137 Ventures' Christian Garrett on secondary markets, transfer restrictions, and why SpaceX runs $1.5B+ in annual tenders

Cororeweave, which I think will be very interesting. But it sounds like we have Christian Garrett in the Temple of Technology. Welcome to the show, Christian. There he is. How you doing? You guys, I'm good. I'm good. How's it going, John? It's great. Good. I'm happy. It's a It's a beautiful day.

Where are you calling in from? Uh, I'm in San Francisco. So, I am uh I'm holding it down. And depending who you ask, this is the future or this is Detroit. So, I'm enjoying finding out what's going to happen. Have you checked your Signal group chats for mainstream media reporters yet? Yeah.

No, I Man, I I really need to step my Signal group chat game up. I can tell you that much. Yeah. Yeah. just take a pass at the member list. If you see Taylor Loren's in there, maybe create a new chat. You know, you don't need to kick her out, but you know, start a new one.

At least move the important conversations elsewhere. Well, thank you for uh joining. Uh can you give a little bit of an overview of who you are, what you do, just for the just for the folks on the show who might not be familiar, and then we'll go into to some questions. Yeah. Um so, uh I'm a partner at 137 Ventures.

Um we're a growth stage venture capital firm. Um and uh we uh want to invest in uh what we believe are generational category defining companies that can be long compounders and uh have defensible sustainable competitive advantages. Um like every firm um we have a differentiated strategy.

You know a lot of what we focus on is as a liquidity partner to companies. Um we do do growth capital. We do invest in primary rounds.

Um but uh you know we saw you know a long time ago really on the heels of Facebook uh and after spinning out a founders fund we saw the opportunity to partner with companies on the liquidity side as a way to invest in them and build positions in them and that's what we've been doing for a while now and that was uh a contrarian bet that companies are going to stay private longer and there would be growing demand for liquidity.

Um now it's uh you know somewhat consensus and and and and popular and understood. Yeah, I think Peter was basically banging the table saying never go public and now you have Elon kind of saying the same thing. Hey, Tesla's kind of rough go.

Obviously did very well, but got kind of, you know, beat up in the courts and whatnot. And so, uh, it's great to see that it's at least an option for those founder-led companies to stay private longer. And we thank you for your service to the capital markets. It's fantastic. You got a question, Jordy? Yeah, I'm curious.

There's been a meme for a very long time that oh yeah, I'm an early investor in SpaceX, but like maybe there's like a bunch of SPBS separating you and like the actual like actual, you know, certificate, right? They certainly don't have the certificate.

How do you think the average investor has done over the that's like investing into these sort of like which is not what you guys are doing but uh when when these sort of power law companies end up just crushing and growing tremendously does it matter that you're stacked in layers and layers of fees?

Uh do you get smoked? Can you come out alive? You know what's been um Yeah. Well, let let me uh I'll take a step back too and kind of make a broader point. I will say it's funny you pick SpaceX. I do have a rocket engine right beside me. That's great. So, yes, we we do have a SpaceX rocket engine here in the office.

That's fantastic. Amazing. So, uh like I said, let's take a step back. I'd say, you know, for the last two decades, companies have trended towards staying private longer and longer like we just talked about. And in order to do that, companies need growth capital and they also need liquidity capital.

And the secondary market is just a tool for private tech companies that works just like the public markets in that it just provides liquidity to existing shareholders. Um there are two distinct segments of that market which is what you're hitting at.

One segment's done in partnership with companies which is where we at 137 Ventures focus on. Uh and another segment operates outside of that. Um you don't want to operate outside of that.

Um you know we've been longtime Android investors and they have tweeted a ton about fake allocations in their primary rounds being marketed to investors, right? And so uh yeah, I will say what you're hitting on is is mainly just the really just a proxy for demand.

Um, and so, uh, you know, investors want to invest in great companies regardless of how. And as demand grows, investors look for supply, and there's only so much supply for primary, which I can talk a little bit about why that is. Um, and secondary is another way to access a company's equity.

And so, people will do things to your point on investing in various SPVS or whatever it is a way to access. And I think some of that is good and blessed by the company as just another vehicle avenue to put capital in these businesses. Uh, and then a lot of that operates outside of that and is kind of a black hole.

and um maybe not the best place to be in because you one don't collaborate with the company and then two you don't have access to information right and so um and the third is potentially like Andrew was tweeting about is there could be fraud as well. Sure.

Uh can you talk a little bit about why like how companies think about doing these tender offers, when they do them, when's the right time, and how how do they go over like culturally?

Obviously, there's some incentive and employee just like reward the employees, but um what other considerations go into a successful tender? Yeah. So, you know, the the tenders and just the broader market we're talking about has grown dramatically um over the years.

