Episode 157 - Marks on the Markets - Private and Public Overview with Justin Speer and Phil Jung
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In this edition of Marks on the Markets, we’re joined by frequent collaborators, Justin Speer and Phil Jung.
Justin is the Principal and Senior Analyst at Sovereign’s Capital where he focuses on Private Equity. Phil also works with Sovereign’s as a Venture Capital Partner.
The two join John to give an overview of private and public markets as we head into Fall.
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 your host, John Coleman, and this is a belated monthly marks on the markets for September. Producer Joey has already disciplined me for this guy, so no one needs to write in. I know I'm a bit late on marks on the markets, but to make up for that, we have an extraordinary episode with two of my favorite people. Justin Speer is one of the leaders of our public equities complex at Sovereign's Capital, and Phil Jung is one of the leading partners of our venture complex at Sovereign's Capital. And today what we thought we would dig into is the current state of the markets broadly, but also what it's looking like in public markets, what the economic outlook is, how we're seeing the IPO market and also what late stage venture, an early stage venture are looking like along with how we're coming alongside CEOs and other leaders in the midst of what continues to be a tumultuous environment. So, Justin, Phil, thank you so much for being here today.
Justin Speer: Thank you for having us.
Phil Jung: Glad to be on.
John Coleman: And Phil got in at 2 a.m. last night, so we're expecting some really fun commentary out of him today.
Phil Jung: Yeah 3 cups of coffee so far. And yeah, it should be fun. Hopefully, hopefully this turns out okay.
John Coleman: Awesome. Well, I'm going to start with a little bit of a softball for both of you, and I'll let Justin start so that Phil can drink a little more coffee. Just give us your current kind of 10,000 foot overview of markets. Justin, Obviously we want to get into both public and private. You're a bit more public focused. Where do markets stand today in September 2023?
Justin Speer: All right. So we established a bear market trough in the third quarter of last year and have since had about a 25% recovery in the market, which is about the seventh worst, I guess, recovery from a bear market trough this far off the trough nearly a year actually was incredible. But positively, we've seen inflation, which was the number one problem for businesses and for all of us has really come off the boil in the last year. It's actually it's led into June, 12 consecutive months, so about 3%. And that's where we're hanging out from nine in terms of the headline inflation. And so that's a good thing and that's a function of what the Fed has been doing, aggressive, like the most aggressive tightening we've seen in at least 40 plus years with the Fed funds rate now at five and a quarter or five and a half. So we've had a monster move in interest rates and it's really led to this. It's an interesting backdrop. It's a lot of just dichotomy. And what I'm saying, like in terms of big picture macro things that we're seeing, we're seeing consumer confidence has been pretty resilient, which is a function, I believe, of, again, excess stimulus that's still in their pockets. We had $7 trillion of stimulus. It worked its way to the economy. We're still working that down. And the other thing that's really been surprising to me in the wake of the Fed's tightening is the employment picture has been actually pretty solid. I would have expected and in fact, if you look at the yield curve and it was anticipating that we would see the unemployment rate move up, it really hasn't moved up that much. And I think that's really moved to the forefront of the challenges for business is just access to qualified labor. But on this front, I think that's the balance Is the Fed, they've tightened. I don't know how much more they need to go. I think the question is how long they need to hang out here. And we've seen a bifurcation in markets where housing activity has been pretty sluggish in general. Existing home sales, we've seen manufacturers struggling. If you look at the sentiment surveys for manufacturers, they've been subpar for a while, almost depressed. But on the other side of that, we've seen growth. Equities in particular have done really well. We've seen the emergence of generative AI, which has extended maybe some of the growth use or lifted the growth use for some large, large players in the market. So that's supercharged some of this recovery. But it's been a tale of really two different stories that I think the question is how this thing ends is can we get inflation down to 2% without breaking the economy? And I think if I look at valuations, for example, I'm getting two different rates. Large caps are actually kind of expensive. Large cap growth stocks are expensive value and small cap stocks are quite cheap. So the market seems to be saying two different things that the economy's great for the large caps, but we may be entering a really potentially a pretty severe recession if I just look at the small cap valuation. So it's one of the more complex backdrops that I've been a part of as an investor in the last 20 years.
John Coleman: Men, I want to unpack that a little bit more. But before we move to Phil, I wanted to follow up with one quick question. I think it was two or three months ago, it was accurate to say that it was nine or ten stocks, the mega-cap stocks that had driven more than 100% of the return of the S&P at that time. Is that dynamic still that pronounced Justin or has that moderated such that other larger stocks are growing in line with those mega caps?
