Earnest Sweat 00:03
Welcome to swimming with alligators. I’m Earnest Sweat and each episode of Alexa Benz and I give you a VC podcast from the LP perspective. You ready? Let’s dive in. Today

Alexa Binns 00:13
Our guest is John Rip du Gard, director of capital at RBC X. The technology and innovation arm of RBC Canada’s largest bank, John’s team at RBC X invests in technology companies and venture capital funds, and offers a suite of credit financing solutions. As an operator turned investor John is going to share with us today his perspective on the VC asset class as an emerging allocator outlines some of the unique characteristics of the Canadian venture landscape and provide his view on vendors biggest challenges and opportunities ahead. Thank you, John, let’s dive in. Awesome.

John Rikhtegar 00:48
Thanks for having me. To start out, could

Alexa Binns 00:51
you share your journey into the allocator position?

John Rikhtegar 00:55
Absolutely. when I was in the UK, at the time, you had GDPR, consumer privacy, data, cookies, regulation, tracking everything top top of mind, and my thesis then was like, okay, if I’m a b2b, b2c, or direct to consumer founder, and I previously used Facebook and Google, to market to my end consumers to know that Alexa Earnest, and John are who we are. And now because of data attribution, they only see us as customers, you know, ABC, XYZ and 123. Like, that’s a very scary reality, and that needs to be solved. And so the business I joined afterwards was a company called cognitive growth stage technology company based out of Canada and Europe. And I was essentially Chief of Staff to the chairman and chief of staff. There meant a lot of different things to different people and that specific business, it was very much so focused on market revenue operations and corporate development. And so this is how I ended up at a bank, I was raising equity debt for this business. And honestly, it was speaking to a lot of the big Canadian institutions. And it was really mind-blowing as to how backwards and approach the big banks took with respect to supporting the tech ecosystem. And I’ll give you a few very clear examples, like I was getting pitched debt products, this is 2020 2021 that were cash flow and profitability based loans. And at the time, as you know, tech, everything was up for California.

Earnest Sweat 06:24
I’m like, Well, what are those terms? Never heard.

John Rikhtegar 06:28
It just made no sense. And like, if you think about a bank, and like how banks were built, banks were built off of providing traditional debt or leverage to cash flowing based businesses. And tech companies are fundamentally different in that their cash burning pre profit and scale by equity capital. So the traditional archetype of a founder or tech company, it was never meant to be relevant to a bank. And then I’m also working with bankers who are incredibly financially astute and financial engineers and understand, you know, the underpinnings of a business, but they weren’t building tech. And so there was also a bit of an empathy mismatch. Nevertheless, I got introduced to the gentleman who heads up our group now at RBC x. And the whole premise that RBC saw was like, Look at how much technology is contributing a percentage of GDP, look at how much venture funding Canada is getting, look at some of the breakout companies we’re getting, look how much employment you know, venture backed companies are driving the overall economy and Canada. RBC being the largest bank, it makes sense for us to build a dedicated platform and strategy that’s built for the innovation economy in Canada. So now I’m in a privileged position where I get to work with, you know, a lot of amazing founders and a lot of amazing GPS, and both invest from RBCs Bouchy capital, as well as be partners in an ecosystem. Wow,

Earnest Sweat 07:35
So I think one thing for me, before we get into kind of like your seat now as an allocator, is, what’s your thesis on now on where things are going from your seat? Where’s the misalignment in the markets?

John Rikhtegar 08:06
Yeah. It’s a good question. Listen, I think I know you said my career journey was intentional. It seems quite intentional. When I play it back to you. I can tell you at the time everything happened very serendipitously. And I feel like that’s just the way it goes. I think the misalignment that I see in the market today, you know, it’s a good question, the Canadian, and I’m going to touch on this when we speak on some of the Canadian nuances. But like, I think what’s interesting about Canada is, when you think about the Canadian venture ecosystem, it’s really only been around properly for a decade to 15 years. And so you think about that being one full cycle, there’s still a lot of liquidity that’s going to be coming back. And that’s warranted over the course of the next five years. But what’s interesting is, the government’s played a pretty significant role in helping prop up the ecosystem that helped get it running. So it’s actually sustainable, and the endowments and pension support from a Canadian perspective, you know, whereas in the US market, a lot of endowments and pension funds invest quite aggressively and support the venture ecosystem. In Canada, you know, we rely a little bit less on the endowment, pension capital to support from an LP perspective. And a lot of the LPS that invest in Canadian ventures are actually fund of funds, family offices, high net worth individuals and corporations. And what was interesting when I first joined RBC, and what I see now is, you know, corporations, I think need to play a larger role, like I think, you know, on the LP side, specifically, even on just like the capability side, the opportunity I see is, you know, given Canada’s a relatively smaller market, but there still are big businesses and big companies and technologies impacting everyone. The opportunity I point blank see is how corporations, whether it be banks, pensions or endowments, actually double down and play a large role in supporting the innovation economy. Talk

Earnest Sweat 09:49
to me a little bit about when you got to RB x was the fund of fund program already there are no and it was not If it was not, that’s what I, that’s what I thought. So talk to me about seeing that opportunity, and how you were able to even get that done and basically incubate within already a large company within like a new initiative

