Allocate CEO Samir Kaji warns of private market disconnect as $500M rounds flow to companies smaller than Airtable

Speaker 1: Well, congratulations on the round. Congratulations on all the progress. Thank you

Speaker 2: for thank you. I think you're doing a a public service. Right? If you can get if you can get all these AI companies to make better outputs, the world will become a more beautiful place.

Speaker 1: Yeah.

Speaker 2: And I think it's important.

Speaker 1: Cool. Have a great rest your day.

Speaker 7: Great rest your day, guys.

Speaker 2: Great to meet you.

Speaker 1: We'll talk to later. Goodbye. Let me tell you about Console. Console builds AI agents that automates 70% of IT, HR, and finance support, giving employees instant resolution for access requests and password resets. Our next guest is Samir Kaji from Allocate. He's the cofounder and CEO. Samir, how are you doing?

Speaker 2: What's going on?

Speaker 10: Good. Good, guys. How are you guys doing?

Speaker 1: We're doing fantastically. Fun day. Do you drive a BMW? Have you been getting bombarded with Spider Man ads?

Speaker 10: I I wish. No. I don't drive a BMW. No. You're lucky. You're lucky.

Speaker 1: You're lucky. That's Apparently apparently it's not even opt out.

Speaker 2: Does allocate take a couple weeks off in August as a company? No.

Speaker 10: No. There's no taking any time off. Like unfortunately, like a lot of our clients are taking time off.

Speaker 2: That's I'm saying. If you wanted to plan like a like I think it can be good to for at least for smaller companies to say like, hey, we're all gonna take vacation in this general window.

Speaker 1: Sort of collusion.

Speaker 10: Yeah. Well, I will tell you though, I did go to Cafe Venetia the other day, so I don't know if that counts as a vacation, but it was it was nice to kind of get away. But yeah, no, it's it's crazy busy right now as you So guys much is happening in the market. So many funds are raising. So many companies are raising.

Speaker 1: Yep.

Speaker 10: And having been in this market for twenty seven years, this is like the craziest I've seen it.

Speaker 1: Yeah. So talk to Does that scare you?

Speaker 2: Because obviously it's good. It's obviously great for for your business Yeah. Which we should let you introduce. But maybe introduce Allocate first and then I wanna get into the Yeah.

Speaker 10: I'll give you the quick sort of thirty seconds sort of, you know, pitch on Allocate. So, you know, having been in, you know, the venture market working with private funds, kinda realized a few things. Private funds are now more numerous. Like we went from 3,000 asset managers to 30,000 within fifteen years. Wow. The amount of capital that's being raised by these funds It's amazing. Is enormous too, right? Yeah. You had Grace and raised $15,000,000,000.

Speaker 2: You had

Speaker 10: Thrive raised 10,000,000,000. So these companies are staying private so much longer. So the private markets grew from a trillion to 17,000,000,000,000. And when you look at that, where is that money gonna come from? Well, historically, the funds were capitalized by pension funds, endowments, foundations, and then it became clear that they needed to find new ways to capitalize themselves. And one way was family offices and high net worth individuals. The problem is it's kind of a headache to operationalize those small checks. And for the people investing, they can't write $10,000,000 tickets into name your top fund and so they go through the wealth advisor. So we create basically the bridge between the wealth advisory world and private funds. And for the wealth advisors, they have one place where they can discover, access, execute, and report on private assets. So there's $10,000,000,000,000 of capital being right now managed by these independent wealth advisors. If you guess what percentage is in alternatives?

Speaker 1: Less than five?

Speaker 10: 33%.

Speaker 2: Good guess. K.

Speaker 10: Well, endowments, foundations, pensions, 20 to 50%.

Speaker 1: 20 to 50%.

Speaker 8: Yeah. Yeah.

Speaker 1: Exactly. The Yale model. Yeah. We gotta get everyone on the Yale model.

Speaker 10: Yeah. Well, you know, you you gotta be a little bit careful on that for sure. But, you know, look, I mean, reality is like you can't ignore the private markets yet. Anthropic, OpenAI worth almost 1,000,000,000,000.