Justin Speer: Yes. A year today the market. And this is the S&P actually the Russell 3000 is up about 18% year to date. And what's really leading that is tech and communication services, which is Facebook, but they're up over 40%. The broad tech sector, which is a big chunk of the market, is up 45%. Most of the other sectors are low single digits. You do have consumer discretionary, which took it on the chin. Last year is up 30%. But most of the other sectors are, you know, flat that up mid-single digits with the worst performing utilities and health care is down 1%. And of course, the regional banks, because of the bank turmoil in March, April, down 17% year to date. But yes, tech is really leading this thing, very big tailwind to the broader market from tech and digital. And consumer discretionary has come along here in the last few months.
John Coleman: It's great. So Phil, moving over to you, I mean, you offer a dominantly in the private markets right now, particularly with venture backed companies along their growth from kind of seed to pre-IPO stage. Tell us what you're seeing in valuations right now and how the market's reacting.
Phil Jung: Yeah, well, first off, the last 12 year and a half, 12 months, year and a half, it was a tough time for the private markets and especially in the software space for technology businesses. You just heard in the headlines every week of large companies and private companies doing layoffs, reductions in forces and people looking for opportunities. Their next gigs because they were laid off, functional areas and team leads, all were cutting their budgets as well. You know, oftentimes in an executive team meetings, CEOs were asking each of their functional needs to figure out how they can trim their spend or expenses by ten, 20, 30%. So a lot of that happened. Now, fast forward to where we are at this point in the year. You know, there are starting to be signs of life. You know, green shoots or whatnot. And what we're seeing in the private markets, you hear less frequently of rifts and further layoffs. A lot of that has already happened. A lot of companies in their first and second round of layoffs. And at this point, people are planning ahead for next year, 2024. And budget reforecasts have pretty much halted at this point for the rest of this year, and they're not thinking forward. And so we're starting to see signs of life expansion in average contract values. We see this in our portfolio as well, as well as perspectives in terms of growth prospects for next year. Hiring plans is slowly starting to pick up again as we go into 2024 and especially this time of the year, post-Labor Day before the holidays. This is traditionally a very active time for the private markets to be deploying and investing capital. People are back from their summer vacations and investment committees can now gather again and folks are looking to do deals before the holidays slow down again. And especially if you raised a fund over the last two or three years. I mean, you're sitting on cash. Well, not cash, exactly. You're drawing capital from your employees with capital calls, but you have a fund available that you are looking to deploy capital into in promising opportunities. So this is these next few months here. It's kind of a sprint in the venture market of activity. So, you know, all I'd say there's a cautious recovery that seems to be happening. If you look at a lot of the data that's put out by Carta, Pitchbook, etc., valuations early part of this quarter and Q3 seem to be picking back up again from some of the lows in Q1 and Q2 of this year. So there's reason to be optimistic and at least in the private markets for sure.
John Coleman: I want to come back to this question of the real economy, which Justin started to touch on both in the U.S. and potentially abroad, if you feel comfortable talking about that. You know, we've talked about on this podcast before that the most recent financial crisis was one of the strangest in recent history, certainly more echoing what we saw back in the 1970s than almost any recent period where you had this combination of supply shocks due to COVID, due to the Russian invasion of Ukraine, due to limited supply chain, is a hangover from COVID. And those incidents we saw massive inflation kicking in and the Fed having to respond to that as just in their rising rates. We saw this regional banking crisis that erupted in the middle of that. And so there were all these complex factors playing in. Certainly some of those seem to have calmed, at least from my perspective. The supply chain shocks seem to be normalizing for the most part. As Justin mentioned, inflation is headed in the right direction, although only with continued rising rates. What are you guys seeing in the real economy right now? Where do we stand with regards to where we were in that crisis? What are you paying attention to? And particularly on this front of recession in interest rates? Do you have a perspective on where we might be heading? And maybe, Justin, if you don't mind, open this up on that front.