John Rikhtegar 10:16
on a present. And maybe helpful even before going into that, I’ll give a quick overview of the key pieces of RBC x, because it’s actually relevant for why we ultimately do fund investing on the venture side. The business of RBC X is really theirs. The way that I describe it externally, is essentially the group within RBC that’s responsible for advising, banking, buying, building, and investing in technology companies and funds. And so the group has 500 People across Canada. And they’re really segregated into four core pillars. There’s a banking pillar, very similar to SBB, as in the US market, where that in Canada in a sense that we only focus on the innovation economy. So we bank ahead to prep your companies to support them through deposit management, cash management, and then ultimately, credit lending. So like venture debt and SaaS lines of financing. There’s a platform pillar, the platform pillar is very similar to what funds would have visa vie advisors to their portfolio companies to help them scale hands on, we have that same capability where we brought on subject matter experts on our p&l in sales, procurement, marketing, data science, so that we can deploy them into our growth stage banking clients, and help those clients scale out more hands on so they can view the bank not as a service provider, but actually as a partner to their business. We have a venture pillar. It’s all about incubation and m&a. How can we build businesses that are designed to help future proof traditional businesses like a bank, as well as how we can potentially buy capability to bring in house. And then the last pillar is the pillar that I helped lead their capital pillar. So that’s everything with respect to fund Finance and Investment Management. So what my team does is we bank the majority of venture capital funds in Canada, support them through cash management and deposit management. We provide them with fund finance facilities, like calling facilities and GP connected facilities, most notably. And then what I do is I invest in growth stage companies series up and then build out and invest in our fund of funds or fund investment vehicle, which is all about investing in early stage managers. So with that context Earnest Going back to your point in terms of like, how did you kind of stand this up? And what opportunity did you see? Listen, I think when we first joined and when this business first got built in RB CX RBC didn’t do much with respect to venture capital fund investing. And the reason was really twofold. The first was the amount of work, energy and resources that would go into making a $2 million commitment and a 20 month our fund was the same as a 20 209 our fund, so naturally, you know, they did private equity growth, because funds were bigger, you can allocate more capital. And then the second reason was, if you think about the stereotypical institutional grade Investment Committee, very sophisticated individual venture capital typically gets greeted with a ton of anxiety, right, like you see the return dispersion in venture, it’s the widest in a private market strategy. You look at the s&p over the past 10 years, you can get a 10% compounding flow liquid return, like that’s a tough hurdle to clear. Since we’ve built our BCX over the course of the past three years, we’ve since invested in 14 firms and 16 funds. And for context, the profile those managers have ranged from, you know, a $15 million Emerging Manager Fund one to a $70 million fund for to a higher mind or life sciences or cleantech fund. And the reason why we’ve been able to be more willing and keen to do these types of investments versus traditionally probably being a little bit more reserved, is by viewing the asset class, both financially and strategically. And what I mean by that is, when I was helping build the thesis for this group, there were essentially three main insights that we saw in the marketplace that completely underpin why we do fund investing that actually still hold true today. The first was companies staying private longer. And so as companies stay private, longer terms are getting extended beyond the 10 year term. And his terms get extended naturally illiquidity premium relative to the public markets that needs to go up because I am going to invest in a committee not necessarily pitching a 10 year illiquid investment, but something that’s more like 12 or 15 years. So that illiquidity was kind of like insight . As I mentioned, dispersion in venture is the widest in any private market strategy. But it’s actually gotten so much wider over the course of the past five years, because so much liquidity has been pumped into venture and alternatives at large, finding a top decile, let alone top quartile manager takes a ton of time. But it’s also like finding a needle in a haystack. So that was really interesting. And then the third insight, which is most interesting to me, is if you think about the landscape of LPs, like folks who invest in venture as the asset class, whether it be an endowment or a sovereign or pension or a fund, a fund or family office, the only lever those folks have to generate cash inflows by way of distributions. And so underwrite a manager to 3x or 5x. Net over 10 years. But for my business, it’s actually a little bit different. Because what I can do is I can say, you know, if we’re looking to invest in America, that’s building a large proportion of the portfolio, Kenyan domicile companies such that we can support them on the RBC X banking side, if they’re doing so at the very early stage like precede seed, such that we’re able to build relationships with the founding teams at the early stage of company formation. If we’re one of only very few or the only Canadian financial institution, the LP syndicate such that we can leverage the mothership of RBC in a multitude of ways With the relationship with the partners and the portfolio companies, if the GPS probably taking more of a diversified versus pure play concentrated approach to portfolio construction, so we’re just getting exposure to a higher proportion portfolio companies as a result. And then if I’m just being mindful about, you know, when you’re gonna get a new manager, we’re looking at the track record, we’re looking at the deal flow. And we’re overlaying that with the existing managers we’ve invested in today to ensure that you know, the the exposures both valuable and accretive there, so to speak, fishing in a separate pond, fund investing becomes incredibly objective, because I can say, you know, what, have fun building a portfolio 50 companies of which 50% will be in Canada, and of which I think visa vie a strategic partnership, we can support 80% of those Canadian companies, 50 companies 25, Canadian 20 to RBC acts. Like if I’m all out them with fair portfolio construction, mortality rates and graduation rates, I can say with some degree of certainty, if we put $5 million into this fun, we should be able to pay it back one time is over within three years, and three times over within seven years, purely looking at revenues that we can accrue at the fund level, from working with the GPS banking the fund and supporting the fund, and also banking, the underlying portfolio companies. So the underlying kind of implications of the strategy, there’s really two things that kind of fall out of it. The first is, you know, instead of only having one lever for cash inflow, we actually have three, which helped the terminal profile of our performance at the end of the funds life to be able to accrue revenues at the fund, portfolio, company and distribution level. But we’ve also been able to somewhat solve the Quiddity for the bank, because in a way, instead of having to wait for year eight for material DPI to crystallize, we can actually start generating cash inflow, the moment the GP starts deploying to their new companies, which actually starts paying back the original equipment that we made from day zero. So that’s why we’ve been able to do what we do. And it’s been an awesome learning experience today.

