Alan's Thinking Cap | Q1 Capital Markets Update

Alan Wink: Maybe to kick us off, just give us a short elevator pitch on Millennium Technology Value Partners. Maybe focusing on the size of the fund, industries where you like to invest, stage or investment check size, and maybe talk a little bit about the value add that your fund brings to a deal and maybe a little bit about an exit or an investment you made in Q1.

Daniel Burstein: Okay. Thank you and thank you for having me. It's great to be here, Alan's Thinking Cap. Great to think with you and all the people participating in the webinar. This is a very interesting time in the venture world and the world of investing in technologies that are changing the world in very profound and potentially very profitable ways.

Millennium Technology Value Partners and its associated funds and our broad franchise has been around for a little more than two decades. I personally have been doing venture capital investing for over 40 years since I began my career in Silicon Valley trading consulting services for equity in a handful of what went on to become very valuable startups in the early 1980s.

We're based in New York City, but we opened offices in Silicon Valley and may open offices elsewhere. We're a little bit different than other funds in the sense that there's no easy description of what's a typical Millennium deal. We have a fund that focuses on deep tech and tends towards earlier stage investments, Millennium New Horizons, and is somewhat in the more traditional venture capital mold. We've also historically done very structured deals, secondary deals, more private equity style deals, provided alternative liquidity. We were one of the first groups to really pioneer the secondary liquidity market over 20 years ago, and now everyone does alternative liquidity, but we like to think of ourselves as having a deep experience in that area and being really a trusted liquidity partner to many companies and many capital structures.

We don't insist on a lot of things. We don't insist on board seats. We don't insist on leading deals. We don't insist on certain sizes. We've done deals as small as a $100,000. We've done deals as big as 50 million. We of course are participating in the AI boom, but we've been doing AI since our first deep tech fund, which was 2018. I personally have a long career as a journalist and I started writing about AI in the 1980s, so we're very variable, adaptable, fluid.

One of the most interesting deals we participated in recently is the CoreWeave deal. Many people will be familiar with that. It's a hardware and software AI chip GPU investment. We were fortunate enough to get a very small piece of the Mistral deal, which has been in the news a lot lately, the French European version of OpenAI, or similar in some ways to OpenAI. We're probably best known historically for being one of the first secondary players in what was then Facebook many years ago, almost a decade and a half ago.

That gives you some flavor for kinds of stuff we do. I would say that one of our best performing deals we've done recently is a company that absolutely no one has ever heard of. It's an AI logistics play and the company has had just tremendous performance and yet no one's ever heard of it.

Alan Wink: Dan, I have to ask you the question. What were some of the early companies you traded consulting services for, for equity way back when?

Daniel Burstein: One of them, the first one I did was Sun Microsystems, which of course has a number of very famous founders from Bill Joy to Vinod Khosla to Scott McNealy and Andy Bettelheim. They needed some strategic consulting on company positioning and they had a direct competitor. In those days, this was around 1982, '83, there was an open systems company which was Sun, and there was a proprietary systems company, which was Apollo in the workstation heavy duty computing market, upgraded from personal computers to high-powered workstations. We helped them define their competitive advantage over their main competitor. We said, "We don't really know anything about your product, but if you'll explain it to us..." In doing that, Bill Joy, the architect of Unix at the time, had to take us sort of inside the internet in a way in order to explain how Unix worked and where it got its superpowers from.

We learned a lot, myself and a partner, and we said, "Okay, we get it at the super high level." I mean, we didn't get the engineering at all, but we get the story and we can spin that story into product differentiation and help write you some advertisements and help do some PR for you and help attract some talent for you. And we can bundle all these services and we wouldn't call ourselves PR people.

We called ourselves artistes of Silicon Valley. We told them we were in the Regis McKenna replacement business and Regis McKenna had been the guru of Apple, but then he'd taken on too much business and a lot of his clients were very disappointed with his performance. So we went around to the people who were disappointed with Regis McKenna's strategic consulting services and just started replacing Regis who had started to farm out some of his business to very low level people and got these amazing contracts and we said we'd be willing to take some cash, but we'd like some stock.

These people had just gotten funding and they said, "Sure, you can have some stock." Then these companies went public in the personal computer and mini computer boom of the '80s and we discovered we were venture capitalists and we had a nice portfolio and we said, "How do you do this professionally?" That was the next step.

Alan Wink: We spoke in our opening comments that the VC market is certainly changing. I mean, I think the market still is extremely challenging for venture capitalists both investing capital and looking for exits, and I think it's really challenging for founders who are out there trying to raise capital today. What do you think is going on in the market today?

Daniel Burstein: Well, I think the market is certainly not all one thing and it has definitely bifurcated over the last two years I would say, into the AI market and everything else. Of course, within the AI market there companies that are just calling themselves AI, even though they may not be hardcore AI. Within the AI market, there's a lot of fluff and there's a lot of over-promising, but within that, within the AI sector, if it can even be called a sector, I mean AI, the phrase that was popular a decade ago, that software is going to eat the world. AI is going to eat the world, and AI is almost synonymous today with venture capital, with investing, with technology, with productivity, with civilization, and all the existential questions that poses, positive and negative.