Justin Speer: Right. I think a lot of the challenges were just due to just these imbalances, in part due to the supply chains, due to absenteeism and people just staying at home from work in the immediate aftermath. But then. You tack on that stimulus. And it's just fascinating to see that you saw money supply just take off like over 25% expansion in the money supply. And then people now have money to spend, but they don't spend it on hotels and restaurants. Immediately they go out and they spend it on goods for shoring up their home and improving their home. So you saw in some instances like retail sales, like gap up over 40% year over year, it was insane. You know, retail sales are up 5%. So you're pulling ahead in some instances, demand like more than five years in a single year. And so it just leads to these massive supply chain imbalances. And then obviously, the tail result of that is inflation. And so what the Fed has been doing is really trying to reverse some of that through the tightening measures, including increasing the Fed funds rate, but also money supply. And I think this is something that I've done some work on money supply contracted for the first time in 60 years in December of last year, based on sort of a statistical work and regression analysis that we've done. Money supply will have an impact in about a 12 to 24 month lag. So we are still yet to feel the full, long and variable lag of some of these measures. And I think that's where a lot of questions lie with regards to the macro. I think that you're going to still see some headwinds in parts of the economy in particular as the full manifestation of these actions from regulators or policymakers are continue to pay through the pipe on their way through. We're going to see, I think, more of that manifest itself into the first half of next year. And so I don't think we're done. And that's where the Fed is going to look at the data. It's data dependent. The big one, though, that I'm watching in terms of the imbalances and the employment picture and employment, the unemployment rate is really a lagging indicator. If you look at job openings, the job openings are still well above historical levels. And if I look at it, are a little under eight or a little over 8 million job openings versus historically close to 5 million. But that's come down from over roughly 12 million back in 2022. So we're starting to see that come off of oil. And that's going to go a long way in easing the pressures on inflation from wage. If that can continue, and I think that's what we're going to keep our eyeball on is really that is the employment picture. And the real question is, is this tightening going to manifest itself in ultimately breaking down the economy into a recession? And right now, I think the broader view is that if we do have a landing, it's going to be a soft landing, which would be really amazing considering all the moving parts. But if we land on a soft landing kind of outcome, that would be a really ideal outcome. I think that's probably being priced in right now. And the bond and the equity markets.
Phil Jung: Soft landing is a similar kind of narrative that we're hearing in the private markets. I unfortunately have not run any regression analysis, John, so I'm sorry, I don't have the wisdom of Justin to back up my claims with any sort of data. However, just anecdotally, you know, in the private markets, it's especially in investing where a lot of that does go into technology, at least for venture capital, it's very different than the broader kind of macro real economy where unemployment is low. You know, today as a consumer, if you're looking to hire a plumber or in fact a person or if you're a daycare center looking to hire workers or even in education in schools, it is tough. It's hard to find folks because unemployment is so low. But in the technology sector, it is really, really hard right now if you're a tech worker because there just aren't a lot of job openings and folks that are expanding, companies that are growing. So there is some narrative around a tale of two cities in that sense. But broadly speaking, there does seem to be a soft landing approach for next year that people are planning for. Next quarter should be better than last quarter. The next six months should be better than the last six months. And the next 12 months certainly should be better than the prior 12 months. Boards are planning to build in this type of growth for next year's budgets, as opposed to this year when there are constant forecasts and ratcheting down what we were expecting to see and with the rise of interest rates. If you are a fund that does make for a difficult environment for fund raising, given that a lot of investors and LP's, you know, they can invest risk free at a 5% return, whereas in the risky private markets where cash would be tied up, these are typically long hold periods for private investments and a lot of the uncertainty. So if you're a fund actively out in market in the last year, this year, it was certainly a tougher environment to raise capital. But if you had raised your fund in 2020, 2021, cash was flowing and a lot of those funds are sitting on available liquidity to deploy capital into. And so in the early stage Market seed series A, startups were still raising capital, the ones that had a real differentiated product to value proposition customers and really strong growth in metrics seen in Series A round. We're getting done now. They were taking a little bit longer, perhaps months instead of weeks, as opposed to a few years ago, but cash was flowing into those companies. We did see a slowdown in mid to growth stage companies that closely mirror more of what's happening in the public markets where Justin spends all of his time. But again, 2024 should be much better than what we are seeing in 2023 in terms of activity of the private markets.
John Coleman: That is super helpful. And Phil, don't worry about having not run a regression analysis even in our short time with the FDI podcast. Justin Speer is responsible for at least 80% of the regression analysis run for this podcast, and we're very grateful for grateful for it. You know, one topic that's coming up a lot right now that I'd love to just touch on briefly is the IPO markets obviously important for the work that both of you do? Day to day IPO markets have been pretty frozen the last couple of years. You know, and leading into that, we had this weird dynamic where there was almost like a twofold IPO market. One, there had been this irrational explosion of SPACs, which we could talk about just a bit and how those have ended up. Some of those have ended up continuing doing really well. There was a company I talked to recently called Public Square, for example, that went public through SPAC quite successfully from their perspective. And there are others I know that are soon to go public through SPAC, but that market has died down. You don't hear people launching SPACs very much now and then. The conventional IPO market has also been frozen as I think later stage venture backed companies are waiting for more favorable valuations in markets. So I would love to get y'all's perspective as valuations have started to creep up both in public and private markets. What are we seeing today? Where did the IPO market stand and what do we expect in the near future? And maybe, Phil, if you don't mind, Well, we'll start with you on that one.
