? Because it’s very attractive, you had provocative headlines. This is something that came out sort of end of 1970s to basically buy a brokerage stock broker said, “It’s time to grab the bull by the horns.” It’s very compelling. We had not low interest rates but we had declining interest rates so it made money easier. Also It made the stock market look far more attractive. You had the explosion of funds that I mentioned, the quadrupling of all these mutual funds, you had improvements in infrastructures, so what was going on in the eighties.
You had automations of the stock certificates, you had automation of data, so that meant that there was more information out there for investors to trade on and you had the advent of discount brokers. So that means, the average investor could come in and open up a brokerage account. And you had changes in government policies, like the creation of the IRA. The individual retirement account, and the government encouraging you to take your retirement savings and putting them into a mutual fund. So I see a lot of the same macro tale winds in the private sector. So today it’s about .001% of US Households probably own equity in a startup. It’s about a 156 billion dollars of assets under management and I see both those numbers growing. Why?
We’re in a bull market and it’s very compelling. Everybody here is trying to get in the game. Everybody next door who are investors, they are all trying to get into the game. They are all creating funds. We have nearly 0 interest rates. So this makes our asset class very attractive. We’re seeing an explosion of funds and again like what happened with mutual funds, the explosion of these funds makes it cheaper to get in to the market because these funds allow you to diversify there. It also makes it less risky, right? Because you have a fund manager who can manage your fund and you can go in and invest in them. You have improvements in infrastructures. You have all these crowdfunding platforms that lower the costs for you to get involved.
Heretofore, you had to have a $million dollars to invest in a VC fund and allow them so they can make investments for you. Now, you can put in as little as $2500 dollars to make an investment and do one of these funds. They don’t call if funds. They call it institutional portfolio. A fund that’s managed by steward and you have changes in government policy. So probably the biggest change was with the Jobs Act in 2012 where now a private company can have 2000 shareholders versus 500 that’s why you’re seeing a number of companies staying private because they can. They don’t have to file to go public, it they have 501 shareholders.
And the other thing that’s coming around the corner January 1st, title 3 of Jobs Act. How many people here know about title 3? So the title 3 is part of the Jobs Act and allows the average investor to invest in private equities and startups for as little as a $100 and there is supposed to be a vote on that probably sometime this month. So all of these act as a tale winds for more and more people getting into the startup game. And we’re already seeing it happen. We’re already seeing tons of money moving into the sector. Moving into the private sector and look at JustFab. Look at Adam, he could have gone public but he decided not to. He’s raising hundreds of millions of dollars in the private sector. If you looked at what happened in 2015, 300 startups already raised $100M. 12 of them already raised over $500M. It used to be the case that you would go to the public markets to raise that. Amazon and raised $54M in the public market, eBay $64M and opentable $60M but now they don’t have to go public because it’s available and accessible in the private markets.
So what does this mean for entrepreneurs? So I think what it means is that startup capital firstly is more abundant. That’s obvious. Maybe even startup fundraising becomes easier. For instance, do you remember 2011, 2012 when everyone was talking about this series A crunch and how all these seed companies were going to fall into this abyss and will not be able to cross the chasm to get to a series A? What happened? You had this emergence of postseed funds and we have an event actually, it’s called Post Seed and we partner with Bullpen Capital which is probably a leader in that space if you will and they started in 2011.
They are about 20 post seed venture funds and now my friend Paul Martino counts probably 200. So there’s going to be a lot more funds. So if you think that there’s going to be a crunch, don’t worry about it. I have a feeling there’s going to be a lot more funds that’s going to come in to fill that void. I think there’s going to be a lot more specialized funds. We’ve already seen vertical funds, you have fintech, you’ve had healthcare. But now we’re seeing even more granular funds like skincare, just skin care focused funds and even Snoop Dog had his Cannabis funds. Everything is getting so specialized. There’s money everywhere, the good news for you is that you can actually find fashion funds, right? Find experts in the field that you like. I think that’s we’re actually going to see local funds. So localized funds were only -- you’re going to be investing in your local businesses.
Because remember, this is opening up to title 3 to the average investor. You can imagine a world where you do have local funds focusing on just funding your local business and having the residence in that area owing a piece of that restaurant or the bagel shop. I think what’s happening now, I said it earlier today I do think that the startup tech industry is really maturing. It’s so hard sometime to look at companies because they’re so good at telling stories these days. I knew that was going to happen, they’re such great story teller and you have to be because you have to sell your vision. But it makes it really had for investors to know what to invest in and so they’re going to invest in everyone, right? Money is available. That just means the saturation of all these ideas.