Uh and you know one of the interesting things like a lot of these companies have made the transition to being cash flow positive in the private markets which means that more shares are actually bought in secondary than primary through things like tenders right over the life cycle of the business.

Um you know data bricks just did that massive that massive round right uh to convert and pay the tax bill for a lot of the RSUs. Um you know SpaceX has raised $10 million in primary over its you know 23 years uh of being around as a company.

they've been running, you know, two tenders annually, um, that, you know, total like more than a billion and a half dollars a year for a long time.

Um, and so, you know, I think a lot of companies are following in the in in SpaceX's footsteps particularly and building liquidity programs like theirs, uh, Stripe mentioned data bricks, applied intuition, open AI, and a lot of them. Um, what hasn't changed is like it matters who your investors are.

So, great investors like they may not make your business, but terrible investors will definitely ruin it.

Um this is why the best companies want to control their cap table as always and you know work with investors like us uh on implementing their liquidity strategy as they scale and more companies as they stay private longer as they've scaled even as they hit cash flow positive.

Tenders have been a way for them to offer liquidity and kind of postpone going public and it's a way to align incentives. It's a way for recruiting and retention like you mentioned, right?

If you're recruiting against publicly traded companies, uh if you're recruiting, you know, software engineers against, you know, Google and Meta or you're uh you know, recruiting researchers from Nvidia or Google, um you want to be able to offer not just a compelling package and upside, but being able to offer liquidity also helps bake bake into folks kind of comp decisions.

Um you have people that have you know structurally have to run these tenders uh based on their RSUs like you know is on the single trigger RSUs and so they structurally have to run them for their employees tax bills.

There's a bunch of reasons um you know some people also use them to mark the business up right if you're not raising primary because you're cash flow positive for years then liquidity checks a bunch of other boxes but also allows you to continually show progress in the stock of the business.

Um so I just think you know as the as the capital markets have grown as these companies have grown um the secondary market has obviously grown with it and um and I think a lot of the best companies have had the privilege of working with their investors working with folks like us people they want on their cap table and to grow their cap table to run these programs and control and manage liquidity in a way that's beneficial for the company.

Uh, have you guys looked at any businesses that are basically building like actual like basically software to manage these liquidity programs and did you guys ever think about incubating something there or is every company unique enough that it should just be done by the investors and the company's council and it's just all bespoke.

Yeah. I mean there's like two versions of that. There's the software to run these programs which exist, right? Carta, Carter has great software, right, for running this. And so I I think you know that's just back to like broader cap table software management trend which is awesome.

Um but that's like more of the execution side. The the other side is more of creating a market right and then using software to facilitate more liquidity and grow liquidity. And that is basically another version of the same thing we talked about earlier, right?

Which is like the best companies want to control their cap table. The best companies have unlimited demand, right? And so in that in that essence, you don't need a broader market to have random buyers and sellers to do price discovery, right?

And so I think the best companies generally like to run their own processes and work with you know their major shareholders and a lot of times you know which includes us and a lot of these a lot of these companies as well um on kind of running these processes very similar how a primary process would run just a different type of transaction and goal.

Yeah. To me, it feels like you guys are in the financial services business in many ways when you're creating these sort of programs and you're an investor as well.

And there's been there's constantly people that see the opportunity, they see how big it is, they try to attack it with sort of software and marketplaces and then time and time again, I feel like we see them sort of flop.

And you saw this with Carta basically kind of apparently giving up on their entire secondary brokerage business at some point.

Um but but again uh people in venture always see a problem and an opportunity and want to like throw software at it and sometimes it's basically you know companies like Andrew saying yeah we want to work with 137 Ventures because they've done an exceptional job you know with with their relationship with SpaceX and you know we want that kind of partner as well and that just looks more like traditional financial services versus uh you know a a venture business.

Uh do you give any attention to every once a month these sort of list pops up around heat around different companies and sometimes I see this list and well they're doing your job for you because you see a list on Twitter you can just go hit the company up right like you know you can just you know you don't usually usually you see 10 companies and you're like all those make sense one of them except for that one.

Uh, so how do you you give any weight to these lists or where where do they actually come from? Because it doesn't seem like it's put out by 137 Ventures, which I would trust. To me, to me it could be a single broker who's just basically pumping their own, but you guys you guys nailed it. Yeah.

I mean, it's it I mean, look, it depends where these lists come from. A lot of them are noise. They're not signal, you know, of transactions. And a lot of those transactions are uninformed buyers and uninformed sellers. Yeah.