Phil Jung: Yeah. Yeah. Happy to start because I'm very interested in kind of where Justin takes this from, from what I share onwards. You know, a lot of the mid and growth stage companies were just waiting for the right time to see when the IPO windows were starting to open. Now, in the meantime, so many of these technology companies were getting much more efficient with their burn ratios, with their targets on profitability in the rule of 40, for instance, is a metric that's often referenced by high growth or late stage private companies. And so you have almost this sideline this backlog of folks on the sidelines waiting. And in recent weeks, we've heard of folks like Instacart and ALM and Klaviyo waiting to go public later this year. And so there's been a lot of conversation about whether these early entrants are going to really blow open the doors for a strong Q4 going into 2024. And all of that trickles down eventually to the early stage side once the capital markets open up from an exit M&A IPO window that gives earlier stage investors and companies a lot more confidence that, hey, there is opportunity for continued growth and capital allocation for us. So that confidence will instill down and trickle down. So I'm curious, Justin, what you're seeing, because that is the sentiment amongst, you know, growth stage investors of we think it's right around the corner. There are companies that have really strengthened their performance and their efficiencies and there's a huge backlog of companies now call it plus 200 million of RR, you know, Agusto, Stripe, Brex, Databricks, others that are just kind of waiting to see when the right timing is. I think the big question is valuation. You know, where are these multiples going to kind of play out? And they're certainly not going to be what they were like a couple of years ago. But are they closer to long term averages, maybe something like ten x of, you know, revenue multiples of what the public markets will bear this time around in the next couple of quarters? I think that's a big question mark that private investors are eager to see and watch.
Justin Speer: Yeah, it's fascinating. You know, there's always in my mind, a particularly in an environment where we are, where it's a slow growth environment, there's always appetite for growth. And I think growth becomes even more attractive in an environment like this. It's interesting to note also that if you look at the broader market growth, equities have outperformed value equities by 25 percentage points thus far year to date, second best since 2000 performance. It's incredible strength of growth equities, which I think is a nice that's nice fuel for confidence for IPOs. So I would I wouldn't be shocked with the strength of the market today to see more activity on that front.
John Coleman: That's really interesting. And I'm for my part, I'm hearing the same, which is now that valuations are recovering in public markets. It's much more attractive for these late stage companies. I mean, the other thing we got to think about is a lot of these later stage companies in private markets, the funds that are holding them are coming to the end of their lives, right? Phil? And so because there has not been a lot of liquidity generated over the last two years, a lot of investors are getting quite anxious. And they haven't been able to get liquidity through the secondary markets because secondary discounts are extraordinary right now and you're looking at 30 to 60% discounts to NAV on secondary transactions. And so I think people are very hopeful that the IPO route becomes available to those securities and that will have a trickle down effect, it seems like, to the rest of the early stage markets.
Phil Jung: John, if I may just double click on that for just a minute, especially for our listeners who may not be familiar with fund dynamics. You know, most private investment funds have certain windows. It's a ten year fund. Maybe there's a couple of one year extensions, but in the LPas, they'll be agreements. There's an end of life where LPs are expecting to receive capital back. Right. It's not like most funds just can hold on to a position in perpetuity. And there are other vehicles for that. But that's not how most funds are structured. And so if you're a large fund with a significant or material ownership stake in a company, you may put pressure on a company to go public. Maybe you'll be one of the first to potentially open up this IPO window later this year or next. Because you need liquidity, you're obligated to provide liquidity back to your investors. So that's something that maybe not all entrepreneurs think about when you're taking outside capital. Understanding the dynamics of where a fund is in their lifecycle, are they early in their investment period? Are there late in their investment period? What is the fund lifecycle timeline of that particular fund? So that's something to be mindful of. One other interesting piece about companies going public is, you know, another reason to do that might be from a company entrepreneur's perspective is to almost reset the preference stack. So for a lot of these high growth companies that have raised tens or hundreds and hundreds of millions over the last several years, when capital is flowing, when investors invest capital, they oftentimes get preferred shares. That comes with a certain liquidation preference. That means in an exit scenario, these investors are paid back first before the leadership or employees in an option that have ownership through an employee stock option pool, see any types of proceeds. And so you stack on hundreds and hundreds of millions of dollars depending on what the exit price is. Unfortunately, most common shareholders in these types of scenarios may not see any sort of proceeds, but what happens when you go public is all of these preferred shares convert to common. So in some sense you're almost starting over in terms of that preference stack. So that might be another reason that drives companies to seek to go public to help with that conversion. So a lot of that goes into it. And again, Justin is the expert here and what that looks like. Those are some of the dynamics that are less talked about in terms of companies going public.