There are only going to be 50 companies that are going to be the huge trillion dollar and more beneficiaries of AI. There'll be many more $100 billion beneficiaries and $10 billion beneficiaries and $5 billion beneficiaries, plenty of room for venture capitalists to invest and make money on companies that most people will have never heard of. That doesn't mean investors won't be very happy and entrepreneurs won't be very happy when those companies get acquired.

There's going to be a continuing buzz of activity and flurry of activity into funding those companies, including a lot of mistaken activity and a lot of overly high valuations and a lot of people mistaking what the real deal is for the wrong deal and derivatives being created and people racing to find the AI of biotech and the AI of drug development and the AI of various other sectors besides chips and the next Nvidia and the next open AI and the next large language model and so forth.

Then there's the rest of the world that venture capitalists have known all kinds of software development, all kinds of SaaS companies, all kinds of crypto companies, all the stuff that we were investing in, FinTech, climate, energy tech, insurtech, all the stuff people were doing for the last two decades until AI came so vibrantly onto the scene. In those companies, AI is going to have a big impact on everything, but there's also core disciplines there and core applications that are indigenous.

Yes, you have to factor in AI, but you also have to be the domain master of those fields. You can't do AI for education without understanding the education market. You can't just derive it from a large language model. You have to understand what tools people need for education, but that's gotten more difficult because AI has posed this enormous existential question over everything. What's going to control the value creation? Is it going to be the domain expertise or is it going to be the choice of the AI platform and the choice of the AI tools, and who really knows what the future of these businesses are going to be?

Alan Wink: Dan, I recently heard a futurist talk about AI and the potential for AI, and he said that for companies they only have two choices with AI. Either they adapt to AI or they go out of business. Where are the opportunities from your funds perspective? You mentioned you invested in an AI logistics business. Where are the opportunities for a fund like yours and are you guys scared off by the high level evaluation?

Daniel Burstein: There are valuations that we think are unsustainable and we don't do those deals. We are investing in companies at higher valuations than we would've done previously. That's certainly true, but we are also staying out of things that we think are overbid. One thing that is a little different than past bubbles is that some of these companies with high valuations are also running at fairly high early revenue run rates. You have to do the diligence and see what the growth rates are, what the revenue rates are, what the moats and barriers are, what the demand for the product or service is.

In absolute numbers, I would say we are getting more comfortable paying somewhat higher valuations than we used to, but we're not a momentum player and we're not just throwing money at things because other people are doing that.

We had a moment in 2007, I think it was, maybe it was early 2008, when Facebook reached a billion dollar valuation and we had an opportunity to do a large secondary deal there that we had been working on for a long time. Our limited partners came to us, some of them, and said, "Wait a second, you're the value guys. How are you going to do a billion dollar valuation deal?" We said, "We've done the work, we've seen the trends on revenue growth and we believe this company can sustain a billion dollar valuation." Some of them were very skeptical and they said, "We don't think you should be doing this." We said, "Okay, we think you're going to be wrong, and we're going to dare to go outside our mold." We turned out to be right in that case. Speaking of that, very cognizant of Meta's stumble yesterday, but our cost basis on Meta stock in 2008 was about a $1.45 a share, so we had a very good experience with it obviously at that time.

Now it's not surprising that we've been able to see our way clear to invest in some companies at more than a billion dollar valuation, but our focus is on finding the gems that are under 50 million, under 30 million and that haven't had exposure to the broad venture capital financing market yet and shepherd them to the next stage and the next stage and provide some value to them.

Our team brings, you asked about value add and we have some people on our team with, for want of a better word, maybe a bit of a cliche, but we bring four what I would call superpowers to the table. One is my partner, Sam Schwerin. There is, I would argue, nobody who understands financial structure, cap tables, P&Ls, creative ways to finance a company in venture land as well as Sam does and can be a real asset to a CEO, a CFO, a board without necessarily having to be on that board. A lot of insight. Sam has done M&A deals, he's done billions of dollars of restructurings. I call him the Sherlock Holmes of balance sheets. He can see what the problem is in a moment's glance.

Both Sam and I worked at Blackstone, we understand the world of large scale financing, Sam much better than I do, and we can bring that set of insights to small companies and help them understand how to grow into large companies and how to do large scale deals.

Another person on our team, Jay Chong, a Korean American with vast experience in working in venture units of Korean conglomerates and Korean strategic VCs, as well as American VCs. Real insight into corporate and strategic venture capital and how those guys think and how they work and how they adopt smaller companies, how they merge with them, what basis a big company adopts a smaller partner either to do a business deal or to invest in them or to actually acquire them.

Ray Chang on our team is one of the craftiest people I've ever seen in terms of bringing outside finance. Again, we don't have to be on the board. We don't have to be the lead investor. Ray will find you an investor in your company if he is involved in the deal. He's also one of the only people, he and Jay, who actually have degrees in electrical engineering and actually-

Alan Wink: Actually understand the stuff.