Um, as an institutional firm, we don't pay attention to them and the best companies don't either. Um, I, you know, it would be amazing if the job was so simple as to look at a list and press a button and buy, but unfortunately, uh, there's a lot more to investing than that.

Um, so, but yeah, I I think you'll see them either like aggregating a bunch of transactions from a platform level, but still a brokerage business, or you'll kind of have brokers who are, you know, sort of trying to create a market and advertise what they may or may not have access to.

Um, so yeah, that that is in that segment of the market that I think the best companies don't particularly like and um and that you don't want to be in as an investor on the secondary side that we talked about earlier. Yeah.

C can you talk a little bit about like how does how do secondary shares work their way into the broker system and how transfer restrictions work a little bit and how those have evolved over time. Yeah. Um so on the first part I mean it's a broad range right?

I mean this this is uh you you have employees that may not be under transfer restrictions. You'll have a lot of employees that uh you know may do transactions on a forward basis. So you know they're actually violating transfer restrictions but you know it's to a different type of construct. Sure.

Um you have a lot of this too are just SPVS right?

So you know uh as investors a lot of institutional firms you know will do co-investment vehicles with their LPs and then those LPs will want liquidity and so you know you in essence have liquidity into the SPV which then allows you access to the underlying um um company.

Um so there's just various forms of supply as companies grow right there is a lot of avenues where there just is supply um and some of it is legitimate some of it's not but you know definitely is there there's a lot of legitimate supply for sure right from employees or SPVS etc.

Um the transfer side actually hits on like this whole dynamic, right? And this is um this actually all goes back to the Facebook days. So in the 90s and early 2000s, companies only had a right of first refusal refusal and that was sufficient to discourage random buyers.

Um Facebook was obviously a popular consumer business and the first to go to tens of billions of dollars enterprise value in the private markets and there wasn't as much money in venture back then.

So the company and the company lost control of its cap table because the volume of shares that traded was well beyond what the company or existing investors could purchase. And so you basically just had a lot of outsiders being able to buy, right? Because there's a ton of demand.

The existing investors, you know, weren't able to just, you know, just use a roofer as a way to buy it and control it. And so once other venture companies saw this, they implemented basically blanket transfer restrictions. And that has been the default ever since.

Um, and so you have to understand like the entire benefit of being private is that companies can choose who they give information to and allow cap table. No founder wants an activist investor and if you control your cap table, it's kind of no longer your choice and so transfer restrictions have sort of been the default.

Um, even in the case of Facebook like Yahoo could have potentially like built a position or Google built a position in the secondary market and then had rights at some point which would be potentially disastrous. Didn't happen but you know that's the risk.

So, if there are no transfer restrictions, does that mean like an early employee could just meet a random VC at the Rosewood and say, "Oh, yeah. I have I'm sitting on $2 million of stock in this company.

Like, you want to take it off my hands and they can just do that over a handshake and some contracts or does it eventually need to bubble up to like the company? How how does the company actually move to their shareholders? " There's still a roper, right? So, yeah.

And like I said before with the right first few years, it was enough to discourage this.

Uh but then with Facebook the demand overwhelmed the ability for the investors to actually execute exercise that right right um from a capital perspective and so and the roofer is just the roofer is discouraging because if I'm trying to build a position in a company through the secondary markets there's no transfer restrictions I know that I go to an employee I say hey you have $2 million I'm going to keep running into this problem where we get a handshake deal I'm going to buy 2 million and then the company buys it and then I go to the next employee right and it's just a waste of my time that's the main structure of the company or the other or the other investors.

Got it. Correct. Exactly. Exactly. Talk about uh the companies you invest in uh or many of them you you described as having like effectively unlimited demand for for the equity. And right now we see venture funds that have ballooned and they have more capital than ever to deploy.

It used to be these companies would get to the point where the VCs would be like I remain gigalong your company. I just like I'm fully tapped. Like I just got to let it ride. Now it's less the case with fun with like 30 mil.

Have you seen do do elbows get sharper in some of these later rounds where I I imagine from an AUM standpoint like you guys have ton of AUM, but you're coming to the table with people that might have 10 times as much AUM and these capital bases where they can hit up a sovereign and be like, "Hey, we're doing an SPV into this one.

Do you want do you want to come in? " Five billion. Yeah. Yeah. Um, so what what's the d the competitive dynamic in the in these sort of later stage good question.

Um, you know, I think it's a bit I I'd say like to your point 100% as as these companies really scale um and demand, you know, demand obviously follows suit with the performance of the fundamentals of the business um and the and and how they've executed on the story you uh you do see obviously a ton of I mean you know SpaceX does a tender and they're 10x over subscribe right that is you know billions and billions of dollars of demand right that is that is unmatch uh and the investors to your point the venture ecosystem has grown so there's a ton you know ton ton a ton more dry powder in the market as well.

