Episode 149 - Marks on the Markets: What's Happening with Venture Capital and Growth Equity? With Brandon Allen and Phil Jung
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The venture capital landscape has changed dramatically in recent years.
How can investors move forward responsibly? How can we care for the entrepreneurs we’ve invested in? How do we find hope in the midst of challenges?
We cover these questions and more in this month’s edition of Marks on the Markets.
Host John Coleman is joined by two leaders in the venture capital and growth equity space: Brandon Allen, Co-founder and Managing Partner at TXV Ventures and Phil Jung, Partner at Sovereign's Capital to discuss how they’re navigating the rocky state of venture capital and growth equity.
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All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies and securities discussed. This podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization.
Episode Transcript
Transcription is done by an AI software. While technology is an incredible tool to automate this process, there will be misspellings and typos that might accompany it. Please keep that in mind as you work through it.
John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman and I am joined today by two absolutely extraordinary guests who are going to talk to us about the current markets in venture capital and growth equity. This is our monthly marks on the Market podcast, keeping up with the most recent events in markets. And I think the expertise that these gentlemen bring to venture capital investing is going to be really enlightening at a time when venture capital investing has been a bit rockier than it was for the 15 years prior. Joining me first is Brandon Allen. Brandon is a co-founder and managing partner at TXV Partners in Austin, Texas. Then secondly, coming to us from the DC area is Phil Jung, who's a partner at Sovereign's Capital in the venture capital team. After a successful career as an entrepreneur, as a business leader and a venture capitalist as well. Brandon Phil, thanks for joining today.
Phil Jung: Thanks for having me.
Brandon Allen: John. Thank you so much for having us.
John Coleman: So we have a lot to talk about because there have been a few things happening in venture capital markets over the last two years. But before we get into the tumult of that time, including bank collapses and all manner of interesting occurrences, I wanted to throw it out to you all. I know you gentlemen are both motivated by your faith, your people for whom mission is really important. What motivated you to get into venture investing and how does that play into your values? And Brandon, I might start with you, if that's okay.
Brandon Allen: Absolutely. Thank you again for having us John that's really exciting and just to be a part of the FDI FDE Sovereign's Capital family, it's been such a blessing to Marcus and I, as we've been starting this fund, I am reminded oftentimes of the Bible that I got when I was in third grade at my church and the verse that was underlined, there was a challenge. There's a verse to underline within it, Go try and find it. By God's grace. I actually found it that day and it was Luke 4:18. The Spirit of the Lord is upon me for he hath anointed me to bring good news to the poor. He has sent me to proclaim the innocence of the captives, recovery of sight to the blind, and to let the oppressed get free, such that they can declare the year of the Lord's favor. And so when Marcus and I think about what we're building here, we really think we're just building something for the kingdom. And there's an incredible social element to that. We want to support through our focus in human performance technologies that actually increase our ability to live happier, healthier lives. We want to build a culture that people want to come into and that people will grow into and learn from. And then we just want to align with great partners and create value for his kingdom. So our faith is really at the center and the core of what we're trying to do here in every single aspect and the aspects that it's not. We're working on it and the Lord is working on us to make it more so.
John Coleman: That's awesome. Phil, how do you think about it?