Earnest Sweet 16:46
John, do you have a diverse group of groups that are within our audience? And one is, you know, allocators in new allocators or people who want to build out new programs within their organizations? What advice do you have specifically for those corporates that are considering incubating some fund to fund practice? And it doesn’t have to be specifically to like, what it like for a bank, but any type of large corporate, what would you say they need to like think about to actually accomplish this 100%

John Rikhtegar 17:25
The first thing that comes to mind is you need to be, you need to have top of the house alignment. And I kudos to the leadership team of RBC x and the folks who lead our group who’ve gotten the buy-in of RBC at large to say, this is a dedicated strategy and platform that we’re investing in perpetuity. And so having that buy in at the top of the house, I think it’s incredibly important. I think the other thing is, like, understand where you have alpha, like, understand where your strength is that potentially other folks don’t like in the example that I gave, there’s a lot of adjacent, you know, products and services and capabilities and strengths that RBC has that other potential allocators don’t have, and vice versa. There’s a lot of weaknesses and things that we don’t have that other folks have. And I think the important thing is just understanding what can you bring to the table that makes your capital strategic, and that your platform can help GPS be more strategic in their company building themselves?

Alexa Binns 18:15
The cross pollination, sort of how you can be how you can be a good partner to so many different parts of the bank, I think, sounds lovely. In reality, have you experienced like, what, what’s the what’s the reality now that this strategy is, is sort of in motion? Are there any adjustments you’ve had to make? Or have you found that some things work better than others?

John Rikhtegar 18:37
I think for us, it’s worked really well, I think the way that we first started off was like, as we’re building the RV sex practice, let’s build anchor partnerships with some of the best GPS that we believe have access to some of the best deals in Canada. And that was kind of first and foremost, then it was all about how can we support phase two is like, how can we then support the underlying portfolio companies? So you have a relationship with the GPU? At the firm level? How do you support the underlying portfolio companies? And that’s really through the products and services that the bank offers. The next lever that we kind of added there was like, How can we really support the GPS? And the GPS on the personal side, right, like whether that’s on the wealth side, whether that’s on the mortgage side? Like how can we build something that’s relevant for those partners. And phase four, which we haven’t necessarily built out yet. But what I really think about is like, how can we now really help the founders, not necessarily on the professional side, but even on the personal side, like if you think you’re investing in some of the best GPS, who ultimately are investing in some of the most brightest minds in Canada, and abroad, and you know, that some of those founders will potentially be some of the next high net worth earners of the next generation from some of the best companies that they ultimately build? How do we help them make sure that we set them up for success in terms of the mothership of RBC when they ultimately do a liquidity event? And we can’t support them through that? Well, so there’s multiple layers to it. But I think at first he was kind of like, Let’s build the anchors, let’s help them with their companies. Let’s support the GPS. Let’s support the founders and I think That kind of four legged stool is how we think about it in practice.

Earnest Sweat 20:03
Now we’re gonna take a quick break to speak with our sponsor.

Alexa Binns 20:07
Next up we have our industry expert and sponsor Brian Huber, fun partner at Gunderson Dettmer, PitchBook has named Gundersen, the number one law firm globally for investors 10 years in a row. Our guest Brian’s practice focuses specifically on structuring, forming and operating VC funds. I have used Gundersen in my own fund formation, and I can highly recommend them. Thank you, Brian, so much for your advice and expertise on the fundraising side that is front and center for a lot of the people who listen to this show. We’re recording June 2024. So is fundraising starting to pick up?

Brian Huber 20:48
I would say yes. emphatically. Yes. I say that both because I think it’s true. And also because I think saying it helps it to be true. I don’t. I don’t have empirical data that I’m basing that on. I have just anecdotally been dealing with the past three or four months, which is a huge influx of calls from new clients and clients that maybe paused for a little bit that are looking to reignite their launch process. And so we’re seeing a lot of activity, I think. So there’s sort of the activity associated with fundraising. And then there’s the onboarding closing. And I think the next six months of this year are going to tell whether, you know, we’re really in a you know, it’s here to stay, or if it’s just a blip. And I’m pretty hopeful that it’s here to stay, because I think, you know, a lot of folks that were struggling in the past couple years with fundraising have had final closest finally, and are already back at it thinking about what what they’re going to do in their next Fund, which is always a great sign. Resilience is something that is why I’m in this industry. And so I would say emphatically Yes, it’s back. There we go. Or

Alexa Binns 21:58
Are the more established firms having that much of an easier time than the emerging managers? Or is that this is something we

Brian Huber 22:05
talk about with clients all the time. Emerging managers, you know, I represent a lot of emerging managers, and it’s been the past two years, three years. It’s the most brutal fundraising market I’ve seen in my career. And, you know, I think I would say that more established managers are having an easier time, but it’s all relative, I think the easier is because they have, you know, existing, loyal, LP bases that they can tap into, whereas emerging managers are starting a new relationship and a really difficult time where there’s a lot of options. But to say it’s easier, I would not, I would definitely not say that. It’s been easy. I think, you know, one of the big things that’s happened with a lot of LPs, institutional LPS dealing with the denominator effect, is that they’re taking time to reevaluate what they have in their portfolio and their managers. And so what, I have a number of clients that had very loyal very long term investors who didn’t come and didn’t reach out for their most recent funds, and it was, it was a shock. And so, you know, nobody has very, very few people who are immune from the tough fundraising environment. And so I would say that they might have it easier, but it’s certainly not easy. Yeah.

