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Public Venture Capital - Democratization or Scam?
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Speaker 3
Hello, everybody. If it's Saturday, it must be the day of revolution, the day when we talk about technology with my old friend Keith Teer, the publisher of That Was The Week newsletter. Every week, it would seem as a huge revolution in technology that's going to change the world. And this Saturday is no different. The title of his editorial this week is Blowing the Doors Completely Off the Hinges of Venture Capital. It's a subject he's all too familiar with and he's joining us as always from the heart of the global revolutions of the world in Palo Alto, California. So Keith, another revolutionary week. How many revolutionary weeks can we have before we all go down the plug hole?
Well, you know, in Silicon Valley, you get rewarded for grandiose announcements. And so every CEO or founder worth their salt is planning them. So I would guess that we're going to have... attempted revolutions, at least, pretty much every week.
So this week, we are triggered by this announcement of something called the Robinhood Ventures Fund One, which, according to Robinhood, at least, appropriately named, for too long, private markets have been out of reach to everyday investors. At Robinhood, We believe access shouldn't be limited to a select few. We've heard that message time and time again about the radical consequences and benefits of democratization. But at this point, the Robinhood guys seem as if they want to blow the doors of the elites of venture capital. What exactly is Robinhood doing?
Well, there's what they say they're doing, and then there's what's really happening. What they say they're doing is exactly what you just read out. They're launching a publicly listed venture fund, very like conversations you and me have had in the past about what I do at SignalRank. They're pulling together assets into the venture fund. They already have 300 million-ish of assets like Databricks.
They're a middleman between people who actually do the trades in the background and you, the user, in the foreground. All of my children have Robinhood accounts, for example. And their claim to fame was that they allowed you to buy fractional shares. So you could buy one tenth of a share of Apple instead of a whole share. which meant you could start trading with small amounts of money and own equities. So it was a democratization in a sense.
For those people who don't know, Robin Hood was an originally, supposedly, somebody in the forest of Nottingham who stole from the rich to give to the poor. Although I think historians aren't quite sure there really was someone called Robin Hood. But anyway, go on.
for our Swiss listeners. We have a huge Swiss audience, by the way. Yeah, yeah. So, yeah, so that's what Robinhood do. And they have expanded into other areas. For example, they added crypto at some point as an asset. They have added prediction markets as an asset in response to Polymarket's success.
Well, now Polymarket, which is... And ubiquitous betting is still... It's a big story. It's still not allowed in the US. I'm sure it will be eventually.
uh so that's just to remind everyone that just to be clear keith you use this important word robin hood is a middleman they're not would it be fair to say they're not actually producing anything they're just
Yeah, it's a little bit like Uber. They're aggregating existing capability into an interface that improves on what was there before. Or a channel, kind of. They're a viaduct. Or a destination for a set of functions. You know, they own the attention of the audience, which is the key. That's what makes them valuable. And so when they're at venture capital, and it's worth knowing, Andrew, they're doing an IPO for this new fund. So an IPO, you raise money. They are raising up to a billion dollars in the next week, by the way, it's happening now. You can go and buy shares in their fund. And $25 a share, they've got 40 million shares.
and we're not going to turn this into an advert for SignalRank, but you're trying to do the same thing. You're following in on Robinhood's coattails, although you're a little bit down the road.
So what they're doing is they're raising up to a billion dollars. They're going to take that money invested in... in their assets and we you know and the key is well what are they buying and what are they selling you um there is innovation for sure in packaging up assets that previously were unavailable that's their whole game has always been their whole game um so then it comes down to should be buying these assets so what exactly and
again i know this When you talk about things like Robinhood, it's always a matter of checking your pockets. What exactly are they enabling people to do? Let's use your kids in their 20s. What is Robinhood enabling them to do that they can't currently do? Well, so if you put that chart back up, I'll use it as an explainer. And here we have a chart, a share of VC exit types, value by type. Of course, we've got the classic VC model where VCs invest in a company, a startup, Google, Uber, OpenAI. And then when one of these companies go public, they acquire all the wealth, although sometimes they lose their money. What is Robinhood doing that's different?
look how small it used to be right and there are going to be some people listening to this so there's a chart share a vc exit type value by type we have Three categories, IPO, secondaries, and M&A.