Phil Jung: Yes, I've spent most of my career at various early stage venture capital firms, both at a firm on the West Coast in Silicon Valley, as well as here on the East Coast, where I currently am based. And I had a stint where I joined one of my portfolio companies as CFO back when it was an early stage company and we were a tech company in the mental health space. So during COVID, we were one of those companies that were very fortunate to be in a position to help a lot of folks in their mental health behavioral journeys. So we scaled very quickly from about 50 to 350 or so employees. So I've been very fortunate to have that experience of being both on the investor And then on the operator side, I met Jake Thompson, who's the managing partner of sovereign's venture capital firm, something like eight or nine years ago. We actually were neighbors. We lived on the same street in Capitol Hill in Washington, DC, and he had just joined sovereigns from Booz Allen, a consulting firm at the time. And I started my career in consulting. And so we kind of hit it off. And as I was getting to know him, seeing each other at events and conferences, and he shared more about this thesis at Sovereign's of investing in excellent entrepreneurs that are building great businesses for good market rate return, but also doing so from a place of deep conviction that how you can love your neighbor is through how you steward a business and how you care for one another and love your neighbor through how you scale a tech company. You know, that was a that was a new concept for me. I was a little skeptical at first, but as we continued to grow our friendship and and I got to meet Henry and the others eventually on the team, and most importantly, I met some of the CEOs in the portfolio. And at the time I hadn't invested in many entrepreneurs, but seeing and meeting some of these entrepreneurs, they had such a clear conviction that they were building these businesses for the kingdom and not building, quote unquote, Christian businesses, but businesses for the world, but doing so from a foundational layer of bringing forth the kingdom perspective. I thought that was really powerful. And so about a year ago, I had the opportunity to consider joining the team. I met folks like John. I was impressed with what the Sovereign's team was doing. And in fast forward, I have the privilege of helping to support entrepreneurs as they go about scaling and building their tech companies in the entrepreneurship venture capital space. So it's been great. It's been a lot of fun and life giving at the same time.
John Coleman: I guess We managed to talk you into joining in spite of knowing Jake for [.....] me, the Phil I'm. To throw it right back to you. And then, Brandon, you can jump in as well if you want. Obviously, the venture environment has changed. You're a nice old man here. You've witnessed a lot of changes in venture capital up to 2021. We were really on something like a 13 year bull run, maybe even longer than that. Talk to us about what that environment was like as a set up so that we can now talk about what it's been like over the last couple of years.
Phil Jung: Yeah, so I started in the investment world in 2015 and it was an interesting time. As every year passed, the market continued to get hotter and hotter. Back in 2018, you started to see more of a drastic, a rapid change in 19, certainly 19 and 20, where the venture capital market was white hot. You know, everything from seeing headlines in TechCrunch or venture beat of entrepreneurs raising tens of millions of dollars where entrepreneurship really became sexy and people wanted to be entrepreneurs. That's what people wanted to do to all the funding and capital that was being raised around that time and therefore needed to be deployed. There was lots of funding available for early stage startups, term sheet who are getting done in a matter of weeks and sometimes days with a very light diligence. FOMO was very, very real. Rounds were coming together very, very quickly and companies were raising therefore very quickly. Every 12 months or so, for instance, there was an emphasis on top line revenue growth as opposed to profitability targets. And as companies were running out of cash, it wasn't a problem because they were able to go out to market, get five or six term sheets and raise their next round of capital at significant mark ups from the last round. So it was it was a very robust time to be a startup founder or even a venture capitalist as you were deploying. When I saw this firsthand being on the operator side as well. So in 2019, i joined Mindoula as CFO and head of h.R. And yes, we're in the right space at the right time. We're a tech company in the mental health and behavioral health space. So during covid, we're able to help tens of thousands of people with their mental health journeys. And that was one of the sectors in the digital health space that was white hot as well. Every other week, it seemed like we had VCs and folks wanting to take us public via SPAC to reach out cold. We got term sheets over the transom from folks that did very little diligence. I remember in 2021 we got a term sheet for $150 million in half in equity and half in debt. And at the time we were only burning a couple of million dollars a year. I had no idea what I would do with $150 million. So it was a very different environment, especially in the last few years from a venture funding perspective, and things have just completely changed in the landscape in 2022 and certainly in 2022 at this point in the game.
John Coleman: Now pick up on that thread Brandon because it has changed dramatically. And of course some of that is driven by the most macro of environments, which is the interest rate environment. Some of it is probably a natural pull down from a white hot market. Previously, if that was the environment up to 2021-22. Brandon talked to us about what the last couple of years have been like.