Alexa Binns 23:21
If you are working your way up the food chain and starting to talk to your first institutional LPs, what are some of those considerations you should have in mind? For those new relationships? What should GPS be prepared for talking to that, that endowments, the

Brian Huber 23:42
pensions? Exactly, is the state the state sponsored entities? So yeah, the one thing that you will definitely deal with is more process, more diligence, deeper dive, they’re going to do a very thorough review of your firm, your strategy, you know, what your what your goals are? I think it can be disconcerting for a manager that’s come from a relatively user friendly LP base. And I say user friendly in that they don’t, you know, it’s not that the institutional LPs are not user friendly, they just have a much more robust process. And I think that’s a great thing for managers, because it allows them to prepare for those questions. And usually what we’ll do is, we’ll come up with our own, almost like a test prep, PDQ that can be used with external investors, but But oftentimes, it’s just an internal, you know, talking points sheet, so that when you are asked the questions you’ve already thought about them. And I think that the most important thing is to not, if you can to not have a question come up that you haven’t already thought through. But, you know, I think what happens with the institutional investors is it really helps professionalize you as a manager, because there’s not going to be a stone left unturned. And, and so, ultimately, they can be a really big Cornerstone investor for your fund. And that can also lead to more inbound requests to invest. But, you know, one thing that we also just sort of, I don’t know if it’s to commiserate with or or counsel our clients on that are doing their first institutional, you know, outreach is, it’s going to take a long time, it’s going it’s a month long process. And that, you know, you shouldn’t get discouraged by that. It’s expected to happen. Very rarely. And I think in some cases, back and 2021, folks are moving quickly on anything, and everything. And so, and that led to, you know, that wasn’t a good thing. And so just be prepared for it to take a little bit of time, it’s going to take longer than you expected, but don’t get discouraged, because, especially if they’re going into the more deep dive analysis, you’ve already passed the first test. So you should, you should see, you should welcome the additional questions with open arms, because it means that they’re really interested in what you’re doing.

Alexa Binns 25:59
Yeah. Yeah. Well, in my experience, was having the Gundersen teammates on that process also kept things moving along,

Brian Huber 26:09
too. Yeah, absolutely. Absolutely.

Alexa Binns 26:12
Are there any things that you should be prepared for in the LPA as you’re working with more institutional investors?

Brian Huber 26:21
Yes, so a large part of it is going to be reporting based or compliance based. I think, you know, reporting wise, it’s going to be, it’s hard to proactively set up your agreement to meet every need of every institutional investor, because they all work with their own script, they all have their own, you know, lists of things that they want to get. And so it’s really just trying to find a way to manage it all. without scaring people away. I think the other thing,

Alexa Binns 27:32
do those things all end up inside letters. And that’s where you expect them

Brian Huber 27:36
they do. Yeah, they generally do. Because those specifically on sort of reporting type stuff, it’s very bespoke, and it’s a little bit different. And for each investor, what we try to do is we try to, you know, massage the requests into something that looks similar across so that you’re not having to reinvent the wheel each time to do a specific report. But that’s generally where we would address it and aside later,

Alexa Binns 28:02
and are there any other trends you’re seeing? better, more? Maybe? LP friendly in the LPA?

Brian Huber 28:11
Okay, that’s, that’s interesting. So I wouldn’t I think trend wise, I wouldn’t say there’s anything, it’s funny, because there are trends that I’m seeing that are changes from, if I ran a comparison of our forum right now, against our forum from three years ago, I wouldn’t call an LP favorable, necessarily one of wishes, just based on a lot of the things that have developed in across the globe, there’s been a heightened focus in the industry on anti money laundering, know, your customer KYC type stuff. And historically, where you might have had a provision that says, you know, we’re going to try to do as much as we can upfront, and by the way, the US compared to a lot of other countries is relatively lenient, I think that will change. If, you know, in the near future, as we sort of get more into it. But you know, I think, whereas a couple years ago, we might have said, you know, we’ll do all our diligence on you, as we’re bringing you in, and you’re gonna make all these reps and warranties. And we have the ability to kick you out within a couple of months past the first closing, but after that, it sort of falls off the mat. Now, there’s much more robust rights for the GP to kick somebody out if they’re not compliant. And I think it’s important because in the end, they tend to and so I don’t know that. I guess I could, I would view that as an LP favorable to everybody but the LP that’s not confined. Yes.

29:37
Yeah, you’re, you’re happy, you’re happy that the bad apples are not not in the front with you.