Daniel Burstein: Yeah, something about this stuff. We have other people on the team, including myself, who've been on boards, I've been on 12 public and private boards through the course of my career, who've been through all these divergent interests as you probably have been, Alan, and as many people in our audience have been. Everybody starts down the road together and then you find people don't want to sell at the same price. People don't want to sell on the same terms. New guy wants to come in and do something different than the old guys want to do, and you end up in food fights of all kinds and you need people with calming voices who can bring everyone together and get everyone around the table to come to some semblance of a compromise that works for everybody, and we've got a couple of those voices at our table as well.

Then we have a unique method for finding companies because we've done, over 22 years, secondary deals with hundreds of entrepreneurs and founders and provided them with liquidity. We have a database of some of the most prolific founders and entrepreneurs and innovators in the whole ecosystem. When we ping them and ask them what they're doing today and talk to them about their next company, we're the guys who gave them money seven years ago that has enabled them to start their next company. So when we want to talk about investing on their new cap table, it's a much easier conversation because we did a positive win-win deal with them last time.

Alan Wink: It sounds like you guys have certainly added value to hundreds of companies over the years, and certainly it's shown in your performance. Let's switch gears for a moment. You mentioned valuations before, both in general in the VC space and also with regard to AI. Interestingly enough, valuations all increased in the first quarter of the year at every stage of VC investment, which I was surprised to see. Is the fact that only the best deals are getting funded today, one of the reasons that valuations are going up or is it frothy valuations for AI companies? Anything we could read into this today?

Daniel Burstein: Yeah, I think you could read into that and companies that had high valuations two years ago and are not getting refinanced and are kind of running on fumes, or because they raised a lot of money two years ago and can cut heads and slow down growth and do a debt deal and not have to face how are we going to cut the valuation in half because that's what it's worth now, are just not doing those deals. To me that's disappointing because these are companies with good assets, or presumably good assets in most cases, that have been built with a lot of investor capital that maybe they overspent too fast on before they started putting on the brakes. I see a lot of opportunity on that side of the equation. We call those, loosely, special situations and we think eventually, maybe not in '24, but in '25 more of those companies are going to have to transact one way or another.

I see hundreds of collapsed SPACs in the public market where you could say from the outside there was something decent about this company that caused somebody to be willing to take it public in the first place, but now it's trading at 75 cents a share. In some cases these companies still have enough money to hang on, but they're never going to get out of the SPAC structure and jailhouse unless they get recapitalized, taken over, taken private, turned around from the inside out, put back on a normal growth trajectory. Lots of private companies that got over-financed at high valuations two years ago, and something's got to happen with those companies, the ones that have strong assets and strong product. I see that as an opportunity, but the founders, the investors, the executives have got to be willing to address the mismatch between the valuations and the expectations and the actual path to financing.

Alan Wink: I think one of the challenges that the VC industry's had over the last 12 to 18 months has been the issue of exits, whether it was IPOs or sales to larger companies. I know there were a couple of nice IPOs in Q1. Do you think the IPO market's going to open up again this year or maybe next year?

Daniel Burstein: I think it's the 2025, and even then I wouldn't forecast a big bustling robust IPO market. I think it's going to be a slow opening starting later this year cascading into 2025, but not like we've seen before. I think investors are just so burned by some of the stuff that went on with the SPACs and other names that it's going to be a slow go into 2025.

Alan Wink: We have just a couple of minutes to wrap up. I want to ask you one of my favorite questions, and you certainly have had an illustrious and successful career in venture capital, congratulations, but I'm sure there was a deal that you wish you had back. What was the one that you said no to?

Daniel Burstein: Well, I could name a few, but we turned Uber down because we thought it was too high a valuation at the time we looked at it. There were a number like that, so I'd like to get some of those back.

Alan Wink: All right. Just what I'll call the lightning round in terms of let's look at a crystal ball and predict the future. Just a real quick answer. Is it going to be up, down or sort of remain the same in 2024, VC dollars invested?

Daniel Burstein: By year-end, we'll start to increase. It's not going to be a huge uptick. It's going to be slow, but we'll start to increase.

Alan Wink: Exits?

Daniel Burstein: About the same, maybe slight uptick.

Alan Wink: Fundraising?

Daniel Burstein: Flog through at least the fall.

Alan Wink: We know there's certainly a lot of dry powder out there still waiting to be invested, I think $300 billion. The last point, valuations, up, down or the same?

Daniel Burstein: Valuations are going to come down for all but the absolute hottest momentum driven companies.

Alan Wink: Got it. Dan, we're up against time. I think we could have talked for another couple of hours. This was wonderful. I just want to thank you for participating and look forward to continuing our conversation in the future.

Daniel Burstein: Keep your thinking cap on, Alan. I appreciate the opportunity to speak with you and your clients.

Alan Wink: Thank you.

Daniel Burstein: Thank you.

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