Historically, when venture capitalists invest in companies, the only way they exit is through that company doing an IPO or being bought through mergers and acquisitions. In the last four years, suddenly a new category has emerged called secondaries. And a secondary is part of a crazy trend called tender offers. Now, a tender offer is when a company offers shares, mainly from employees, to new buyers.
Like OpenAI. OpenAI is very hot on the secondary market, right? There are a lot of people working for OpenAI who have shares in a private company, and then they're selling their shares on the secondary market is that a fair way of thinking of it that's
correct and it's done in a structured way usually with the bank involved and it's called a tender offer there are more uncontrolled secondary markets like forge global and hive but these are these are structured bank-based tender offers and what you're buying is usually shares from employees in a late stage company That money goes back to the venture capitalists, who in turn give it back to their limited partners.
To come back to your kids, your boys, if they wanted, if they had the resources, through the secondary market could acquire shares in open AI, is that correct?
And the like, yeah. And the demand is in a very small number of names. It's maybe 10 companies at any given time that are attractive. Anthropic and open AI presumably dominate, everyone's heard of them.
Stripe and SpaceX are in there as well. Right, okay. So to me, that already speaks to the democratization. I mean, your kids now have the same access to these early stage companies. as Mark Andreessen or Ben Horowitz, don't they?
So the devil is in the word early stage and the anticipation of what might happen next. And so, you know, as you know, with venture capital, there's a life cycle of a company and the ones who do tender offers are normally You know, historically, they would have already done an IPO, but they're tending to stay private much longer. And most of the growth in wealth happens while they're private. At the point that they do a tender offer, the selling employees have drawn the conclusion that this is the peak, or close to the peak, or at least, you know, it would be risky to keep holding. What a Hollywood person might call the climax. Correct. And so these tender offers are producing a lot of shares available at high valuations. The poster child for this is Figma, which is now public, which was attempted to be acquired by Adobe for 20 billion. That failed. Figma then started doing secondaries at $12 billion, whilst it was still private. A lot of people bought at $12 billion.
Okay, so I'll take your point. So some of these secondary markets are being used by perhaps overpriced late-stage private companies. So what... is robin hood doing with this announcement of its private market fund going public that will benefit your boys we're talking about your sons as classic examples of people who want to get into the startup investment space but don't have the access
at the moment or perhaps the capital um it's in a group of like entities the others are destiny tech 100 and power law that I probably say to my kids, be careful, because the assets you're buying can go down. Why? Because they're already highly priced. And the money that you're going to pay is going to go back to venture capitalists and their LPs, and you're going to be holding these relatively highly priced assets.
It's packaging up these assets for people like my kids, which is possibly a good thing, depending on the basket of assets or a bad thing, depending on the basket of assets. So you really have to get to the next level down. It's democratizing. But is it democratizing exciting assets or disappointing assets?
And I mean, that's going to obviously depend. So I know you have your own stake in this, and it's a big deal from the point of view of SignalRank, but for the rest of us, Keith, why should we even care? So it sounds to me like maybe not a scam, but Robinhood's always seemed to me like a rather odd company. They're not producing any value. It's just a game. I mean, it's an extension of Polymarket, or it's the way in which Wall Street and IPOs and Polymarket have all become part of the same kind of
gambling game well i think this is the time to influence robin hood it could be that that that's definitely one of the things it could be but it could also be that companies that are going to experience you know another 10x growth become available to retail investors before that happens So it entirely depends on how Robin Hood plays the game and the other players in the space.
Robin Hood doesn't know because it can't know of these companies, the middlemen for whether these companies are any good or not. It depends on so many variables, on the future of the global economy, on AI, on so many other things. They can't know any more than anyone else, can they?
So let me take another tack on this. Again, using your voice because you brought the mark. I don't want to personalise this, but some people might say if they want to invest, sure, that's a good idea. They're aspiring entrepreneurs. Let them invest in the public markets. What's wrong with the current market? public market now of course what robin hood is doing is entering the public market but what's wrong with them investing in microsoft or facebook or google there's
nothing wrong with that but but you've got to do the math um as a person with savings i assume you do do the math from time to time the public markets take taking the averages as the likely outcome because almost nobody beats the market. The best case scenario is that you can grow your wealth by about 10% a year. In private markets, the best case scenario is that you can grow your wealth by a thousand times. So private markets, historically, have been where the growth is, and increasingly that's more...