Speaker 1: Yeah.

Speaker 10: SpaceX goes public for 1,770,000,000,000. Like, it's crazy.

Speaker 1: Yeah. Yeah. Yeah.

Speaker 2: Yeah.

Speaker 1: Yeah. And and it would be it just feels like from just like in not even the financial numbers, but just the idea of just being in the American economy and being bought into the next iteration. Like, there's been this discussion of going going public earlier. It's very onerous, etcetera, etcetera. But there is another world which is just broader exposure through funds and and that's a lot of what's happening here.

Speaker 10: 100 agree.

Speaker 1: Yeah.

Speaker 2: Once a week, maybe twice a week, sometimes three times a week or four times a week or or even five. There's a company that I've never heard of that comes on and raises $500,000,000 and, you know, they're maybe like one or two years old. That I get a little bit wary because I sort of like My career came online, let's say, in 2018. Yeah. I've been paying attention to startups prior to that, but like really was paying attention in 2018. And we went through this sort of crazy period, and then we saw a pretty massive correction. I got

Speaker 7: to Yeah.

Speaker 2: Sort of be on that roller coaster. And so now, while we're back in boom times, I'm just like much more wary than I was before because I was young and maybe overly optimistic. Right? And so today, I'm just when when you look at the public markets, there's a lot of a lot of valuations seem relatively reasonable. In the private markets today, there's, you know, we saw Airtable. If Airtable was a was a was just like, I know a I know a SaaS company that has a tiny tiny tiny fraction of Airtable's current revenue that that is doing a new round well beyond Airtable's valuation. And it's just because they're squarely serving other AI companies. Mhmm. And ultimately Yeah. They're they're just as much of a software company as Airtable was. Mhmm. And so you see this like massive kind of disconnect between exits and private valuations. Mhmm. And so my I have like I have a lot of alarm bells going off, but I'm curious how you see it and and LPs on the platform are seeing it.

Speaker 10: Yeah. One of the most dangerous things to say in the investing world is this time's different because rarely is it completely different. So, you know, similar to you, I've had some scar tissues built up. I actually, you know, started my career in '99. Was at Silicon Valley Bank. Was at SVB and I was lending into the .com. And back then, you know, companies were going public based on one metric, which is eyeballs. Right? Like, how many eyeballs? How many people are visiting your site? Well, today, it's AR, which, you know, as we know, can be a little creative in terms of how people are actually saying AR. What's actually true right now? So I think we have to disassociate, you know, AI as, like, this technology innovation, which I think is gonna be bigger than anything we've ever seen, bigger than the Internet, bigger than mobile and cloud, and maybe the biggest innovation since the railroads. The challenge though is when you have a new technology of this size and scale, especially moving this fast, the supply and demand for those companies changes. So you have so much capital being raised. People are incented. Like, you're a VC, you're incented to invest in the next hot AI company, which has grown from, let's say, 1 to 10,000,000 to 100,000,000 in revenues, knowing that full well that if you catch the tiger by the tail and you get the Anthropix or you get the OpenAI, your career is minted. And so a lot of capital goes into these companies. And every single time that I've been through one of these, the companies that do win are bigger than ever by a massive degree of magnitude. The issue is so many expensive mistakes. You mentioned Airtable. That was like 2021. I think their peak valuation was $11,700,000,000. They raised almost 1,500,000,000 and they sold for to Bending Spoons for $1,250,000,000. Right? That means common shareholders get nothing. Mhmm. And the people that came in at the end, they may get a return on capital, but that's a horrible opportunity.

Speaker 2: I think common shareholders were getting something because the actual The total price equity value is 2 point something billion.

Speaker 1: Yeah. 2.2

Speaker 2: It's roughly 800,000,000.

Speaker 1: But again, it's a tiny

Speaker 2: fraction of what what they would have probably marked it themselves.