I mean, you’ve heard Jeremy Liew say that, “There’s a lot of everything out there.” So if there’s a saturation, what does that mean? It just means that it’s just very competitive. And I’ve been trying to think about how this would change the IPO mentality but if there is all the money in the private sector, how would you think of an exit? Do you even think of an exit? Does that matter anymore or does it get really fuzzy? And I’m not sure but I think the mentality around the IPO exit it does change. And so what does this all mean than? If this is what happened for startups, what does it mean, this abundance of capital and this saturation and competitive landscape. This is what I’ve been working on so hopefully it makes sense.
So I think, we start thinking long term. And I think that’s a good thing. Well, what do I mean? So what I’m proposing here is that there’s going to be an abundance of capital, right? So think about what happens with the abundance of anything? Abundance of money, capital, happiness, love, food, water, when you have that – for instance, if you go to a party and they have abundance. Or you go to an event and they have an abundance of water bottles and water and drinks, you don’t walk out of the event filling your pockets with bottles of water and food and drinks because you know when you go home you’ll have it.
Or you’ll go to the store, if you’re hungry and that is a good attitude and I’m so sorry about this. Adam, keep this in mind, this might happen to you. It’s a good way to think because you wouldn’t be stabbing your pockets, your bags with bottles of water because you know that it’s already readily available. If you think about it, stuffing your pockets and your bags with a bottle of water is sort of short term thinking, right? It’s short term survival tactics versus long term value creation. We were here to create so Jack Landon has a great saying that he says that “the purpose of man is to live and not to exist” and his short term survival tactics really just allow you to exist but not to live, right?
Living is a long term thinking goal. So you think about it and apply that to sort of capital, abundance of capital. Maybe we will actually just take what we need because we know, it’s going to be there if we do well. And I think that’s actually a good way to think about it because there is a lot of people, a lot of investors not many but some investors will say, “Take what you can.”
A lot of investors in that panel this morning said, they really don’t think you should take as much money as you can and that’s good because I think everybody is wising getting wiser about what could happen if you have too much money. But what can happen if you have too much money?
You’re forced to spend it. You might not think about it consciously but you’re forced to spend it either your VC’s want you to spend it because you have it and now you have to meet certain goals or maybe your senior managers want you to buy that you know that new $500 ergonomic chair because you can. You have it and so you need to spend it and probably one of the biggest mistakes I see companies doing or the biggest reasons I see companies dying is because they are overspending. So just take what you need in an environment where you have an abundance of capital. I think you can just take what you need.
The other thing I think, the other point in regards to thinking long term is when you think long term and not short term you think about what you’re passionately want to do. I mean if it’s long term, you’re thinking, “God, I don’t want to do this for 15-20 years, I better better like it.” And that sometimes, that’s not the mentality we have in the startup culture which is “I’ll do this and I’ll flip the company – I’ll just do this for 5 years and then I’ll sell it. “ But no. I think because it’s going to be so competitive because you have to make a business, you have to start thinking long term and passionately and think about what you passionately want to do.
And finally, I think you mature faster. So remember I said, it was going to be very competitive and so what does that mean? You have to be a business faster. And I like to think of local businesses when they open up. Sure, maybe some of them are not the best managers but because it’s such a competitive environment sometimes they actually mature a lot faster than startups do. At least they have that mentality. When you open up your local nail salon and bagel shop, you’re not thinking, “Okay, I gotta’ get headlines. Okay I’ve got to get those vanity metrics than I can raise the next funds.” No, you’re thinking about your economic model. You’re thinking long term. This is what I’m going to do and so I have to think about how to make it a business. And I think you actually won’t have a choice. I think if the money is abundant particularly in the early stages. You won’t have a choice but to have that traction because you just won’t be able to get-- there’s just going to be too many of you. So that’s the good news and the bad news and that’s my talk and I hope you guys all—
I think we’re in a world where great ideas are going to be funded and I’m excited to see that and we’re also moving into a world where entrepreneurs are going to be smarter, I hope and thinking about building solid business for the long term. That’s my talk.
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Joined Vator onFounder and CEO of Vator, a media and research firm for entrepreneurs and investors; Managing Director of Vator Health Fund; Co-Founder of Invent Health; Author and award-winning journalist.