Auren Hoffman: data markets are smaller than everyone thinks, and charging founders for VC legal fees is wrong

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And we got Orin Hoffman coming in the studio. He is here. So, welcome to the stream, Orin. How you doing? What's going on? I'm doing great. Happy to be here. Very excited. Great to Great to finally have you on. Probably should have done this a long time ago.

We we we had a brief phone call, I think, a a couple years ago. Good to reconnect. Uh what's the latest in your world? Well, things are great. We're uh we've got a couple different things. We run a uh like a weird holding company where we own a bunch of data companies, start different data companies.

Y and then uh then we're also at uh Flex Capital where we do a lot of seedstage investing. We did 20 deals last quarter. Our goal is to do about a hundred per year. That's amazing. Yeah.

We were kind of struggling to find what your title should be, so we just put founder and investor because you you got you wear a lot of hats. That's good. I I think you got like Sam Leon on today. I'm like an aspiring Sam Lesson. So, okay. Okay, that's great. That's great. We all How are you on the slopes?

So, you a good skier? No, I'm not aspiring Samson. I'm not at that stage. Yeah, I'm only aspiring on certain things. He's got like 20 other dimensions. I'll never catch up. He plays a lot of tennis. He yaps a lot, but Yeah. He runs like three minute miles. Yeah. So, okay.

I haven't talked about running on the on the data side of your business. How was that an AI bet that you made a long time ago? Is it is it did you get lucky? Did you have incredible foresight? I think I got on I I think I had the wrong bet.

Um and so I think on the data business uh I think we had believed that as the that these companies that sell data like data as the ingredient not just like analysis on top of data the ingredient.

We thought that these companies would become like way more valuable because we thought the number of buyers of data is would go up significantly. Uh so if you think like you know people this is 10 years ago people made oh there are uh maybe 50 hedge funds that buy data today significantly. There's 11,000 hedge funds.

The market's going to go from 50 to 500. Um I think it the market went from 50 to like 58 um over the last 10 years. So it really didn't go up. retailers or maybe 20 retailers that bought a lot of data.

Um, 10 years ago, how many out of your out of your if you this will be tough to remember specifics, but a lot of like seedstage companies will be like, oh well, we're going to generate this data and like we're going to sell it eventually and it's going to be valuable and it's like, oh, and then you kind of press them on it.

It's like, well, like hedge funds will buy it.

And then it's like okay like are you confident that those 58 hedge funds or have have you seen have you seen any of those are ter they're a terrible market it's a very small market um and they really most of them are even like the biggest hedge funds in the world like Bridgewater like the amount of data they buy is minuscule compared to the AUM it's like it's basically zero um and is that just because they spend more on like launch than yeah are they getting data from other sources like more public sources are they scraping the internet or are they just not using data driven algorithms.

They have some data. They have data that you could put in an Excel file and stuff like that. And these are not like they're smart people who are thinking about quote unquote data.

But when you actually think of like a data business that's selling data, proprietary data, different types of data um and usually data that's like larger than you could like put in Excel file. Uh most funds are not doing it. Uh most they're really really Yeah.

If you think of like real estate um so when we were starting like the number of real estate investors that were using data was zero and today it's Blackstone it's like one um it's going from zero to one real estate is a pretty big asset class now they're using some data there still people are using still some data but really like we're talking about like real alternative data really have a very sophisticated system to be able to ingest it and use it it's very very very small is that driven by the fact that maybe it's almost like I I I we've been thinking a lot about Google IO and V3 and Google's advantage in video generation particularly because they own YouTube and YouTube feels like an incredibly valuable data source.

Correct. And it's almost but the whole like data is the new oil.

It's almost like no data is like a Rembrandt painting that there's only one of and so Google doesn't want to sell that data like Google wants that right and so the like yes the data market would be bigger if all of these assets actually transacted and were funible like oil but they're not they're super proprietary brand your data is more valuable so if you if you've got something like Reddit and everyone knows Reddit they understand what people are talking about on Reddit and they say, "Okay, we're having all these like interesting conversations.

" They sell that to Google for $60 million or something to train their LLMs. And but if you if you had just like lots of people having interesting conversations, but you weren't called Reddit. Yeah.

Um my guess is instead of 60 million, you might get 10 million or 5 million or something like the brand is actually the 10x thing of why people want to buy it as well. Yeah. What about just uh creating data for the purposes of artificial intelligence?