John Coleman: Yeah, I completely agree. Maybe to follow up on a thread, but to switch topics a bit headed into the next section. Justin had begun to bring up earlier segments that the markets seem to be excited about. I think AI is what everyone's talking about feels eerily similar to, you know, eight nft's in 2020 and like blockchain in 2017 or something. But, you know, I think we'd all admit that generative AI is a transformational technology. There have been great leaps made, particularly on the natural language processing side of that or on the large language model side of that through Chat GPT and others. What are industries or segments that you're most and least optimistic about right now? And so Justin, maybe we'll start with you on this, but as you think about industries, you're really fired up to be an investor in those that you're really cautious about right now. What are those?
Justin Speer: Right. And I think that on the heels of COVID and what that's done is it's really, I think, accelerated this growing affinity for digital experiences. And so where we're seeing some really rapid adoption, I think it's a secular growth thesis is in the adoption of these technologies. But really the shift towards electronic payments is one that I've been focused on. You know, that's not something new, but there are some really, really robust areas of opportunity for disruption in a host of different sectors with payments and electronic payments in particular taking over. And there's some really great cultures out there, really great leaders out there, small cap companies that have just massive addressable market so they can grow into. So I think that's an area where I think there's an area for disruption, for growth. And in an age where growth is hard to come by and the shake up in the financials in particular, and particularly the denting evaluations for SPACs, some of these companies, you know, came out of SPACs. And so there's some really interesting valuations that I think don't reflect necessarily the longer term opportunity that some of these companies have. And I'm pretty excited about.
Phil Jung: Yeah, on my end, you know, I think we're full in this generative AI hype cycle. This past week was the latest YC Demo day over two days and effectively all the. Nominees reference that they were or some sort of AI company or generative AI company. Now, I think there is a lot of excitement, especially earlier this year, about what was happening in the space. And already there seems to be some clear winners. The entropics, the hugging face, the chatGPT, open AI, folks of the world. But what we're most excited about currently, as we think about how AI can be used, are very specific opportunities. I use cases, verticals where I can assist and augment kind of human analysis or insights that are being driven. So for instance, we recently looked at a company, we're still looking at a company that supports providers as they interact with patients during a live interaction to help document through technology. So there's no manual labor that now needs to be inputted in notes and also the associated billing, the CPT codes and the requirements to help Bill for that time, which decreases the burden on the provider to spend after each patient visit, to spend and typing up notes and submitting all the required documentation for that time. We think that's a really elegant use of AI technology in a way that's real. Where [....] can you see immediate benefit? We're also, it really continue to be excited about software. I mean, you know, it's been how many years, decades since the phrase, you know, software eating the world has really taken over. But we're still seeing applications of instances where software can continue to automate and provide just more efficiency. We're excited about a company currently that has developed software for autism care clinics that are spending time with patients and their families. And these are children who are dealing with serious, prolonged kind of cases of support and need where often providers are working 30 plus hours with them. And all of the documentation in that case as well in terms of care plans and pathways and next steps and follow ups and appointments. All of that is still done pen and paper in some clinics. And so a software platform that really is the operating model for that clinic on how they run their business. We think that's another way that software instance can really change the trajectory of how care is delivered. And so software, you know, specific use cases of AI, you know, those are areas that we use feel very excited about. And, you know, oftentimes people ask us, well, we have this great company, it's not a software company. Would you consider investing? You know, currently that's outside of where I focus today. And part of that is because for software businesses, it's very different from other industries in the sense that, you know, once a software platform is created to deliver that same value to that next customer, it doesn't require much in terms of incremental costs are that R&D has been developed, you know, that new user or that clinic or a customer can log on through a SaaS portal. So that's a high margin business. And what that affords the company is margin to invest in other areas of growth or operations. And it gives you a little bit more room for error as you continue to scale headcount or sales and marketing team R&D, etc.. So we like those high margin businesses that can be scalable and we'll continue to see, I think, a lot of growth in those areas. You know, an industry that has really fallen out of favor in venture is actually consumer consumer focused businesses. You know, during COVID, we saw this boom in e-commerce and home delivery of food and whatnot, post-pandemic. A lot of those industries and companies that saw, you know, rocket ship growth have really fallen out of favor. And that's partially because, you know, one end user consumer behaviors, fickle, you know, preferences change and to to acquire customers, it takes a lot of marketing spend to stay top of mind. It requires massive marketing and advertising budgets. The cost of customer acquisition is very high relative to these other kind of software businesses, for instance. So consumer focused kind of opportunities have seemed to fallen out of favor, at least for now, in the venture industry. A lot of the direct to consumer models that used to be very exciting just even three or four years ago.