Um, but also I think you know the size of these tenders and primary rounds does scale a bit. Um, definitely on the tender side. So I do think like as a company grows the its secondary market does grow and the liquidity programs grow in size. So that helps meet some of the demand.

Um but you 100% run into that like look at I think a certain stage it works but there's a certain stage where like there's more demand for you know SpaceX or Android um than there is supply and that just is the function of it and um I think you know that's where relationships really matter um but even then right there's still a limit right so I would say like I think relationships are end up being the biggest driver there for your ability to still not just obviously an allocation but also try to continue to size up the position ition and invest more.

Um, and uh, you know, I think being around being a major shareholder, being around for a long time and having very close relationships, which is what we focus on, uh, gives you, it's a liability. It's a liability. Allocation and venture is like often comes down to likability.

It's like, does the CEO and the management team like you? If so, cool. We're going to give you preference. What's that quote? It's like, you know, you might get your praa, otherwise good luck. Well, being an SPV promoter is more like being a club promoter than being like a VC or something like that.

Um I have I have a I have a more like yeah venture is unique.

Venture is unique because um you know it's a unique asset asset class given how important access is and you know access and that dynamic there you know leads to like you could be a a you could end up getting access to an incredible company um and uh and maybe even still be a schmuck to your point.

Um however doing that consistently and over a long time frame uh I think is a different story. Um, yeah. Yeah, totally. Uh, how do you advise founders that, uh, are kind of reaching the territory where you guys are starting to invest? I'm going to pull out a number. Let's say they're close to nine figures of ARR.

They're a real business now. It's working. They're raising a bigger round that's some mix of uh, you know, liquidity for the team as well as, you know, uh, some some growth capital. do and they're worried about kind of like signaling risk around selling secondary, right?

In the in the public markets, you see this, it's like, okay, this CFO is like selling a huge amount of their position. That's obviously bad. Same thing on the founder side. If the founders are selling huge amounts of uh of secondary, it can be a bare signal.

Uh and we saw the worst of this in 2021 and 2022 where founders would be selling like $50 million like pre-product market fit. uh and that wasn't common.

But how how do you advise founders as they start to get opportunities to get liquidity and they're sort of worried around well I'd like to be able to like buy a house and put my kids through college but uh without stressing about it but I don't want to send the the wrong message. Yeah.

Yeah, I mean I I I think you hit on, you know, the reality of obviously there there are the obvious extremes, right, which is, you know, if a founder is selling 90% of his position while still operating the business, that's obviously uh uh going to going to raise eyebrows and people are going to protest that.

And the founder, you know, sells uh $10 also people probably aren't going to bat an eye, right? So what number in between is is the magic number depending on stage. Um and you know, look, I I think one it's usually driven by life needs, right? And so that de facto backs into a dollar number that makes sense, right?

Pe um and so I think in many times the conversation is around d-risking around a life need. Someone just had a kid, they're starting a family, they want to buy a house, right? And so I would say like, you know, you're also investing in in in founders that you trust and are rational and reasonable.

And usually these conversations are fairly easy from that perspective. Um I don't think there's like a particular dollar amount.

I think one of the things to think about whether you're a founder or you know on the investor side is you know more so like you want to think about the the two dynamics around percentage of holdings and then total dollar size right and those are interesting right like in some sense if you sold 5 million bucks but it's half of your holdings right 5 million bucks uh at a certain stage of business is not a lot but you know selling 50% of your position while still operating you know may signal something and it works both ways right you may be able to sell $100 million which is a lot but it could be you know5 5% of your position, right?

Which generally people would not view as a lot and that's the conversation. So, I think it's a bit of like um it depends on the the the circumstances and the context, but for the most part, founders are pretty rational and reasonable.

And you got to remember, most founders are the most bullish in their company, even more so than the investors. So, the desire to sell is generally pretty tapered and usually driven by life needs. Makes sense. Well, thanks for stopping by. Great to have you on. Great conversation. Can we see the rocket again? Can we see?

Show us the rocket one last time. Let's see the rocket and then we'll get on to the next one. Okay, that's a beautiful engine. Uh let's hear for the rocket, folks. If you uh if you end up with a spare rocket, we'll throw one. Yeah, send it over if you got an extra one laying around.

Uh I need at least three more appearances on the pod. I can talk to the rest of my partners and maybe 137 Ventures will send you a rocket. We'll see. Fantastic. You heard it here first, folks. It's great having you on. Have a great rest of your day. Talk to talk to you soon. We're going back to back, folks.

We got back to back