That's definitely true. But if you make a hundred bets in private markets, each one of those hundred, you can lose all your money. But if just one of them does a thousand X, you'll get ten times your money. or a hundred times, depending on the numbers. So the public markets are definitely high risk compared to public, private markets are, but they're also high reward compared to public. And so there's a trade-off there. Obviously, you should never put all your eggs in a single basket. So opening up private markets to public investors is I'm definitely a strong believer in that, as long as it's educated. I prefer it. Say that again, as long as, what do you mean it's educated? What does that mean? Well, that there's proper understanding of what it is you're buying. I also believe in de-risking. So there's two ways of doing private baskets. One is called concentrated, the other is index-like. Concentrated is Robinhood. They claim they're only gonna have 18 companies in their portfolio. Just by way of contrast, and we're very early, we have 45 already and we'll end up with 150. So the amount of the risk spread over a certain number of companies is one of the variables here that one has to think about. And a highly concentrated late-stage portfolio is probably the most risky and aligns to what you just said. An earlier stage, more index-like basket, is more de-risked.
So, Will, I take your point. How would you respond to my... suggestion that all this really reflects this kind of merging of the financial markets and betting markets like Polymarket. And it perhaps reflects a kind of apocalyptic time where everyone is gambling all the time on everything, which is what Polymarket is.
Well, I don't think you're wrong to say that that's part of what's happening. I think that is part of what's happening. But it's also true that in parallel to that, the largest wealth growth in the history of the human race is happening. And who gets to play in that pond is highly selective right now to people who have a million dollars or more net worth and robin hood is right to suggest that that can be broken and more and more
people can benefit from this wealth you know it's about the democratization of finance people with a million dollars have more rights not because they're better or even smarter it's just because they got the money
And one of the reasons is because they assume, I think, people with more than a million dollars are perhaps a bit more responsible, are able to lose more than your kids, who are often extremely ill-im... I'm not saying they are, but a lot of kids in their 20s and their teens are profound. And this is the demographic that this stuff is attracting, are so ill-informed
You're right, Andrew. Say it again, Keith. I'm right. You're right. But if you focus in on a single word, risk, it's an economic truth that risk has a price. And the higher the risk, the lower the price. And so these... Economics 101. Yeah, I mean, we know that, Kika. Well, you can't say we know it because I suspect many of our listeners don't know it. You might know it. But I do think risk has a price. And I think that when you bring private assets to public markets, the weight of the risk is the only thing you need to understand because then you can figure out whether you're prepared to buy it and with what portion of your wealth. And, you know, so democratization is definitely 100% great. Risk that it carries is a variable, and different players are going to bring different baskets of risk to the market, and they'll be priced differently, and they'll perform differently.
Yeah, and we've talked about... booms you and i disagree on this i mean the nature of booms is one where a lot of people assume that risk has no price and then you have a radical correction or collapse and everyone recognizes i have one more question keith and then we're going to move on on this because it's boring really in my mind as you know it's not something i'm particularly interested in um what exactly i've always and maybe correct me if i'm wrong but i've always assumed that to go public You have to have some value. It can't just be an idea. It can't just be some whim. To go public means that you have some substantial product. What exactly, in this Robin Hood private market fund that's going public, what exactly is this thing? It claims it's a thing, and if it's going public, it must be, in a sense, a thing.
But where's the value? What is it? They've spent $340 million buying previously impossible-to-own private companies. So they've put down 340 million of their own money to buy these assets.
A little bit like Berkshire Hathaway is. Berkshire Hathaway owns other companies. Robinhood owns other companies, not fully. And in the case of Robin Hood, these companies were previously impossible to own for retail investors. Its product is to make it possible to own them. and you judge them based on what it is they're selling you.
So in a way, I mean, coming back to this final point, come back to your kids. They could buy on the secondary market, but actually this Robinhood announcement in a way might not be such a bad thing because it's encouraging them to go to the public market and invest in something like Robinhood. Is that fair?
And then coming back to the revolutionary point about blowing the doors off venture capital, why should Andreessen Horowitz or Sequoia or Union Square Ventures, why should they care about any of this?