Not pulling data from other sources and trying to go find a round peg in a square hole with selling into a hedge fund. More like there is demand for robotics data right now and we are going to go get a bunch of robots and generate a bunch of I like that. Yeah. I mean obviously like scale AI is a great company, right?

So they're doing that. They're actually going and building those types of data. We just in we're we're investing in a company kind of doing what you're saying with the robots. Um, I I think those types of things are good, but it's not always just for the AI.

Like there's other types of buyers because if you just are selling to like AI core model companies, you're you're talking maximum of a dozen buyers. That's not a great market. Um, and you went from 58 to you went from 58 to 12. Yeah, exactly. So, do you just want to sell to OpenAI, Anthropic, Google, and Facebook?

like and maybe a couple of others like I don't know that doesn't seem like a great business long term either. Yeah. And and if the deal the first deal that you do is 100 million what's the deal size on the next one? You know, do you are you going to create a hund00 million worth more data that you can sell to them?

Is it even that valuable? Anyways, um the the wanted to have you on specifically to talk about a a post that you had yesterday that uh went pretty viral. Uh you said that any VC that makes you pay for their lawyers is not founder friendly.

Founders barely affording rent should not be footing legal bills for VCs with private jets. And yet this is standard. Uh you kind of extrapolate on this, but you're writing, you know, uh 20 checks a quarter, maybe more.

Uh I'm sure that almost every single one of the companies you back ends up uh you know having to pay some VC's lawyer bill maybe in the next round. Um but what I would love for you to kind of break down the post and what inspire Yeah.

For those people who don't know, in a standard in a term sheet, somewhere in the term sheet, it says usually it says the company must pay up to X dollars of the venture capitalist legal fees.

And that X can be negotiated and it's it can be as low as 10 grand and I've seen it as high as 300 grand for more complicated deals and stuff like that. Um, and it's there and it just it seems it seems odd for a whole bunch of reasons.

First, it's like there there may be many different investors, but you're only paying the lead investors types of things. Second is that um uh you know, why are they you know, why are they actually having the company pay? It's it's it's like a little bit of backdoor way to get your fees paid.

Um and then there's like there's like a a more complicated argument as well, which is I don't think this is LP friendly. A lot of a lot of VCs will say this is LP friendly. Um because then I don't have to like Yeah.

Wouldn't the person paying presum you you can pass it I mean that the VC could pass the fees on to their LPs. So in so they could pass it on to their LPs and this is a backdoor way of doing that without actually telling the LPs that you passed it on to the LPs um by taxing the the company.

It's it's taxing the company but but it's a it's it's a it's even the LP isn't aware of it. Whereas if you actually normally if you if you use Tigus or something and you pass it on to your LP, your LP sees the bill and they're like, "Why are you spending 50 grand on TGIS?

Like you should be spending less and they can have a conversation or if you're like if you're having air travel, they can understand that as well. There's a whole bunch of reason. Can you give me more clarity around like the idea of passing fees on? " So like the real the real fees.

So So VCs have like two and 20, right? But then there's certain fees that you can pass back that it gets it closer to even three. You could get it up to like two and a half, three, yeah, four percent. And that could even be like when a VC pays for lunch with a founder, you can pass that on. Correct. Interesting. Yeah.

And every VC has a different model. When we I always thought it would be like there's 2% fees and then you got to do whatever you want with that. If you need a private jet, like that's coming out of the 2%.

If you need to pay salaries, if you need to pay for tigas, if you need to buy lunch, like it's all coming out of the 2%. But you're saying it can be passed on. The the true loaded fees can be much higher than 2%. Interesting. Yeah. Like at Flex Capital, we try to almost do everything in the 2%.

So if we go to lunch with we take it out of our own management fee, which means we get less compensation because of course you you most VCs want to protect that 2% that goes directly to them, right?

we get less competition but we think it's more LP friendly and then we'll you know there might be certain things like your your fund audit might be done to the so you have to decide okay what is what's actually done to the fund versus what's done to the management company so we'll we are more to the management company every VC will do it different on how they do it but some can be like but at least regardless at least generally when I'm passing fees at least the the the LPs do see it yeah and then they can have a conversation like hey why are you do spending all this money with lunches to to me?

Why am I paying for your lunch to go to Spago or something? So whereas with the with the with the uh with the um uh legal fees, they don't know. They have no no the LP has no way of accounting that money. What about like general pressure to bring down the cost of startup legal fees at the series A level?