Brandon Allen: Absolutely, I mean, the last couple of years we just got started. I was a freshman in high school in 2008, so I couldn't speak to the venture mindset as much back then. But, you know, I remember we kind of went through this exercise where every year it felt like the shoe was about to fall right. You know, the valuations on the public markets continued to expand. The valuations for early seed shows continued to expand. You had these huge capital vehicles, you know, the most prominent of which was SoftBank's $100 billion vision fund, doubling, you know, the size of the asset class overnight that was coming in. And as a result you had a lot of companies raising megadeals. And so it was incredibly hot definitely at the top of the cycle. But to your point, you know, we have now seen that that cycle is now coming to an end. We see it specifically within our human performance sector, which had a little bit of a market cycle from 2019 to 2022 now, but then also in the macro cycle and then also in the venture capital cycle and the capital market cycle as well. To give you an idea, there was 85 billion of deal volume in 2020, there was 125 billion in 2021 and there was 2 billion and there was 200 billion this last year. And so, you know, a lot of expansion, doubling of the asset class, but we're seeing a huge pullback right now.
John Coleman: Yeah. Brandon, you know, I'm a fan of your thesis because I'm buying new gadgets all the time. I've got my aura ring, I've got my GPS watch, my Garmin GPS watch. They're not sponsors of the FDI podcast, but perhaps they should be. As you think about navigating this environment, you know, one topic that keeps coming up are the different stages of venture investing, right? I know both of you are actually more targeted towards the early stage, but for listeners who are less familiar with the market, you know, they hear early stage, late stage growth equity and they hear that maybe the opportunities are different across those different areas. Phil, would you mind offering some thoughts on just what are each of those categories for our listeners? And do you view them in different places right now?
Phil Jung: Yeah, absolutely. So, you know, there's a certain journey that entrepreneurs are on for those that are raising, especially tech companies on this venture backed journey. Entrepreneurs may start off with an idea. They've identified a market opportunity, perhaps based on their years or decades of experience working in a certain industry. And so oftentimes a founder or founding team will bootstrap or raise a small round from friends and family to get an idea off the ground. Perhaps this is to build an initial MVP or do customer discovery to figure out is this a viable problem in a market that is in need of a solution? At that point is when entrepreneurs typically come to institutional investors, we often refer to that as early stage venture capital. This may be an early stage fund like sovereign's. It may be others. Then there's been a proliferation of early stage seed series types of funds that have popped up over the last decade especially. So at this stage, Institutional Capital Partners in the Seed and series A are investing in companies that are typically more than just an idea or a concept. There's a working prototype. There's customers. There's revenue being generated. And entrepreneurs are looking to add fuel to the fire, start scaling the technology or solution out there. So investors are pouring capital in, hoping to invest in marketing or further building out of a sales team to really start scaling this effort of bringing this idea to life. As companies continue to mature into different parts of kind of the life journey of a startup. So perhaps in the mid-stage you now have built out at this point fully fleshed management teams and are building out departments now, you're building more of a repeatable sales cycle. So it's more of a rinse and repeat type of playbook. So you may raise capital from VCs or other institutional partners that may be focused on call it the series B or the C rounds. And as companies continue to mature from that point, they'll hit the growth or late stage part of the ecosystem where these are big, big funders, oftentimes in the billions of dollars that are looking to void capital and companies that are preparing right before they go public. And so this market in that late stage mirrors a lot of what we're seeing in the public markets most closely, because as a next kind of life stage of the company. So these companies have an eye towards profitability if they aren't already. There's an absolute focus on strong repeatable unit economics and margins that investors hope to see a return on. And even in terms of valuation, it'll most closely mirror what we're seeing in the public markets, what the goal of these companies eventually going public and becoming IPO'd and providing a return for investors. So there are different funds that focus on different parts of the market segment and happy to touch on any of those segments further. And Brandon can probably share more expertise as he does early and both a little bit of mid-stage investing as well. But at sovereign's and in the group that I help lead or focused on the early stage typically around the seed or series A.
John Coleman: A Yeah. Brandon, pick up on that if you would.