They're still in their business of investing in startups. But that's actually the most interesting part of it. Sequoia and Andreessen charge their investors somewhere between 20% and 30% of the profit on the money that they invest. Robinhood is charging 0%. So they are creating a venture capital fund where the profit stays with the investors and doesn't get taken out by Robinhood. So they're changing venture capital from a 30% tax to 0% tax.
They are charging fees. It'll end up being somewhere between 2% and 3% at the end of the day, which is similar to Andreessen and Sequoia. And their stated goal is to become the biggest venture capital company in the world. If that happens at 0% fees, it makes Sequoia and Andreessen's business model untenable.
Yeah, but the point, and I don't want to argue on behalf of Sequoia or Andreessen, they can make their own arguments, but their point of their value is that they actually have access to these companies. They have a network in Silicon Valley. They know the best entrepreneurs, the best technologists, and they're making these investments. Robinhood isn't doing any of that.
Well, now you're agreeing with me. I agree with that. What are the assets? The key questions are, what are the assets? How early do you own them? In the case of Andreessen and Sequoia, they often own these companies at the seed round or the A round. So the growth is huge if they succeed. So buying assets early, when those assets are well chosen and they grow, deserves a premium. And that's why Sequoia and Andreessen can earn that premium. If you buy assets late when they're already fully grown and you package them up for retail investors and they don't grow massively, you really don't deserve a premium.
Yeah, I think we're going around in circles. Let's move on. Another interesting piece you linked to this week is about the humanities being automated by Yasha Monk, an old friend of mine, the publisher of Persuasion. He...
suggests that AI now is at a point where it can write political philosophy papers, not quite perfectly, but getting towards a point where it's harder and harder to distinguish between AI and people who have spent their lives training to write political philosophy. It's an interesting observation. And I think he's right, isn't he?
Well, he's definitely right on the facts. He actually writes about an experiment he conducted to get the AI to write a paper. And he concluded that it was depressingly good, in his words, because he felt it could be submitted for publication and be good enough to be published in an academic journal. And then he asked the question, where is his value add or any writer's value add if that trend continues? And he does conclude at the end that there is a value add, but he thinks effectively an average non-specialist in a space is going to be able to produce a specialist level publication using AI, and it will be increasingly difficult to distinguish between that and one written by an actual specialist.
So this comes back really to what we were talking about before, about radical democratization, just as the Robin Hood story is about the democratization of markets or access to investment. Yasha is talking about radical democratization so that experts or former experts like himself, professors of political philosophy, don't bring much value. I mean, does he get into the argument about whether if he smartly uses AI, he can improve the quality of the piece? Or does he suggest that after a while you just kind of hit a wall?
No, he does retain some optimism about the importance of the human. That said, I think he might be misframing this, and even we might be. I think automation is probably a better word for this than democratization. Democratization suggests humans are being leveled up. What's really happening here is humans are masquerading as producers when actually it's the AI that's becoming as good as or better than humans. So if there is democratization, it's software agents that are writing, not humans.
Although some people will probably hide behind that and claim that they're political philosophers by using AI. Another of your pieces that you linked to this week is by Paki McCormack, one of your favorite writers, the author of Not Boring. He writes about power in the age of intelligence. Where is the power then, Keith? Whether it's in the democratization of financial markets or what Jascha Munk is talking about. I mean, this seems to be the core question.
Well, it's interesting. If you and me ask ourselves, what do we still respect? I think it comes down to creativity that breaks through some previous boundaries and therefore grabs our attention because of its uniqueness, novelness, newness, depth, interestingness. AI is very bad at that. Humans are very good at that. At least the humans who are good at it are very good at it. And we're still attracted like flies to a light to creativity.
So power is with the creative. And in fact, this was something I talked about with the Los Angeles Times book critic Beth Ann Patrick, another keen on America friend who came on the show to talk about the Washington Post closing and the impact on the literary world or the Washington Post closing of their book reviews, we agreed, I think, or Bethann noted that the book still retains a degree of popularity, maybe because of the value of creativity, Keith.
I think it's exactly that. When a new book comes out that breaks some kind of ground intellectually or from the point of view of leisure and fiction, a lot of people buy them, either digitally or physically. And that's because we have a thirst to be either entertained or educated.
So maybe Yasha's point about the humanities being automated is that the humanities aren't particularly creative and that most people working away in university departments writing these white papers aren't creative and that we shouldn't be too sad about their demise.