Uh Justin Khan was working on a project with Atrium to try and automate the the series.

Before you can even get there, there's I think Ahmad had a good response to your post from Mercury saying that like he just basically tells the lawyers we're going to cap it at this and you agree up front and then the lawyers are super motivated.

But that's still that's and that by the way that's mod's amazing and that's that's definitely step one. Like you got to negotiate that gap. Maybe you can't negotiate all the way down to zero, which is what I would like to see happen more, but you've got to negotiate it.

My guess is also it it also depends on h the the higher the cap, the longer it will be to close your round. So, most people know you get Shouldn't it be the other way around?

No, the higher if it's a high cap, the the lawyers are just going to be like, "Yeah, this is going to take because it should be it should be price. I'll pay you 300k to close it this weekend or 50k and yeah, you can take a month. " I can basically tell you like here's how you close your round.

It's going to be it's 15 days. Yep. Plus one day for every $2,000 that's in that I can guarantee you that that will that will that will be exactly what it is for every single round that is in there. So backwards.

Shouldn't Shouldn't One def one one defense of of startups eating the cost is that you know if you're if you have an emerging manager with a $20 million fund and they're barely you know paying themselves a dollar in in salary and if they want to lead around that that ends up getting priced it could get expensive but your argument is still like okay well be ls are still eating that that cost.

Yeah, I mean look, it can be negotiated and maybe in some cases it could make sense that's in there, but there if if you're why are you doing something so complicated? I mean, YC created the safe. The safe doesn't have any legal costs, right? Really, um you you can actually use a pretty boilerplate uh uh thing.

You you most of these terms you should be negotiating in the term sheet anyway. So going from term sheet to close, which is where all the legal costs come in, from term sheet to close, like why is that expensive anyway? It's because probably you're not managing the lawyers.

The lawyers have no incentive to to keep the cost low because they know what the cap is. If the cap says 50k, I guarantee you you're getting a bill for no less than 49K. Um like in in the history of the world, I doubt it is almost ever come in less than 49K for a cap of 50k.

like how do they automatically always hit because they're they're filling the space. They're built different. Uh the other thing as an LP what you don't want to pay the fees and not get the ownership is the other thing, right?

It's like if you're just getting past the costs and you're like eating that, but you're not getting like the the incremental kind of dollars deployed into the company. Yeah. Or like the incremental ownership.

Is it does it I mean I guess like where I'd want to go with this is what do do you have conviction or or any excitement around tools that can be like AI tools specifically that can be introduced into the proc like basically that um term sheet to close period to just make that more efficient where we could say okay in most cases but first of all like we we just did a we were just involved in a company that did term sheet to close in in six days.

Like it's not that hard, especially in the early stages of a company. Like how much diligence do you need to do? You need to and look, the company did a good job. They got all their stuff in a data room. They did all the things that they were supposed to do.

Then as the venture capitalist, okay, well, you've got to you've got to somehow read it. Read through it. Maybe you can use AI to read through some of it. You got to go check it. You have to make sure that the the bank account is legit and all these other types of things that isn't fraudulent.

But it shouldn't take that much time. The main reason it takes a really long time is just the back and forth. You put a red line in, I send it to you, then you don't have time to look at it that day. It takes you three days, then you send it to me, then I it's like if we actually all got in a room, that's what they did.

So they got all in a room on day six and they basically put like a 4hour block and they said, "We're going to just go through every single issue right here.

" and they were able to iterate on it just live and then you would you you would you would put it on mute you would talk to your lawyer to go back it just got done it's so much easier and obviously even M&A agreements like you should be able to get those done so much faster and actually those often do get done faster yeah like sometimes you can do an entire M&A um uh from term sheet to close faster than you can do a VC financing many M&As go go faster than VC because everyone's just motivated to really work on it and put in the time to make it happen.

Yeah. Well, thank you so much for stopping by. Come back on again soon. I love it. Invite me anytime. Yeah, this is great. Yeah, we'll make it happen. Yeah, great hanging. Talk to you soon. Cheers. Bye. Uh yeah, we have some breaking news. Uh the first nuclear executive order has dropped.

Uh I'm going to read here from one call out that people are celebrating. To maximize the speed and scale of new nuclear capacity, the Department of Energy shall prioritize work with the nuclear energy industry to