Brandon Allen: How would you double click? One of the big things that we saw, one of the really huge major trends was the emergence of micro VCs, which Phil just pointed out. And so you had people like Brandon Allen and Marcus Stroud getting an opportunity to raise a fund. If you're raising your first friend, you're typically not going out for $500 million or $1,000,000,000 or a billion and a half because you have to prove yourself out. Right, So start small and then grow larger. There was a cultural emphasis on really getting people into business. This is where we get the whole concept of emerging managers. And so when we look at it, we see the capital markets, you know, some of the cultural trends that were happening there, emerging managers coming in and then driving the availability of capital for early stage ventures. And so there was nothing better to be than an early stage founder over the past couple of years that has now definitively changed and changed in a couple of ways. Number one, just anecdotally, in the data that we capture through TXV, we've noticed that people haven't even been coming in to do priced rounds. Right. And so when we talk about seed valuations or C Plus or series A, we're talking about things that are defined in announced. We've seen a lot of investors or excuse me, a lot of companies coming in and saying, oh, we need open ended capital arrangements, we need a convertible note, we want to do some debt, we want to do other types of things. We want to extend our last round. And so that just reflects that. It's a pretty tough time in the seed markets right now. Another thing that's happened is even within the seed investing within our sector, we've seen about a third drop. And so while a typical seed funding would have been about 8.8 million just last year, now it's dropped 29% to 6.2 million. And that's reflecting, you know, just a larger drawdown in valuations as well within human performance. One of the craziest things that's happening. And this starts to shift over into the growth equity in the later stage is that 40% of the digital health funding was accounted for in the mega deals that happened over the past quarter, too. So 40% of all the funding in the market went to basically about ten deals.
John Coleman: Oh, wow.
Brandon Allen: Which is crazy. So, number one, it's is that there's not a lot of early stage version is happening right now, within human performance. And secondly, there's consolidation at the end of the sector where people are saying, okay, we have all of these companies that have had all this availability to Koppel so far. We need to, number one, choose some winners, and then we need to number two create operational efficiencies within that. Those stories haven't always been uniformly positive. We think of the example of Tono, which is a really hot, connected fitness device. You put it on your wall and used ML, trained you, and then it used electromagnets to simulate the weight that you were pushing out. We had the operation to look at it back in 2019, Marcus said. We didn't have a lot of conviction around the early stage connected fitness. At that time we thought Peloton and a lot of these other things were simply, you know, logos slapped on things that we already had. Internal actually just had a round where they lost 90% of their value. Wow. Firms, you know, multi, you know, an over billion dollar unicorn to now needing to take, you know, 110 million because of problems with supply chain because they were growing too fast in a bunch of other different reasons as well. And so, you know, this is new. This is changing. We're seeing it, you know, again, from the capital markets into the early stage. Markets are down. And that's really the entrepreneurs who are at the end of that, their behavior has changed as well. And so we're seeing the feedback cycle come from the LP. So there is founders and back.
John Coleman: Wow. You're painting a relatively dire picture, Brandon, of the market. We're going to come to a more optimistic picture here shortly, but I want to pick up on that thread. You'd mentioned how a lot of companies really are struggling with the business model that have been supported by this easy money, low interest rate environment that we were living in, much more availability of venture debt, which is obviously drying up a bit. And we haven't talked about with signature in Silicon Valley Bank and others, you both have portfolio companies already in the portfolio, entrepreneurs who are living now in this environment where capital is not as available, where they're having to do layoffs in certain circumstances, reprice rounds down to raise additional capital, to try and extend capital, you know, longer so that hopefully markets recover. As you counsel the entrepreneurs that you're partnered with, what are you advising them on right now? And Phil, maybe you could start how were you counseling those entrepreneurs now? And maybe it's FDI podcast, so maybe on a kind of technical business level, but also to spiritually, how are you helping them to weather this storm at the moment?