Well, I think what will happen is the good writers will be like Sequoia and Andreessen. They'll be very good at doing their craft early, you know, before anyone else and benefit from that in the case of writers by attention, in the case of venture capitalists by gains. And therefore, the craft still retains its power.
craft retains its power that should have been your your headline this week rather than blowing the doors off the hinges keith craft retains its power uh steve gilmore i know one of our one of our loyal listeners criticized you and i keith because he says we disagree too much but maybe we agree too much on this front that we're not in doesn't sound like we're in violent disagreement on any of this so they're Even if the humanities are about to be automated, that's not necessarily bad for humanism or maybe for creativity. You're suggesting that the reverse might be true.
I think the reverse is always true. I think any time a technology relieves humans of the mundane, it elevates the special. That you and I. I don't know about you and I. Steve's point, by the way, wasn't that we disagree too much. It was that we disagree about the same things over and over again and don't move on.
Okay, well, to annoy Steve, we're going to disagree finally, Keith, about the same old thing again, which is abundance. One of the other pieces you link to is by one of the great apostles of abundancy, Peter Diamantis, and a character called Dr. Alexander Wissner-Gross, who sounds like he could have come out of Dr. Strangelove or something, a rather odd-looking character, on this idea of abundance. I just think it's complete and utter nonsense. I think that there will always be power. There will always be scarcity. Whenever you get certain kinds of abundance, new abundance, you get new kinds of scarcity too. Are you in this camp of achieving abundance by 2035? It seems as if the reverse is true, if anything. There's more scarcity now than there's ever been.
Well, look, these two, Diamandis and Wisner Gross, are part of a group that does a podcast. Salim Ishmael is on the podcast, by the way. I think you know Salim as well. And they are part of Singularity University historically. Which are trash because I can't remember.
There was lots of scandals, weird things going on. Yeah, I don't think they were part of anything weird. I'm not quite Epstein weird, but there was something weird going on.
Well, the concept of the singularity is highly discussed. But let's just say they're part of that. And so they have a stake in the ground, which is they believe the singularity is inevitable. I think they're probably right about that. At some point, automated software and robotics that is self-referential and can reproduce itself at better and better functionality is probably going to happen.
There's two quite separate conversations. Well, then let's define abundance. I think you have to separate abundance into two conversations. The first is, will the production of things
grow to such an extent that almost everything is available to everybody. I think that probably is yes, at some point that will happen. Things meaning food, homes.
You mean like access, like we were talking about with Robin Hood, you have access to invest in early stage tech companies. It doesn't mean that everyone can just buy these things.
I think you have to remove the word buy because that's a word of the present. If you imagine that things are produced in abundance automatically with no human input and things meaning things we need or want, then the concept of buying them goes out the window because there's too many of them. They'll have zero value, actually, because there's too many of them. So supply will outstrip demand.
What's logical about... You still have to have resources to produce stuff. I mean, even with AI, for all its supposed freeness, the big tech companies, the AI platforms are investing billions, sometimes trillions of dollars in producing the power to drive these things. So it's
And they're talking about 2035, which is not a long time.
Words and timings
Andthey'retalkingabout2035,whichisnotalongtime.
Andrew Keen
Yeah. So they believe that this exponential abundance is fairly short term. That's what they believe. We can disagree about that. I don't think we can disagree that abundance defined in the way I just did will eventually happen. It will.
And then the second thing is, well, you didn't, I would say it's complete nonsense. I mean, how do they explain land, for example, and the fact that you can't just produce land? Well, there's so much land on the earth compared to people that it doesn't matter. I think that's enough, Keith. Otherwise, you're going to annoy me too much. That's such a stupid thing to say.
Keith Teer, we agreed that maybe venture capital is interesting, but now he believes that land is abundant. I'm not so sure, especially in our age of Greenland. of rising real estate living in San Francisco. That is just one bridge too far. Anyway, Keith, good conversation. We will talk again next week. Maybe we'll have a whole conversation on why you believe land will become abundant. No, it's already abundant. By 2035. Already abundant. Well, then if that's the case, then why would America want to own Greenland?
Yeah, well, that's enough. Otherwise, we're going to get stuck in and Keith, what's his name? Steve Gilmore. We'll get all excited again. That was the week with Keith Teer. We'll talk again next week. Thanks, Keith. Bye, everyone.