How I Invest with David Weisburd
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.
00:23:37 · David Weisburd, Jerry Ye
[00:23:37] S0: Yeah. I was gonna ask you about that because the downside of having companies that... Just read that pre seed rounds are typically now at a $100,000,000 valuation. I guess seed rounds, that means are 500,000,000, a billion dollars. Why even do user acquisition financing if you could go and raise equity? I guess your answer would be that not every sector of the economy is this red hot sector today. [00:24:00] S1: Yeah. Not every sector is that red hot. But the other side is, you know, it is still coming out of cost. Right? Even at that at at, you know, those valuations as well. Right? So if you just price it in terms of, well, what if you use UA versus, you know, not losing that 20% chunk of your company, and you do hit your revenue goals, that's actually pretty expensive. [00:24:21] S0: And talk to me about venture debt. So venture debt has been around for many decades. And since really the earliest history of venture capital. Why is venture debt not better than user acquisition financing?
00:24:21 · David Weisburd, Jerry Ye
[00:24:21] S0: And talk to me about venture debt. So venture debt has been around for many decades. And since really the earliest history of venture capital. Why is venture debt not better than user acquisition financing? [00:24:35] S1: A, it's not necessarily available for all companies. Right? Especially as you go earlier stage. For example, if companies that have 10,000,000 ARR, you know, you're not gonna get venture debt offers generally. But b, it's usually on a fixed repayment schedule, and user acquisition financing is actually where the revenue is coming from revenue share. So we're not getting paid unless those users actually generate the revenue as well. So it actually matches when revenue is actually generated and when the company actually have the the funds to repay. Right? There's also, as as we discussed earlier, it's not recourse as well. Right? So it is a bit a lot more founder friendly. So we're not going to end up with a sizable chunk of the company because you underperformed for a quarter or so. [00:25:25] S0: We talked earlier in the podcast how you spent your entire career making these very art like aspects of venture capital quantifiable. What percentage of being a great venture capitalist can you quantify today?