Justin Speer: That's interesting Terms of the categories are the sectors that have been under pressure. You know, those pandemic gaming categories early on, I think are facing this this this hangover effect. That's something to be mindful of because I don't know not to look at everything, but I don't know if current expectations from the broader market really reflect that reality, particularly as stimulus savings wear off. And I mean, how many times can you paint your home? Right? I mean, it's just one of those things where we're going to see a little bit of a hangover. And I think that that can last a while. The other area for us where there's a lot of pressures in the banking realm, you have pressures from I didn't realize this until I did a lot work on about nearly 85% of banks funding come from deposits that are yelling, you know, deposit rates of like 40 basis points. When I go money market rates and Treasuries and CDs at five and a half by five and a half percent. So their funding vehicles are going to be. Really under a lot of pressure. At a minimum, their margins are probably going to be under pressure over time. And then on top of that, you've just got dislocation and some of these valuations for office multifamily from this moving rates that's going to affect the asset ledger book. And so it's something that obviously led to a little bit of rumbling earlier than we haven't even gone into like an economic kind of stress yet. Really, it's more just valuations moving. But at the end of the day, I think banks are going to be an area where we have to be really careful with.
John Coleman: You know, And what's interesting to me Justin to pick up on that theme. And then one that Phil mentioned with banks, there's been this realization that what people thought of as a very safe place for money maybe isn't. Now, no one lost a dollar because of federal guarantees, but in fractional reserve banking systems, there's always been this disconnect where you deposit money in a bank, you think it's incredibly safe because you're not earning anything on it, or maybe you're getting a small savings rate and then the bank levers that up 90%. Basically, they loan out, you know, 80, 90% of the money that comes in and deposits into into riskier assets. And because that's been guaranteed through the FDIC and through these implicit guarantees of the federal government, I think consumers have largely kind of been unaware of that. But with the regional banking crisis, people have started asking themselves, like, why am I sitting in a repository account with greater risk when I can go to a money market with a better interest rate and there's no real leverage risk like there would be in a fractional reserve account. And it's fascinating because that is if that continues to catch hold, that is incredibly corrosive of the profitability of the typical bank structure, right, Because that's where they get their money on the loans that they're doing, the deposits that empower that. And I think people are more aware of how fractional reserve banking works now than they were even six or eight months ago. Probably the second thing I'd bring up, which Phil touched on, is, you know, as we look at these run in technology stocks, I think the tech sector for the first time in its recent history was forced to demonstrate discipline. And they actually did that in a way that investors appreciated. You know, one of the questions was always when this massive 15 year bull run in technology or maybe even longer than that ends, right, since the late nineties, basically. How are Google and Facebook and Apple and Amazon going to deal with belt tightening? Are they going to be able to conduct layoffs or are they going to be able to sort out which parts of their business are profitable and not profitable? Are they going to be able to manage costs when they need to because they've never been forced to do that before? And I think, Phil, my impression, both in private companies as well as their larger technology counterparts, is that investors saw real constructive cost control in those companies and they demonstrated ability to manage through crises when they needed to cut costs. And I think that's part of what gave people confidence to get back into these names, right, is the idea that they saw them manage themselves reasonably well through what could have been a downturn. And so my hypothesis is that that was approved point that people have been waiting for for 15 years and that the tech sector actually largely passed on that. Great.
Phil Jung: Yeah, that's a really great point, John. And now I got to say, I think it took a little bit of time, several quarters for that to really hit home for a lot of entrepreneurs and maybe even, you know, 18 months or so. But it's really interesting, you know, in today's environment, even when we get pitched opportunities at the seed or series stage. So very, very early companies oftentimes, you know, call it a million or a couple of million in revenue. Even entrepreneurs are presenting investment opportunities into their company as almost a dual path. We can leverage this capital wisely. We know if we put in a dollar in marketing, it'll spit out 110% in top line revenue growth, for instance. And so we can use that towards growth and dual tracking it with this capital, there's a path towards profitability. Right? And so even at the earliest stages of company formation for entrepreneurs to be thinking about that profitability targets and efficiency ratios and that's just not something we were seeing, you know, five plus years, you know, the whole bull cycle almost. Right? When capital was plentiful, entrepreneurs were just thinking about, well, if I hit my next top line goal, I'll be able to raise more capital. And burn does not matter as much. And so it's really interesting. It took some time, but we're definitely seeing that in today's market.
John Coleman: Guys. This is the Faith Driven Investor podcast. You guys are faith driven. Investors want to turn now a little bit from the kind of financial market dynamics to what you're seeing on the faith front. Two topics come to mind, but I want to start with one first, which is each of you takes a different approach to what we termed spiritual integration in the companies that you serve as a capital partner and what that can look like. And in fact, when we say spiritual integration, we just mean how does the leader of a company live out their faith in the context of the way in which they manage that company or they lead that company. And how can we as capital partners, encourage them on that journey in a way that creates human flourishing and love of neighbor within those companies? Maybe to start with, you Phil in the venture markets. What is the latest in spiritual integration? How are you all coming alongside companies and what are you encouraging companies to do? This may be different than what you would have done a couple of years ago, or that's beginning to be innovative.