Phil Jung: Yeah, it's a great question and it's just a different time today than it was two years ago. And so the advice and how we partner with entrepreneurs looks different to, you know, from a macro funding environment. You know, typically companies have raised every especially you call it the last five years, companies are raising every 12 to 18 months. They're going back out market. There's plenty of capital today. That's no longer the case. We're telling our companies to plan for at least 24 months in between rounds of funding and to start. Now, look at your budgets now. Every line item there are probably ways to optimize now instead of when you're at six months before a cash update. We're working closely with our finance heads and CFOs to help them in the budgeting cycle, to plan for the year and ways to think about profitability as an option as opposed to just waiting to get to the next round of funding when the existing cash runs out. We're advising companies that 2023 will continue to look challenging from a fundraising perspective. So if you raised last year and are able to stretch the existing runway to get to 2024, we think that'll probably be a more fertile opportunity to raise where VCs are looking to actively deploy capital, especially as you enter the main or late stage type funding rounds that we alluded to earlier today. And then touch on this for profitability. You know, it's interesting, it's not just our portfolio companies, but even early stage companies that are out in market right now. We're seeing a lot more pitch decks and in meetings that entrepreneurs are thinking about what the clear path towards profitability looks like, not in some distant future, three or four years out, but what it might look like in 12 months and 18 months, and how this round of funding gives them the optionality to get to those goals of profitability. From a spiritual integration standpoint, lots of companies are having to make tough decisions right now. We're hearing of rifts in the market all the way from big tech down to smaller startups as well. And how do you be a good partner even in those difficult moments? And sometimes it is a business decision, but there's still a way to honor individuals and employees if you have to make those types of decisions. It's doing so treating them with respect, being able to communicate very clearly why the decision was made, helping people find, hopefully the next landing spot, vouching for them, or being a reference or being willing to open up your Rolodex of contacts and making intros for folks passing around resumes to your networks or other entrepreneurs that may be hiring and putting in a good word. So there are ways to, I think, honor individuals and employees, even in tough circumstances. And if things are going well, too, it also presents opportunities to really lead by example to be a vocal leader and. Demonstrating, you know, why you're building what you're doing and not just because entrepreneurship or startups are sexy or because people want to work at a high growth tech company. But there is definitely an emphasis on the whys today of why you are building, why this company or startup exists and why it's important, why there is a redemptive element to what you're building. And I think all of those things matter in where people spend 40 plus hours of their week working and spending time with building.
John Coleman: That background as a CFO is probably helpful for you right now, having run a venture backed startup as a CFO. You know, Brandon, you've kind of heard Phil weigh in on this. How are those conversations going for you and Marcus right now? How can you lean in with your portfolio company leaders?
Brandon Allen: Yeah, I mean, we are having those conversations with every single portfolio right now. Some of them are different. Some companies are doing really well, some companies are plateauing. Luckily, we haven't had any companies that have had a lot of difficulty yet. But, you know, to really double click on what Phil says, you one of the things that we're looking for, for a company and for a leader is to have a really strong idea of what it is they're trying to accomplish in this next stage. Right. And so when we talk about even the categories of Seed series A, series B, we're investing into a seed company. We're saying, hey, we need to achieve some level of product market fit. We need to know what we're doing and we need to have an economic story that makes sense by the time we get to our series A. Now, what's changed relative to what used to happen is now your series A, you get one shot. There's no Series A one, two and three. You're not going to have a convertible note before in a convertible note after it. You have to assume that the level of capital that you've been able to bring in is largely going to be the capital that you're going to need to prove whatever it is that that business goal is. On a personal level, yeah, the reductions are really difficult. Market discipline comes for us all. You know, what I found is oftentimes speaking to entrepreneurs, there is such a hesitation to fire people because of the personal relationships that we all have with our companies. But, you know, with the point that we are in the market, you know, right sizing the team and making sure that everything's operating in the right way is the number one thing that all companies have to be focused on. You're coming out of that clarity of vision. And so clarity of vision, clarity of operations would be the two things from TXV perspective. We like to help in a bunch of different ways. When we think about platform, we're talking about capital introductions, we're talking about help with talent, we're talking about help with customers as well. You know, in as much as talent is one of the most important things, it is not the most important thing. When you have a company that needs customers. And just the way that we've been orienting our scope of action, bringing in customers, making sure we're really honing the commercial aspect of how the companies are running has been top of mind for us to the point where we've actually started saying, Hey, when we talk to our CEOs, we'd love for whoever that Chief Revenue Officer, the Chief commercialization officer, whatever it is should be on or the sales officer to be in on those conversations as well. Because at the end of the day, and this is part of what happens when you don't have market discipline, people chase these different things, these different macguffins. But, you know, this is a business that has to sell. The economics have to be good. And so just having a focus on that and really walking through those numbers very tightly without being overly driven by a vision of what you could accomplish has really been kind of the conversations we've been having with certain entrepreneurs to pull them back a little bit.