Speaker 10: If that's if that's the case, that's great. But that's not the case for a lot of those 2021 companies that raise that. Sometime I I was saying 50 to a 100 x multiples for these companies. Now the multiples aren't that crazy this time around, and these companies are growing. The bigger challenge is, like, which one of these companies is actually durable? Like, I mean, is a big frontier model gonna subsume you? What happens with open weight and open source models?

Speaker 2: Yep.

Speaker 10: It's still too early to tell. Mhmm. So I think you're right in that you should be somewhat nervous. But at the same time, venture has always been a parallel industry. 6% of total companies that actually return over 60%, that's historical. I think it's even more amplified right now. But I'm, you know, in the mindset right now that I've been through these periods and people always have short memories. Like, 2021 was, what, five years ago. And, you know, it's almost like we forgot 02/2223. Things do not go right when you just plug so much capital with such speed. And so I expect the same thing to happen. I don't know when this changes and when gravity comes back in the private markets. Six months, twelve months, two years, maybe it's even five years. Maybe we're all wrong. But I would I would actually be willing to bet that within the next few years, we're gonna see some kind of pullback And then we'll kinda see, you know, what they say when the tide goes out. You see you see who's wearing the swim trunks. And I think we'll see that next year or the year after.

Speaker 2: Right. Don't you see oh, okay. Yeah. That's a better way to put it. Yeah. Who's wearing the swim trunks? See who's swimming swing. Said. Well said.

Speaker 1: I want to know how how are how are new venture firms changing in their construction? What what you you mentioned the the the boom from 3,000 managers to 30,000. But what are you noticing over the last few years that might look different in the way a new fund gets built? Maybe it's more interns or more or less banker crossover types or more operator, more founders. Are there any trends that you've noticed that you're seeing, okay, that's clearly working at certain funds, more people are following this, even in the way they're structuring or the pacing or anything trend wise around new fund formation?

Speaker 10: Yeah. And and new fund formation slowed down, you know, you know, for sure over the last few years. Right? You it was at a fever pitch in 02/2021. In fact, everyone felt like it was cool to be a VC without understanding that it takes forever to know if you're any good, to get paid, all those things. Fundraising is really tough.

Speaker 1: Yeah.

Speaker 10: And you know, lot of it what came down to when you have so many funds in the market, everyone's searching for differentiation.

Speaker 1: Mhmm.

Speaker 10: And so they create these things which is like, I'm gonna create a talent team. I'm gonna going to create, you know, a AI sort of way to vet things. And I think these are all around the edges. But any venture firm at the end of the day, all that matters is, you know, sourcing, picking, and winning. And you gotta do two of those three things really well. If you're a really small firm, it's sourcing and winning candidly. Like, I have no clue if you're a good picker and there's so many false positives. Right? So I think people sometimes lose the plot a little bit and say, let me create something really unique that I can tell my LPs versus focusing on, am I gonna see the greatest companies or the right entrepreneurs in the thesis? And once I see them, am I going to win given sort of the competitive arena? And I think that it's really tough to be an emerging fund. I mean, raising capital, I think it's a great time to start if you have like a a reason to win and a reason to exist. Yeah. Now big funds are different. Like, let's they're playing a different game. Yeah. You know, somebody raising a $10,000,000,000 fund is just trying to get into the very best companies and plug a billion dollars into that company.

Speaker 1: Mhmm. Has had how often do you see someone coming across and pitching sort of a a new firm that feels like an old firm in the sense of we're going to go and compete and win $20,000,000 series a's and b's or something around there as opposed to the early fund manager 50,000,000, solo GP. They're going to do a 100 k check into this and like little add on that feels more winnable to your point about the importance of winning. The the Mount Everest of winning and picking is probably you're going to go, you know, lead that major that major round without the signal from a tier one.

Speaker 10: Yeah. I mean, look. If you're gonna do a $20,000,000, you know, series a, which is not gonna be like a big frontier lab type of company or, you know, one of the big mega rounds, you have to, raise them in a you probably want to raise $350 to $500,000,000 And who is going to give you the money? It's people whereby you have a track record somewhere else. We've seen a few, and this is all public now, but chemistry is an example of one where you had three people, one from index, one from and one from Bessemer, right? They come together, they are clear series A will lead, and they kind of sit in the middle between the seed funds and the big mega shops who are doing different types of series a's

Speaker 2: Yeah.