Brian Huber 29:43
Exactly. Exactly. Um, I think in terms of others you know, venture does not, you know, the companies that our clients are investing in are very innovative and, you know, breaking the mold the venture fund terms tend to not really change relative to some of the other industries. So you’re still seeing the two and a half and 20, year two and 20. And, you know, 10, year term, five year five, six year investment period, all that stuff is pretty much stayed the same. I think so. And so I would say that there’s maybe not anything that’s currently in the form of LPS that would necessarily reflect an uptick in LP favorable rights. But I do think that the LPS coming out of this tough fundraising environment are in a much better position to demand or to request or to reevaluate what they’re asking us for wouldn’t surprise me if we looked you if we look in six months, and, you know, maybe there’s more reporting that’s being done automatically, or, you know, I think those types of things could could be where we’re headed. Yeah.

Alexa Binns 30:50
Brian, it’s been a pleasure to get in touch with Brian or any of the other lawyers at Gunderson Dettmer, please visit gunder.com that G U, n, d, e r, DOT c o m. And now back to our LP, can you share some of what your GPs are coming to you for personally, it’s interesting to hear about the forms of forms of loans, etc. What’s Trending? Yeah,

John Rikhtegar 31:15
two things that come to mind. Very difficult for founders to get mortgages. I mean, the reason why point blank is they pay themselves very little. So it’s very difficult to service the debt. So the way that a traditional bank would underwrite a mortgage to a potential individual doesn’t really fit the archetype of a founder, because a lot of their net worth is tied up there in their illiquid company shares. And so how do you re archetype the underwriting criteria to allow mortgages to actually be available to founders? I think it’s something that I think about a lot, and that we’ve been spending some time on. I think the other thing, that’s really interesting, and there’s no necessarily solution to this, but you know, there’s a lot of times where founders want some level of liquidity themselves. And so the only opportunity for founders to get liquidity today is to the secondary market. But what that inherently does is, it caps their upside. And so let’s say there’s the example of an individual who wants to renovate their home or send their kids to private school or, you know, buy a new home, whatever it may be, and they need $100,000 of liquidity. You know, one of the things I think about is how can the bank help through providing a liquidity loan as an example, where the founder doesn’t actually have to take secondaries today, but can keep their upside and we can help build that relationship with them on the personal side, such that when they do ultimately raise that next round, or when they do ultimately liquidate, liquidate, that loan can be paid back. It’s a lot easier said just like this, versus when the nuts and bolts of all that get going. But those are two probably examples that I think about a lot that if we could solve it would be really interesting. I think you

Earnest Sweat 32:43
I can even tell from this conversation in our previous conversation, you are an active learner when you’re in a seat. And I’m sure you had a perspective when you were going to become an allocator. What that would feel like, what are some things that you didn’t know? But now you know that it kind of surprised you now that you’re an LP? Appreciate that?

John Rikhtegar 33:06
Great question. There’s two things that really stand out to me, one of them, I think, some of the audience could deem surface level but I think some folks would appreciate and one maybe a little bit more nuanced. You know, when you’re in business school, and you learn about venture, and let me say, first, I think not all business schools teach venture, but for those that do, and I think all should, what always gets discussed and the psychology of a business student, when you hear the word venture capital have always been the relationship between the VC of the startup. But what doesn’t get discussed and what you don’t learn about it is the entire business and relationship that is between the GP and LP, totally, and it is, and it is wild. And it is crazy, how opaque that is. And you almost realize being in this seat now is the entire kind of capital food chain that is venture. And the privileged position that I’m in is I get to see it from the very back. And I get to see everything looking forward. So like when I first understood more about this business, I don’t know if you both see Narnia, but it was almost like I opened up the closet to Narnia. And there was this whole world out there. And I had no idea it existed. And it was just like, really, really interesting. So I think the biggest learning that I had at the surface level was just like the capital food chain and venture and private equity is at large and how it works on the LP side.

Alexa Binns 34:21
Yeah, but number of founders who don’t realize that the VC they’re pitching also has a pitch

34:26
decK. Totally. Yeah, totally. My my

Alexa Binns 34:33
buddies from college all started, Doc’s end. And at one point, I got an email from Ross that said, Alexa, you’re a power user of Doxon. Why? Why are you in our top users? And I go, Oh, I have a decK. I’m fundraising. And it hadn’t occurred to him that you know, it happens higher up in the food chain, like you said, John, It’s

John Rikhtegar 35:00
so funny. Now it’s so it’s so true. It’s so true. And I think the other thing, just because it’s relevant to the other thing, I think most people that I work with consider me a data guy. I think that’s just one of the things I, you know, I like making decisions off of data, I think it’s very helpful and objective. And I think one of the things that I appreciate learning, it’s just venture math, like in venture economics, and how venture works financially. Now the money flows. And I’ll give you an example, like a lot of folks talk about these billion dollar exits and unicorn hunting, so to speak. If you look at the past decade, the median US venture capital back exit over the course of the past decade was $140 million. And so take that in consideration. And so now say you’re an early stage investor, maybe you bought a percent of that business on entry, and you get diluted down 50% to 4%. On exit, so you’ve maybe generated $6 million in proceeds back to that 100 $40 million exit. If your funds are 50 million bucks, you’re generating about point one DPI to three extra funds, you have to do that 30 times over all, you have to find 30 times the amount of exit enterprise value to accumulate. For you to do that 30 times over, you have to have five times better shots on goal to account for the loss ratio. So maybe you need 150 investments, if you have two partners. Maybe there’s bandwidth risk, right. And so it’s kind of like, just like understanding all the different implications and nuances from certain decisions and understanding the business adventure. Again, I still consider myself a rookie, but like, understanding how those decisions work, I think has been hugely beneficial understanding asset

Earnest Sweat 36:24
class. Yeah, it’s, I think, those are two great points, because it’s not just that relationship with founders. And it is opaque there because they don’t understand the other stakeholders that we are responsible for. To the allocators.