John Coleman: And I want to pivot a little bit now because you guys are leaning in with entrepreneurs every day. You're keeping a close watch on the market. We have painted this dire picture of the last couple of years, and frankly, I'm with you I think the next year. I mean, given what we're seeing with the financial system, much less financial markets, with the interest rate environment, probably at least staying flat right now, perhaps going up even a bit more depending on things and the likelihood that we are already in a recession or potentially entering a recession. You know, it's one of those periods that you have to weather. At the same time, I think history would tell us that periods like this create some of the greatest opportunities for investing and frankly, also for startups. You know, my old firm and Jake Thompson and I talked about this, we did an analysis of what happens when tech companies get hit the hardest, like the tech bubble of the late nineties, early 2000. It actually creates a vibrant startup ecosystem because all these folks at big companies that have options that are now not worth as much, you know, the golden handcuffs are off. They go start some new things. You see valuations coming down. So investors have a chance to enter in at a better valuation for companies that are likely to be long term successful. And there are always innovations needed in market, right? Life doesn't slow down. I mean, I think the most obvious example right now is artificial intelligence, where I think everyone is paying attention to what's happening with chat GPT right now. And you know, many people saying this is the biggest thing since the Internet, right? Artificial intelligence. So I don't mean to leave the witness there, but Brandon, maybe start with you. As you look ahead and as you think about investing right now, what are the opportunities that you see in this market to make great investments?
Brandon Allen: Yeah, you need to double click on what you just said, you know, just because we are in a different point in the macroeconomic cycle or the market cycle or the tech cycle does not mean that opportunities is not out there and it doesn't mean that people should be pursuing opportunities. Right? We had a long ten year bull market run driven by monetary loosening that results in the situation that we're in now. It is very natural and correct for there to be some sort of rebalancing in that. And all of the people and all of the resources that are being redistributed throughout the economy will hopefully go find the types of companies that we're talking about right now. And to your point, John, one of the most exciting things that we're looking at is AI right? And so when we focus on human performance, we're talking about the modalities of eating, sleeping, moving and mental health. Health care, the healthcare industry writ large is actually one of the industries that is the toughest to go in and to digitize and to go in to innovate because of the heavily structured regulatory environment. What we're seeing right now is that outside of health care is where a lot of the innovations are being driven, especially through tech. And with the emergence of technologies like AI, we're going to see a fundamentally different everything over the next couple of years from a, you know, just a human being in front of a computer, chat GPT is amazing. And what happens when chat GPT then becomes integrated into all of the different applications that we see across human performance? What does it look like to have a new generation of companies being built upon emerging technologies? That work is being done right now. We're starting to see a resurgence, see companies come in that don't just put AI in the deck, but that have ai really built into their core model. And that technology is really going to even in the limited way that we're understanding it as a natural language model through chat GPT. There's going to be a lot of things that are going to change over the next couple of years, and we're excited about the companies that are going to do.
John Coleman: Yeah. Phil, what are you looking at right now?
Phil Jung: Yeah, and just to really highlight one of the points that you alluded to, John, of why this is a great time to build a company. And what we're seeing on the investor side, you know, when comp packages for engineers and developers are no longer in the $500,000 a year packages, startups can actually hire great engineers and developers. You don't have to compete with these big tech firms that are offering these types of packages. And even if you're working at some of these bigger tech companies and you're feeling uninspired or don't feel a call to the mission of an organization, you know, it gives them opportunity to build something that they actually care about. So we're actually seeing a lot more companies being built from teams and founding teams that are being very intentional and passionate about what they're building. And you're able to access talent much more easily than you were able to even two years ago out in the tech market in terms of opportunities that we're seeing. Yeah, we see everything from large generative, AI, ambitious companies to a lot more unsexy businesses too, that are definitely worth and deserving of outside funding because of the problems thay are addressing. You know, one of the most recent investments that we've made from our team is in a company called Relay, or it's a hardware enabled SAS platform that equips frontline workers. And in today's world we often think about engineers and white collar jobs, but we don't think about the front lines. And with the labor shortages that many industries are facing, you think about retail, our restaurants, or even at our hospitality chains. These are workers that are looking to boost productivity and find safer and more compelling opportunities for meaningful work. But these categories of folks are often left behind in terms of how technology can advance the productivity and the work that they do. So Relay as a company that equips them with a hardware enabled communications platform where everything from providing data analytics on tracking to where they can optimize a place in a hospital, depending on where a patient needs are and where your labor personnel are staffed at a hospital to providing panic buttons for hotel workers who unfortunately, there's been some statistics that have shown that up to 25% of hotel workers made workers have been sexually harassed at some point in their careers. Really, it provides and equips these frontline workers with technology and tools to optimize productivity and communications. So that was a recent investment that we made. We also look at, you know, when it comes to A.I., there's been a lot of buzz and really interesting and compelling use cases of how AI can apply for everything from shooting movies without having to animate a single sketch, you know, creating music or art, which is all great, and creating LinkedIn photos, simply uploading three or four side shots of your face and creating AI image of whatever context and background that you can desire. But we also think that some of that pickax and shovel plays as it relates to A.I. is going to be where big opportunity lays. So data, place. Everyone needs access to data. So do you have proprietary data that you can support a lot of these AI companies for their training models, for instance? We think a lot of these infrastructure types of unsexy industries and infrastructure, there will be really big opportunities that present themselves in the current cycle.