Speaker 10: Or different types of series b's. I I see very few of those now. I because the bar for those is pretty high.

Speaker 8: Yeah.

Speaker 10: And if we look at 10 funds, maybe one falls into that bucket.

Speaker 1: Yeah. Yeah. It it does seem like it's maybe an underrated white space because there's so many funds that can't they're so big at this point even though they might be able to win. They're also not that upset if they lose that round because they're like, yeah, okay. We'll just come in with a 100,000,000 later and get our position. Like, it seems fine. Anyway

Speaker 2: What how have you how did you looking back, like, what's the takeaway from the solo GP, I'll call it meme? Because it's interesting because it was something that became, like, very desirable and was and it was something that I think LPs were were interested in. It's something that, certainly people that aspired to be venture investors. I think a lot of people have this idea of like, oh, it'd be amazing to be like a solo founder, solo GP. Right? You get all the glory, all the economics, or whatever. But it's interesting because it just feels like a solo GP, when it works, it's amazing. Right? I think of a lot, you know, gills of the world as, you know, the the top of the mountain there. But, there's so many cases where for LPs, it's like, well, it'd be great if you had, like, a solo GP would be cool, but what if you had three or four partners that were all fantastic Yeah. And just increases your luck surface area. And then for a founder, it's like, yeah, you wanna basically pick one partner at a firm to partner with, but it's awesome if there's a few other partners at the firm that can maybe make an introduction or open up their network or whatever. So it feels like something that impractic like, is it was like a cool idea and there was this moment around it. But now, if you wanna win, why would you why would you even like brand yourself in that way?

Speaker 10: I I mean, look, I think it's can still work. And I'd rather back a solo GP than somebody that, you know, decides they wanna start a venture firm and decides that to raise capital, I just need to bring on a partner and they've never worked with that partner. Because, you know, the problem with partnerships too is, like, there's a lot of politics. Right? Like, you know, do we really you know, are we aligned? You know, how does decision making work? If the deal is not consensus within the partnership, does it get done? And those can actually create you know, Bessemer, for example, has this great anti portfolio. If you go to their website, all the stuff they miss. And I guarantee some of those misses were, you know, one person had a ton of conviction, but they couldn't get it through the partnership. Right? And so, you know, solo GPs at least can move really quickly. They don't have to go through a committee. Even Elon, you mentioned, he has a team actually. Right? So he's solo GP from an investing standpoint.

Speaker 1: Stolen Valor.

Speaker 2: Yeah. Stolen Valor. Oh, he has a has an he has an amazing team. But, like, you can't I can't

Speaker 1: name also any the solo GP branding was very much, like, foisted upon him. He was not like, I will never hire anyone. It was more just, like, something that was fun to talk about.

Speaker 10: A guy like Orin Zev. Right? So Orin, I don't know if you've Orin has been doing it, and he will say, I'm a solo GP. I have no admin. I have no other partners. I have no one on it's just me. And that's what you're gonna get. And, like, he's done, you know, candidly very well for himself. You know, you've seen everything's public on him. And so I look at it and say the bar is higher, and a lot of solo GPs realize it's pretty damn lonely. Right? So you're you're basically doing the raising. You're you're working with companies. You're trying to do everything. You're running the firm. And then you're, like, four years into it, and you're like, wait a second. You know, my fund is trading at a 1.1 x because I went crazy in 2021. No one's giving me money. I'm I'm pulling a salary of the $20,000,000 fund that I could probably get in a in a quarter working somewhere else. You're like, why bother? What's the purpose of doing this?

Speaker 1: Yeah. Yeah. Have you seen anyone try and tap the traditional venture capital backers, the LP base for something that looks like more competitive with a Thrive eternal. Like, I'm gonna go buy a baseball team. And Yeah. I want to tap Yale for that or something like that. You you as an as an example.