Alexa Binns 36:43
Could we do a little? I’m so curious, John, on fun math. Could we talk a little bit about where you’ve decided to focus as a result of that question?

John Rikhtegar 36:55
Sure. thing? Yeah. It’s something I think about, we talk about all the time at work. So why don’t I talk a little bit about the difference that I think through so we focus predominantly on smaller funds, we typically do 100 million dollar sub 100 INR funds. But there’s been cases where we’ve gone above that. I’ll give you the example of some of the gist archetypes that I see in terms of small versus large funds, and then apply to Canada and kind of give you that new odds. This probably isn’t this probably isn’t new to most people. But the way that I think about ventures, there’s two primary archetypes of investors, I think there’s folks that are focused on assets, and AUM, and folks that are focused on Molek or multiples. And I think understanding as an LP who you’re speaking to, is really important, because the underlying implications of that and return profile will be fundamentally different. And I’ll give you an example. So you have two separate funds, you have funding and fund B, say fun days $100 million fund that fund B’s a $500 million fund. Now, if you’re the GP on the 100 million our fund, say you’re able to Forex that fund your take home, you would have made $20 million in fees 2% over a 10 year term, $20 million, and then you would have made 20% of the 300 million our profit pool, which would have been $60 million. So if you for X 100 million are fine, which most GPS would probably be very, very satisfied with and LPs, you would take on 20 And fy 16 profits, so $80 million in total. Let’s take fun, be fun, it was a $500 million fund and say you only want x at five Herman is fond. You’d make nothing in profit as a GP, but you still make 20% in management fees. 2% over a 10 year term is $100 million in fees. So what does that mean? That means you as the GP would make $20 million more if you want X 500 Mine are fun than if you Forex one undermines our fund, which I think is fascinating. I think that’s like the clearest example of sometimes misalignment in venture and why it’s really, really important to understand who you’re speaking to, because though the GP in that case would make more in fund B, the LP would make three times more of their money in fund a. And so that alignment is key. Hence, why at our group, small funds sub 100, man or funds has always kind of really been the focus. But I think it’s also important to talk about the Canadian lens. And again, I’ll kind of route this on data. Over the past decade, I mentioned the median US venture capital return and I know not everyone’s into the median, we’re in for the upside in the asymmetry. But like, go with me are on the median 140 million is the median VC back return over the past decade in the US and Canada, it’s about 95 million. What’s interesting is that over the course of the past decade annually, it’s roughly been 50% of the US exit. So Canadian exits typically have been on median half of what the US is excited for. There’s very clear implications as to what that means from a Canadian perspective. The first is it’s important that Canadian investors are very disciplined allocators, don’t follow the heat and can invest very early and invest a good amount of capital early. And the reason why that’s important is if you know your median exit value is technically lower than the US counterpart. You need to be able to come in early to still have the same asymmetry to generate a strong multiple, right the difference between investing in a $10 million post money valuation and in it 20 million or post money valuation is half your return. So I think in Canada, going early is incredibly important. I think the other thing that’s unique to Canada, is capital efficiency is super important. And I’ll give you another clear example. Right, like if you know $95 million is the median exit value. If you think about the investor return on aggregate, if the target is a 10x, that inherently means that that $95 million exit can only consume 1/10 of the amount of capital, right nine and a half million dollars. Now on the US side, if the US exit is two times larger, theoretically, that US exit can consume two times the amount of capital for the same exit profitability. So what does that mean? That means that in the Canadian market, we can’t just follow what you folks are doing in the US or else our companies will be way over capitalized. And so we need to figure out how we can still get to the right exit values, while staying capital efficient, and trying to do more with a little bit less. And I think, when you think past 2021, and the past few years, where capital efficiency was, has really been the priority, I think that’s been very strong for Canada, because that’s something that has really been ingrained in company building DNA and trying to understand, given we know, there’s less capitalist side of the border, how can we help our companies do more with less. And the third thing I’ll mention, which I think is also interesting, is just with respect to fund size, like, I think, you know, if you have two different types of exits, and the same fund size, US and Canada, you know, the fund level returns will vary quite considerably. And, you know, if you own 10% of that $95 million median exit, and you get nine and a half million dollars back on a $20 million fund, that’s point 5x DPI on a $50 million fund, that’s point 2x dpi, and so that the implications there are quite significant. So for us for the nuances in Canada, investing early, investing in GPS that are focusing on capital efficient businesses, and investing in funds that have kept their funds size appropriate to the scale of the Canadian market, has really been where the group has focused today.

Alexa Binns 41:54
The grant making part of the government grant making also seems to come in really early to help with that capital efficiency at super early days. Is there anything like that, as you graduate to being a more mature company?