Phil Jung: Yeah, well, maybe I'll start with the trend that I'm seeing More and more common is, as a lot of companies are either kind of remote or in a hybrid scenario and you're not seeing everybody in the office. I'm hearing more and more examples of companies that have dedicated channels, whether it's a Slack channel or other forum where people can share highlights, encouragements and also prayer requests as well from those within their company to celebrate the highs and the lows in ways that we might encourage one another. You know, some have explicit prayer channels, even though these are not, quote unquote, Christian businesses. Right? These are secular businesses led by believers. But they feel in this day and age where we're all looking for something bigger than just us, they're looking to join a company that cares about an individual and their whole self. They're promoting and encouraging those ways to communicate and bring your whole authentic self to work. So I've been really strengthened and encouraged by that. In this environment, it is really tough if you're an entrepreneur in the early days of company building, oftentimes you don't have a fully built out executive team. Maybe you're solo founder. The highs are really, really high and the lows are really, really low. And so we see our role as capital partners, obviously, with supporting business related initiatives and budget reviews and go to markets and all of that. But just encouraging founders who are so often heads down into their business, which can get demoralizing at times. We act as a reminder of, hey, you know, in this market, if you're only growing, you know, two X instead of the three or four X that you are aspiring to do this year, that's actually really good in this market. You know, this is what we're seeing amongst your peers. That has been a huge encouragement. We've gotten that direct feedback, I think, oh my goodness, we're only growing two X this year. Last year we did four X and I thought we were just, you know, sucking completely missing it. And yet it's really helpful to get a sense of what you're seeing in the broader markets. You know, that's been a very small thing that we've realized. You know, we're seeing so many thousands of companies a year having 80 plus portfolio companies. That's a small way that we can encourage founders of what's happening in the broader macro. But most importantly, it's reminding entrepreneurs that their identity is not in their business, it is not in their performance. Yes, of course, it's great if your company is thriving and things are going well, but first and foremost, your identity is as a child of God. And whether your company's success then becomes the next unicorn or it fizzles out next year. And that kind of fizzle rate is very high in venture, by the way, an early stage venture that your identity is not in your work, it is not in your performance of your company, but it is purely because you are a child of God and reminding them of that, praying with them, asking how their families are doing, how things at home are going, how their church life or their community is going, and just reminding folks that there is more to life than just their business. Although it is very important. Just to be clear, that has been a great reminder for us, even as capital partners, to double down on that effort, especially during this time when things are shaky and raising capital becomes harder and growth becomes harder than in prior years. So we've been trying to be very intentional about that, setting aside to pray with our founders, with them, and outside of time with them too, with amongst our teams, encouraging them of what's happening in the broader environment so that they can kind of stay plugged in. And in the know, I think, for instance, after we record this, this might be a great resource that we share out in terms of how Justin and John are thinking about what the public markets and the broader kind of later stage environment is looking like, especially for those early stage founders. I think people would be encouraged by that.
John Coleman: Fantastic. Justin, what are you all seeing? I mean, public companies, CEOs and public companies are obviously in a somewhat different situation than our earlier stage companies. What are you all saying there?
Justin Speer: And so we are really blessed to be a part of the culture here at Sovereign that really is focused on spiritual integration and recognizing that culture is really, really important. And we're navigating pretty complex times with, you know, some and I'll just be open and honest. Some strange ideas coming in to the marketplace about what a strong culture is. And so, you know, our process is all about finding companies that have faith driven leaders that are doing incredible things for their people. Your servant leaders have golden rule oriented values. These are companies that have incredible benefits. They do some really wonderful things for their people, not just their employees, the families and the communities around them, and do so in a way that's really God honoring. And one of the things that we do at sovereigns and one important area of impact that we have on the public equity side is that we're hosting these roundtables for CEOs of public companies to come together. And it's a small group which creates like a really great format environment for just openness from peers who are dealing with similar types of challenges as public company CEOs. So we're bringing these leaders together and they're learning from one another about best practices that each of them are deploying within the organizations to serve the people and to enable their people to flourish. So I think that's a pretty unique thing that I've really never been a part of in my career until I came here. It's one of the highlights of my career, really, is to be able to be a part of that and really blessed to be a part of that. But we are just delivering these companies, the opportunity and the CEOs of these companies, the opportunity to learn from one another? And each leader has a different they have different roads, different geographies, different industries. And so as our co-founder Luke Roush would say, our aim is it to be prescriptive on a set of tactics but rather descriptive on how leaders can maybe serve their employees, build on what they're already doing within each of their companies? And hopefully these CEOs will be served with such great ideas from their peers that they act on them. And that will manifest itself in the many thousands of employees that are represented by those leaders in these rooms just to deliver incrementally exceptional culture. And so we actually just had our first roundtable in Dallas have nine companies in attendance, over 40,000 employees represented, 100,000 family members. And that's, from our perspective, what it looks like to positively serve these public company CEOs, not asking for anything in return, just trying to help them and help their people flourish.