John Coleman: Yeah, it's interesting. I do think AI is a real phenomenon right now. I mean, you can't look at what's happening with chat GPT with images. Etc. without thinking that it does carry echoes of the whole distributed ledger technology blockchain thing though, where I'm sure a lot of companies are just going to slap artificial intelligence on the name of the company or in what they do and hope that that uses the the valuation guy a lot. It's got to be discerning about it. And I am entirely confident that the very last field that artificial intelligence can replace will be venture investing. Right. That's certainly those jobs are safe.
Brandon Allen: The thought has occurred to us or like I say, positioned pretty well over here. You know, no, AI bot is going to talk to John Coleman and we are going to.
John Coleman: Ironically this is actually chat GPT creating this podcast listeners we wanted to spring that on you at the end. Listen guys, I think this has been remarkably informative to our listeners. We're going to move to this idea of a scripture or a lesson that you're learning from Scripture that's moving you right now to conclude the podcast. But before we do, I just wanted to ask you if there are any final thoughts that you would leave our listeners with as they think about investing in venture capital this year? And Brandon, if it's okay, we might start with you.
Brandon Allen: Absolutely. One of the things I guess we didn't touch on was Silicon Valley Bank and oh, yeah, you know, I personally and I'm sure I join with a lot of people and just mourning the loss of that bank, especially in the way that it actually ended up turning out. While it was clear that the bank didn't have the risk management that it needed to. There was a degree to which tech cannibalized itself and created the conditions around a run on the bank that we should be a little worried about. Obviously, with First Republic Now, which is also a big player in our industry as well, and having a stronger balance sheet, having had $30 billion placed on it by some of the bigger banks and JPMorgan still having to come by it. It is unfortunate and there is a degree of capriciousness, I would say, in what's happening. But, you know, it'll all buff out and we'll see how it all lands. But yeah, it is for sure an incredible time.
Phil Jung: One of the things that we've been talking about on our team and as we support our portfolio further is especially as capital allocators, the role that we play. Yes, we can do our parts as VCs as investors. You know, we have certain levels of influence where that you may be on a board where that's formalized as a board vote on certain items. But even if you're an informal adviser, we have influence. And so how you support the entrepreneurs or companies that you're backing, maybe it's, you know, quietly as you're praying for the companies that you're partnering with. And they may never know that because you're doing that in your personal quiet time to sharing insights of what you're seeing in the market in real time, to being willing to roll up your sleeves a little bit more than you normally would in a different environment, you know, offering your expertise to review a financial model, going out of your way to make a couple more intros than you normally would to potential funding sources or potential customers leaning in to help with HR related issues at the executive level or even at the manager level or below, helping to recruit an interview because your HR team may be a little bit more thinned out than it was a couple of years ago. There are ways that we as capital allocators can have influence on our companies asking how entrepreneurs are doing outside of work right with their home life, with their communities, and just putting aside the business for a moment to care about an individual and their whole self. You know, all these small and big ways we can have influence on the ecosystem. And so I challenge all of us to not lose sight of that. Then even though we support our LPs, you know, Brandon has raised from outside partners, At Sovereign's, we have as well, you know, keeping them abreast in a period of rapid market dynamism and uncertainty, keeping them updated on how we are thinking through our operations, whether it's your banking relationships or your portfolio, because in the absence of communications, people will tend to worry or perhaps assume the worst. So being a sound of a steady hand and the sound of reason during a period of otherwise market uncertainty, I think those are all slow and big ways that we can play a role in supporting the broader ecosystem.