John Rikhtegar 42:12
Not as much. You know, there’s, the growth capital in Canada is quite thin. There’s a few folks, there’s a few folks that I’m sure you both know, like Georgia and partners and Novia, who are very established and reputable partners. And the good thing about there being few growth funds in Canada is they get to see everything in Canada. But typically, some of the best strengths that those platforms hold is the ability to also be the trusted boots on the ground for Canadian deals for foreign investors, specifically those also in the US. And so though, on the growth stage side, there’s less visa via grant. And more on the other stage side for sure. The growth partners that we do have in Canada, albeit less than the US have done a great job being able to support local innovation. John,

Earnest Sweat 42:58
it’s really interesting, you said that, given the Canadian venture market is about 1015 years old. And then you went and said, Hey, given the math and you went through it, and the median exit, we can’t do the same things that the US can do. That kind of broke my mind. And I had to check myself because it was more of a like, Oh, I’m having a US centric approach of like, oh, since they’re behind us, then they can learn from all of our mistakes and do it better. What is it that doesn’t seem like that is the case? What other things do you feel that your market will have to Zach, where we Zig that goes along with that idea of hey, we have to take less capital and do more with less? What other things are you seeing within the venture market in Canada?

John Rikhtegar 43:50
Yeah. It’s another great question. I’ll try to emphasize a few things that are probably less spoken about. So I won’t touch on AI or anything like that. But why don’t why don’t we touch on fundraising. So this is capital raised by GPS from LPs, if you look at and it was recent reports that were published recently, if you look at capital raised by GPS from LPS in the US market, from 2022, to 2020, I think the figures are down roughly 54% In terms of capital value. And if you look at that in Canada, it’s down 77% from our data. And so what that means is we’re definitely on the same train, but our train is going down a steeper cliff. And the reason why that’s the case kind of goes back to that LP composition that I mentioned, when we don’t have some of those big endowments and pensions, investing locally. It just means there’s a bigger capital gap to fill. But what’s interesting is if you look at fund count, so that was a valid look at fund count between 2020 and 2023. The US is down 64%, Canada’s down 30%. So what that means, interestingly enough, is we’ve been able to raise more relative funds to where we were previously but those funds have been smaller. I think the reason why they’ve been smaller besides the key point I made is really because I think GPS fundamentally understand that to invest in Canada, you need to apportion your funds size appropriately to still be able to generate strong returns, given that small funds don’t have strong fees, and you make a lot of your upside on the carry. As well as the fact that exit values and exit values in Canada just are not the same as really on the US market. So on the fundraising side, that’s kind of one of the interesting dynamics, I think that I think about a lot. I think the other thing is on the liquidity side. And you mentioned this, but, you know, if you go back to 2011, as I mentioned, when our ecosystem really started getting going, from an institutional perspective, been 10 to 15 years, you have a lot of late stage assets right now that are kind of on the sidelines, the next five years are going to be critical for Canadian venture, because I don’t expect a lot of this liquidity coming in 2024, I still don’t expect a lot of that coming in 2005. I think 2627 28 are gonna be years whereby you’re going to have a lot of these companies that maybe were founded in the early 2010s, got there first find things in that kind of like 2012 1314 era, and going to be some of the bigger names that have came out of Canadian venture over the course of the past few years. And what’s interesting, again, from a data perspective, is if you look at the totality of aggregate exit value over the course of the past decade, in the US market, relative to the amount of capital that’s been raised by VCs, the ratio, there’s roughly 2.9x. In Canada, that ratio is 1.7x. And the reason why it’s lower is because there’s been less relative liquidity. And so I think liquidity is really important. I think that a lot. And the last thing I’ll touch on with respect to Canada, which is really interesting, it’s just like exit value to fund size. I know I touched on this, but like a little bit different. Funny enough 2023, based on our data, was the first year where the median Canadian exit was very strange, but the median connected key and exit was actually larger than the USB and exit. So contracts, what I just said, slightly. And what’s interesting now is not necessarily to compare the exit value and 23 to the median font size and 23, but the exit value and 23 to the median font size and 2014, to understand how funds who invested in these companies are ultimately going to be able to generate financial returns. So like, if you look at Canada, the median 20 13x value relative to the median 2013 fund size was 1.2x. The median 20 23x value relative to the median 2013 fund size is 6.9x. And I think the implications there are really interesting as GPS thinks through, you know, folks making decisions on fund sizes today and capital allocations today are fundamentally underwriting to where they think exit values are going to be in 10 years. Because if you look at where the majority of large exits that came in venture, we’re talking eight 910 12 years, like it takes a lot of time. So yeah, some of the unique takes on Canada, but I’m super excited for the next five years for sure. Judd,

Earnest Sweat 47:47
I have a follow up to that. Yeah, on the market. So, you know, I appreciate the median approach, but like we’re in venture, and we’re all doing this for outliers. So for the outliers, one assumption I have and I’d love you to respond to it is, you know, prior to the pandemic, I think the move to have regional small venture players to own certain regions, whether it’s countries or parts of the US was that we’re gonna find the best companies and get that ownership before then they become coastal darlings, right? You see that even with Shopify having a lot of Silicon Valley companies or firms invested in, did that change now for outliers? Big we know now when we all realize we can do zoom being a flooding of like, large funds, having seed programs and precede programs. Did that change kind of the math as well, like, how do you think about keeping value in funds and candidates being able to have ownership and those outliers?