Speaker 10: Not not that much. I mean, Thrive is pretty unique in everything they do. I think they're really progressive and Josh and team have done a, like, fantastic job. I mean, DC is also general catalyst. They've done some pretty interesting things. I mean Yeah. They've gone into hospital systems. Right? So they've done things that are like a PE and credit.

Speaker 1: Yeah.

Speaker 10: And, you know, that that is more like private technology finance and going into these adjacent areas to create competitive advantages. Because when you're raising $10,000,000,000, guess what? There's about 15 firms that you're gonna compete with. So what is the differentiation outside of your partners?

Speaker 1: Yeah. Do you think the situational awareness story changes RIA consideration?

Speaker 10: I don't think so. I mean, look. It I mean, you know, it's supposed to that was a very unique thing. I mean, the guy had I mean, the guy is incredibly smart and, you know, he's he's still is up, you know, overall from, you know, the day of. But when you drop that much and use that much leverage, like, it's gonna be a big blow up. RIAs themselves, like, you know, are we talking about RIAs from the asset manager side or RIAs from the wealth manager side?

Speaker 1: There was just a there was just a conversation a while ago about, oh, VCs, like, they often have really great deep understanding. Sometimes board seats in these public companies, they take the company public, then the stock trades down, but they know that there's a really great thesis. Maybe they should be holding on behalf of their LPs instead of distributing. The RIA sort of sets you up for that. I'm less talking about RIAs as like going long crypto or going long secondaries. I'm talking about playing in the public markets. Someone in the tech community just got their hands sort of burned. Does that change, like, the appetite from LPs to allow venture capitalists to play in the public markets at all?

Speaker 10: Yeah. I don't think most LPs want their VCs to play in the public market. Obviously, Sequoia, everyone knows, you know, has a long hold only. Then there's crossover funds that do it. But it's just a different skill set, honestly. If we're an LP, or somebody else is an LP, you're at the end of day paying the GP to you know, invest in private companies Yeah. And then exit those private companies at at some portion where we can make the decision on what to do with the public stock.

Speaker 1: Yeah.

Speaker 2: You were at SCB in 1999. Any good stories of venture capitalists using leverage?

Speaker 10: No. But what people because I'm surprised

Speaker 1: I I like John

Speaker 2: and I were talking about this yesterday because, like, you know, the venture capitalists or at least there was some that were kind of doing a little grave dancing

Speaker 1: Mhmm.

Speaker 2: On Leopold last week and and we were talking yesterday after the show being like, yeah, it's funny that VC funds can't blow up, you know. It's just like a slow death.

Speaker 1: If if they die.

Speaker 2: Yeah. If if they die.

Speaker 1: Yeah.

Speaker 2: But I'm wondering if there was ever a period in Silicon Valley history that Silicon Valley was like, you know, we should be using leverage. And then and then some some sort of set of events that led to

Speaker 1: Yeah.

Speaker 2: That not being very common.

Speaker 10: Now now fortunately, not too much. Right? So not in terms of true leverage. Now there are people that have used nav lines, but you haven't been an RA. Most VC firms are exempt reporting advisors, so they're not able to do those things. What we did see, and this is less than '99, but 2008, right before kind of the GFC started, there were some funds that did warehousing. And what they would do is they would go to a bank like SVB and say, we're raising a $200,000,000 fund. We are going to start making investments before our first close. Can you lend us the money to make those first few investments? And guess what? There was a couple that did that, more on the fund to fund side than, you know, the, you know, direct side. And guess what? The market changed. They couldn't raise capital, and they had this huge warehouse sort of facility that they they had to pay off with no capital.

Speaker 1: Interesting. That is a crazy scenario. Yeah. So it has happened technically. Thank you for the history lesson. This is exactly what we were looking for. Perfect guess for our earlier debate.

Speaker 2: Very cool. Well, it's super fun. Really, really fun hanging. Great to finally meet. And, let's we're we're trying to get pulse on what's happening. We think what Yeah. What's happening in your world ends up sort of