How I Invest with David Weisburd
00:16:16 · David Weisburd, Jerry Ye
[00:16:16] S0: Shout out shout out to Plaid, non sponsored. [00:16:19] S1: Yeah. It's actually not Plaid. Okay. But there's... It it can't be Visa or Mastercard because their agreements are actually with the merchants. Right? And the merchants definitely do not want, you know, them selling the Who is that? There are panels like Yodlee or Consumer Edge. This is all, you know, public information that... [00:16:38] S0: And where do they get their data? [00:16:39] S1: Yeah. So they they form the interconnects for a lot of these companies. Right? Some of them actually buy smaller banks, smaller card issuers, etcetera. [00:16:47] S0: So using this card data, SignalFire invested in Grammarly. Tell me about that.
00:16:47 · David Weisburd, Jerry Ye
[00:16:47] S0: So using this card data, SignalFire invested in Grammarly. Tell me about that. [00:16:52] S1: So as part of the the panel, right, just keep in mind that you can figure out what retention rates look like as well. But we saw a company that was inflecting, and not only was inflecting, you saw really high retention rates, which were similar to what you would see in a SaaS company. And that led to investments there. But what was interesting there was actually, and this kind of ties into what I'm working on now too, is before, from the outside in, that led to the investment in the company early on based on cohort performance. And now, Grammarly actually, a couple years ago ended up receiving a billion dollar user acquisition financing facility from another firm, and they're essentially leveraging those same cohorts, but for user acquisition, that's non dilutive. Right? So it's not an equity investment. And for them, it's actually a short term problem, and this is a short term solution for it because the revenue comes back in twelve, eighteen months. Right? And they don't have to sell a chunk of their company for it. [00:18:02] S0: This touches on one of the most underrated and least talked about forms of funding for startups, user acquisition financing. Tell me about that. What is user acquisition funds?
00:18:14 · Jerry Ye
[00:18:14] S1: For companies with post product market fit, there's actually a solution now where it's non dilutive. It's not equity. It's not venture debt. And for these companies, they know that every dollar they spend on UA turns into $2.03, $4 down the road, but it takes six, twelve, eighteen months for that capital to come back. So even for the most well capitalized companies, they quickly become cash flow constrained. What this does in place of equity is because this is a short term problem, it's a short term solution where we fund a large portion of their monthly spend in exchange for a capped revenue share. And that's paid back as the cohorts generate revenue. And once the principal plus the fees are paid back, then all the residual revenue actually belongs to the company. So you have high ROI for the company. It actually makes a ton of sense because it's essentially just pulling growth forward. And I mean, there's obvious, you know, downsides as well, it's like if we mispredict the paybacks or whatnot, it... There's, you know, risk to this asset as well. But as long as the company is hitting performance thresholds, and thresholds are set when we make a monthly investment, like they have to have 40% ROI by the first month, 50% by the second, etcetera. If it ends up underperforming, then we actually pause funding for the next month. So instead of like a ten year time horizon, we're talking about investing each month separately, but on average, they pay back seven, twelve months.
00:19:52 · David Weisburd, Jerry Ye
[00:19:52] S0: One thing I've learned from talking to hundreds of investors is that great investment firms aren't built on investment returns alone. The firms under are great at the things most people don't see, their operations, their relationship with quality of information they use to make decisions. And here's what AI has changed. Every firm now has access to the very same models, so the intelligence isn't the edge anymore. The edge is what you could feed it. Firm with its fun operations and data in one connected record can actually put AI to work. A firm running on disconnected systems simply can't. That's why thousands of GPs run their funds on Juniper Square. Juniper Square puts your fund operations, data, and administration together in one connected record. That means less time managing disconnected systems and more time investing, working with LPs, and building your firm. This episode is brought to you by Juniper Square, the operations partner for private market GPs. Learn more at junipersquare.com/howiinvest. That's junipersquare.com/howiinvest. Give me a sense for how many startups are using user acquisition financing today. How big of a market is this? [00:20:59] S1: It's still very nascent. Right? So there's another large venture fund that has raised 4 to $5,000,000,000 just for this asset. [00:21:07] S0: So it's not Catalyst?
00:21:07 · David Weisburd, Jerry Ye
[00:21:07] S0: So it's not Catalyst? [00:21:08] S1: Yeah. General Catalyst is customer value fund. And they not only work for startups, they also work with public companies. Right? So like Lemonade for the longest time, Fiverr, they've invested a $150,000,000 into Lemonade. It was like $2.50 into function, I think, and a billion to Grammarly. So these are actually really large tracks for for this product. [00:21:35] S0: Have you heard of Henry Shi and the startup leaderboard? [00:21:39] S1: I have not actually. [00:21:41] S0: So Henry Shi, previous guest, he started this scoreboard, which is the lean startup, basically, scoreboard where he tracks the top companies that have raised very little capital and has... Have grown. Famously, you had mid journey. I think it... They had something like a dozen employees and a $10,000,000,000 valuation at some point. I'm wondering how AI changes the fundraising game for companies. In other words, what are the downstream consequences of having smaller companies with high revenue? Does user acquisition financing fit into this new way of funding startups?
00:22:21 · Jerry Ye
[00:22:21] S1: I mean, if you think about a company, right, a lot of their... Especially for consumer companies, once they have product market fit, a lot of... If if not their their largest line item is UA spend. So... And as I mentioned, right, right, for those types of companies, it's a highly predictable problem in the short term. So does it make sense to, you know, fund that with, ten year capital at a cost of a ten year capital structure? Or is it better to relegate, you know, the cost of your data center or your token spend, etcetera, for that side? But for UA, you know, this is a lot cheaper capital. So, you know, you can potentially have companies, especially on the consumer side, that leverage and lean into this type of structure and are able to increase valuations quite significantly. Especially in like, let's say the gaming space where fundraising has been depressed over the last couple years. For example, the gaming space where fundraising has been difficult and there are companies that have leveraged UA spending to scale their revenues three, four, five, 10 x, right, over the course of a year or two. And that now has opened significantly... Opened a lot of doors in terms of being able to raise the next round.