John Rikhtegar 48:59
It’s a great question. I think one of the things that, you know, started with COVID and continued on for the Bull Run was a lot of like borders, everything was borderless, like the amount of US capital that was invested in Canada was that I don’t have the data on this. But like I know, for a fact the spark was way high. Like it went from maybe 20% of all capital raised from Kenyan companies was from the US, US, the US VCs. And that sparked up to 50%. And so I think what that meant then was US investors were underwriting Kenyan companies as though they were just typical companies, which may bring a little bit of risk if they go back to the kind of Canadian type exit. But I think to your point Earnest One of the things that’s really interesting, that we’ve been spending a lot of time on recently, is Canadian Life Sciences. Because this is a very unique, unique space that’s kind of very niche and specialized, I think it is actually overlooked. And I’ll give you a very unique, unique perspective here but like the Canadian Life Sciences market, the the amount of IP that comes out of Canada with respect to some of the research institutions and hospital As an academic institutions, relative to the amount of capital that’s available to fund those, to fund those innovations, is incredibly high, meaning the amount of capital available is very low. And so if you’re a GP, focused on Canadian early stage life sciences and have some dry powder, you have access to a lot of really, really interesting innovations. What’s also interesting is, if you take what I mentioned on the importance of Canadian investors investing early, a lot of Canadian Life Science investors actually focus on co-creation, IP generation with the founding team. So they’re literally like a founding partner. And what that means is they can literally command 20% Plus entry ownership on some of these businesses. And if you can do that, regardless of what your exit value is, if you’ve kept your fund size appropriate, you can actually generate some really substantial fund level returns just on that last longer model. Exactly, exactly. And, and the other, you know, the last piece I’ll mention that makes, you know, your comments on specialization, so unique is like, again, from a data perspective, if you look at the top 50 Canadian venture backed exits in history, 13 of those 50 have been in life sciences. But which is, which is quite remarkable, right? Like most people probably wouldn’t think that. But Canadians definitely punch above their weight when it comes to life sciences. And if you think about, then, those 50 companies, and you look at the aggregate exit value that they’ve generated, 40% of the aggregate exit value came from those 13 companies, which is remarkable. Which means that Canadian life science companies, not only can these investors invest very early, not only can they command very strong entry ownership, but they can actually get out buyer type exits to your point, which makes that subset of venture specifically for Canada, quite interesting to be spending a lot more time in talking

Alexa Binns 51:39
so much about the exit opportunities. What is happening in the next 234 years in terms of m&a and the IPO market? Because here we’ve got so much antitrust regulation, what are the opportunities? What do you guys talk about in terms of your exit

John Rikhtegar 51:58
opportunities? Yeah, it’s probably quite similar to what you folks talk about as well. I mean, like, listen, I think, many, one of the other learnings I’ve had from just doing this for a few years is how cyclical ventures are. And I think Bill Gurley has said it best in that venture, you have these long kinds of risk on periods, and then you have these sharp risks off periods. And it’s almost like a sine curve. And the goal of venture is to be able to position your funds so that your portfolio can liquidate at the peak and invest at the trough. And I feel as though now based on the data that I’ve seen, we’re a little bit past the trough. I think the worst is behind us, I hope. But still, if you’re a GP, now, I think we can all agree is probably not the most opportune exit window to be able to liquidate your holdings just purely based on where pricing is. And so if you have the flexibility to probably wait a few years, given your companies can grow and sustain that timeframe. I think it gives GPS a little bit more leverage to be able to get more upside in some of these exits. What I think is really interesting, and I think Earnest may have mentioned this in a prior podcast is just like, there’s a huge liquidity glut when it comes to the public markets, like our RBC group put out a report and it showed that there were $650 billion plus privately held companies today. And even if half of those have those valuations that are warranted today, you know, 325 companies, if you look at the sheer pace of VC backed IPOs, over the course of the past decades, like 20 to 30 a year, which means that you have a decade long liquidity glut. So like everyone would always speak about venture, the off ramps, the vector for liquidity for ventures, the public markets, I don’t know if that’s necessarily reliable anymore for the next little while, at least. And on the m&a side. One of the things that I’ve been speaking to a lot of our GPS about and seeing is like anything over a billion dollars is getting significant regulatory pushback. And so GPUs are now thinking how can we liquidate and put points on the board on 100 million dollar exits 250 507 or $50 million exits? And I think what’s interesting there is I think funds who have kept their fund sizes appropriate have the flexibility to do that. I think a lot of funds who raise at the peak and we still have a lot of dry powder and large funds probably don’t have the flexibility to be able to take preliminary liquidity or to be able to actually generate fund level returns on, you know, single 100 million dollar exits or $500 million exits, because it just doesn’t resonate in terms of the broader fund. So I think liquidity is a challenge. I expect it to be. I expect more cash outflows than inflows for ventures at large over the next two years, at least. And I think it’s just going to be a matter of trying to sustain and keeping the portfolio upright if you’re free for GPS.

54:27
Are you actively

Alexa Binns 54:28
looking to speak to managers and what’s the sweet spot? Like, who should reach out to you?

John Rikhtegar 54:34
Yeah, appreciate that. Absolutely. We’d love to speak with anyone building adventure. You know, I mentioned sub 100 million dollars is typically our sweet spot. But even if you’re above that, you know, I’m a student of the game so still keen to learn and build relationships. As you guys know, it’s a very relationship driven business. So feel free to reach out at John DOT ric dr@rbc.com And I’m always keen to connect.

Earnest Sweat 54:56
John just wants to say thank you for just your thoughtfulness, the data and just wish you the best in the programs and want to help any way we can appreciate it. Thank

John Rikhtegar 55:09
you guys. It’s been a blast. you later alligator

Earnest Sweat 55:13
after portfolio tile, investing with a smile.