John Coleman: That is awesome, guys. Well, you know, we end all of these podcasts briefly by just asking folks what they're learning from scripture right now that they might want to share with others. And so just in a couple of minutes, Phil, is there anything on your heart right now that you're learning and scripture you want to share here with the audience?
Phil Jung: Yeah, maybe. You know, I'm taking my own medicine in terms of what I shared last of even as an investor, just not rooting my identity in fund performance, you know, fund size, the logos that we're able to partner with in terms of portfolio companies, you know, all of that is in God's hands. And so in John 15, where it reminds us that I'm the vine and you are the branches, that if you remain in me, that you will bear much fruit and that apart from me, that you can do nothing. I think that's so humbling and yet so empowering that even, you know, I may think that if I just am able to crank out a couple more hours of work, then maybe, you know, this next company or this next partner of ours, you know, we can close that deal or that opportunity. Well, you know, just as much if I go to sleep and be energized for the next day, God is still working in my times of slumber. And so just that reminder that even as an investor, that there's only so much that I can do that is ultimately in the Lord's hands and in that I find security and comfort and peace that transcends this world. I mean, that that's the message that I'm trying to share with our entrepreneurs that I'm preaching to myself at the same time. So especially in this very competitive industry where there headlines every single day of activities and exciting things that are happening, just knowing that, yes, that is good. But also, you know, God is better in terms of how he is moving and what he's able to do beyond our imaginations.
John Coleman: It's a good word, Phil. I will say I feel a little bit guilty that we asked you to prioritize this over sleep given the 2 a.m. arrival last night. So Phil did skip his nap for the Faith Driven Investor podcast, but hopefully that's a ministry resource that it's a good priority. Thank you. Phil. Justin, what's on your mind right now?
Justin Speer: You know, just coming off of the fact that Phil got in at 2 a.m. and he's doing this, he looks fresh. I think you're you're doing well. Phil. But in that vein, you know there's a section of text and scripture. Mark Chapter six really in verse 48 is where I'm thinking about It's on my heart after all of our discussions, but know the disciples of Christ. They're in training, they're in basic training, and they didn't really know who He really is. They knew he was special. They do not really how special he is, but he just fed 5000 miraculously. And before that he gave them the power over unclean spirits and they've seen him calm storm before. And the people after he fed 5000 wanted to make him a king. And Jesus departed to a mountain and his disciples were left like, What in the world? And we've left everything for this man. And now we're leaving him. We're alone in a boat, rowing in verse 48. So Jesus saw them straining. Rowing for the wind was against them. Now, about the fourth watch of the night, he came to them walking on the sea and we're pass them by. So these men were probably three, four or five in the morning. They had just pulled an all nighter. They're exhausted and they're rowing in this boat and they're afraid. And then here comes Jesus walking on the water. And then you come to realize that they now realize that this is more than just the king. He's the king of kings. This is God. No one can do what he can do unless God is with them. And more importantly, that He is God. And so sometimes, you know, you get in the boat. And I realize that these companies that were investing and I didn't realize that one in four people are coming to work with either mental health or a substance abuse issue. People are dealing with a lot. And sometimes we're all dealing with a lot. And we are rowing and we're trying and we're going against the wind and we're exhausted. And I think we just need to remember just as what Phil is saying just to keep our eyes on Christ. And and they apparently were still a lot of learning to do because they were afraid they still had to build their faith. And it wouldn't be ultimately until they saw him on the cross. And he resurrected three days later that they really had their faith and their hearts were melted and they did some amazing things in his name after that, in particular about let's just keep our eyes on Christ and recognize that our labors not in vain. And he's with us and he's in control and he is the master of the universe. And I love God very much, and I love these stories. To help remind me.
John Coleman: Man, I feel like Justin just ran a regression on scripture, right?
Phil Jung: That was going to say the exact same thing. John That is the equivalent of a regression analysis, man. I'm glad. I'm glad I went first.
John Coleman: Justin Phil, you guys are awesome. Really appreciate you making the time today. I really appreciate your insights on markets and I hope you will consider doing this with us again. Thanks for joining the Faith Driven Investor podcast.
Justin Speer: Thank you John, thank you Phil.
Phil Jung: Thank you.