John Coleman: That's great. That's great. And Brandon, I will mention that our crack producer, Joey Honescko, texted me during this and said to remind people that just last month the marks on the market episode was about the Silicon Valley bank collapse with Zach Mansfield and Justin Sphere. You should check it out if you're a regular listener because there was a good explainer. Brandon It looked like you wanted to add something there as well.
Brandon Allen: Yeah, we think about the parables a lot here and about verses in a way that they play out in terms of just any of our interactions. And one of the ones is kind of top of mind for us now is a friend loveth at all times, and a brother is born for adversity. And so, you know, when the markets are up and everybody is happy, it is very easy to be a friend that love is at all times. But right now, you know what? We are trying to be just as Christians, as people, here at TXV is the person that you call upon in adversity. You're not going to call us and we're going to eat. A lot of companies are going out for follow on rounds. It's easy to say, Oh, well, the market, you know, we've had to pause right now. But having those more difficult conversations both about the companies, about, you know, the willingness of people to strip checks right now and about what may need to change within the company and the leadership in a way that's loving and really honoring of Christ, I think is one of the things that we're thinking about at this point in market cycle.
John Coleman: That is an awesome spiritual lesson that the concluding question we always ask on the podcast is just what is God teaching you through Scripture right now that you want to share with others? And Brandon it feels like a pretty good encapsulation of a lesson that we could all learn that you're ruminating on right now. Anything you'd add that God's really pressing on your heart right now?
Brandon Allen: Parable of the Sower, you know, reflects the ways in which, you know, you make bets, you spread the seed over the field. And this time, just as you know, an investor or some of those responsible to other people. Just wondering, you know, looking back, why did we take the bets we took? How are they doing? What are the conditions in which we actually made those and how have people responded to it? And so, you know, in that verse in particular, it talks about the different types of things that can happen that would result in a seed not flowering. And, you know, that's very top of mind right now as well.
John Coleman: Bill closes out on a high note here. What is God teaching you through scripture at the moment?
Phil Jung: You know, what's been lately on my heart is, you know, the concept in scripture over and over of God's promises and his covenant with his people, you know, in Genesis with Noah after the flooding, promising covenant to never do that again to the ultimate fulfillment of God's promises in Jesus Christ, in the gospel message. And I've been reading this book, Habits of the Household, at the beckoning of some of my colleagues, and it's been great, or I have been reminded of the commitments and the promises that we've made, for example, in marriage to your spouse of, you know, despite how you may feel or despite what you may cost you as an individual and your desires and what your wants may be at the time that you've made a covenant to support and love that individual. And I've been thinking a lot about that. We have a young child, we have a puppy. So sometimes, you know, patience is thin, but we're being reminded of that has been top of mind and it actually has permeated through how I think about our portfolio to right when we enter in a partnership with a company, you know, one of the promises that we're making not just to be there when things are good, but to go the extra step, to go the extra mile despite what it might cost me on a time and resource perspective from our connections to really care and serve our entrepreneurs and our companies, especially during this market time, that's been something that God has been challenging me on.
John Coleman: Phil, Brandon, we're really grateful for you joining us today. I know you guys are experts at what you do. You're doing a great job throughout these markets and it's a privilege to be able to host you on the Faith Driven Investor podcast and I hope we can get you back very soon or maybe a year from now. We'll do a Mark's in the Market podcast about the recovery in venture capital markets and get to revisit. Thank you both for joining today.
Brandon Allen: Thank you so much, John. So encouraged by you and the rest of the sovereigns team.
Phil Jung: Thanks, John. Thanks, Brandon. It's been fun.