Alan's Thinking Cap | Capital Markets Update

Alan Wink:Alright, thanks. Kick us off, why don't you give us a quick elevator pitch on Acronym, kind of focusing on what's the sector focus you invest in typical check size, maybe a little bit on the value add that you bring to a portfolio company and maybe talk a little bit about your last investment if you're allowed to.

Joshua Siegel:Sure, sure. So Acronym is primarily investing in two buckets of capital. Right now our first bucket is our early stage fund. It's a late seed series, A fund or what we would call the tweener stage where we're focused on companies that are generating at least a million in a RR for enterprise or SMB SaaS companies focusing on FinTech, hospitality tech, PropTech, commerce enablement workflow, the occasional healthcare SaaS and the occasional cyber. We used to do some stuff in CPG as well, but we're sort of coming off that stuff because CPG is a very tough area. We'll do checks of 500 to 3 million. We will lead rounds, we will co-lead rounds, we will co-invest. We like companies that are raising rounds of anywhere from two and a half to 6 million. Typically, we won't do the eight to 10 million rounds at only a million a RRR because it's just too early.

It's just too early. So we're very careful about that. We underwrite for an eight to 10 x return on every check independent of any other check. So no one company has to return the entire portfolio. We will have that of course, because we have deals that will do 40 or 50 or even a hundred x or so we hope, but we evaluate each steel independently. In portfolio construction, we utilize QSBS in almost everything we do. So we're investing really for tax-free returns for LPs and LPs are all high net worth individuals. With the occasional family office, we don't take institutional capital of any kind. I'm also typically 10% of every fund. So I'm perfectly aligned with my LPs and what they're doing to make sure that the interest of the LPs, the founders and the management all syncs up together so we know what we're doing.

Typical hold time in a lot of these companies is like seven or eight years, so we invest over three to five years typically, sometimes a little less, sometimes a little more, but typically we have a ladder of investments doing so. We also are investing out of a growth fund, which writes one to $2 million checks, same spaces, but it's doing series BCD and is looking for that are going to exit in under four years. So both those funds are active, they have capital or actively deploying. We will go to raise the next early stage fund though in 2025. So that will start to happen in short order. You always have to have money as a VC, otherwise you're just somebody running around talking to darkness. So five to say.

Alan Wink:So it sounds like you're going out into the market in 2025 to raise a new fund, A little bit concerned about the difficulty of fundraising today. Are you sort of conserving capital so you could stay the market?

Joshua Siegel:Yeah, everyone's always concerned about that and we're concerned about it as well. We have a good group of core LPs already, which is solid, which we'll get good internal support for that, but the people that we're talking to want additional exposure to somebody that's going to really evaluate a real business that is in hype and is going to be attractive for someone to buy later. So the type of stuff that we look at are real companies generating real revenue on a real EBITDA basis to a certain extent where the margins make sense and you're not a subsidized venture capital solution for somebody else and somebody just has to buy you on hype, right? These companies make real money and they're providing a real solution to a real. So the way we invest and what we're looking at, we're looking at companies that are going to exit in the 250 to 350 million range, not looking for the crazy unicorns that have to exit at a billion, although we will have those, but we're really right in our zone of where we need to be, where companies are capital efficient, they're sales efficient, and we can be really helpful in that regard.

So we're excited for what we're going to be doing.

Alan Wink:So let's talk a little about the current market. There's certainly a lack of clarity and stability in the global financial markets and I think this has created a really challenging time for investors, founders and limited partners. What's your perspective of the current state of the United States venture capital market?

Joshua Siegel:So I think there's a number of things going on here. One of the biggest challenges are the exit paths. We haven't really had and continue not to have a clear indication of exit paths for a lot of these companies, typically that was the capital markets and m and a and the capital markets right now are pretty close to IPOs for just the immediate future. Simply because we don't understand tax policy, I firmly believe they will open again and when the US Congress and Senate pass the tax bill, we will have clarity at least from tax standpoint. And that will be super helpful for a lot of companies because they'll know where they need to invest, they know how to plan for it, they know what's going on this other side of things. You have the tariff situation and you have fiscal policy from the president and that can cause some challenges because people don't really know what's going to happen tomorrow or the next hour or something like that.

So for venture capitalists, this presents a problem. We still are writing checks, we're still investing in deals. We still like to see things happening, but the exit paths are a little unclear. Now, you will still get good m and a activity for people wanting to buy things, but it has to be a real, real thread, the needle use case to make it really effective. Otherwise, you're not going to have some big Fortune 500 company buying a random startup for no good reason, unless it can be accretive to earnings. Most founders don't know what that word means. Creative is a very important element for any big company, and so you've got to provide value, you've got to do it. So VC's active, everyone's writing checks definitely at the early stages, very active. Our stage is tougher just because we are active, but finding deals that fit our criteria are good. Later stage, if you're doing something crazy AI or SpaceX or whatever, that's very active, but you got to have a clear differential in order to raise that capital and there's a lot of money going to only a very few specific later stage deals. So there's a bifurcation in the market for that.

Alan Wink:So let's stay on the topic of IPOs a little bit. I think a lot of people are surprised that the IPO market hasn't opened up quicker. I read a statistic that if you took all sum total of all the VC backed unicorns, you're looking at 3 trillion of value. I think a lot of people thought 2025 was going to be, that window was going to open up. Now it looks like it's going to be delayed a little bit at least. How do these unicorn type companies continue on the path without having the capital provided by the IPO markets they're going to have to go after? So

Joshua Siegel:Yeah, so here's the interesting thing. I mean core, we iPod and it's done okay, but the important part of the IPO is that it got its money. The IPO is for cash, so it did get its money, it's able to pay off some debt. It hasn't shot up like crazy, but that's not the purpose of the IPO. So other companies are ready to IPO and they could, but I think they want that pop. And so there's a disconnect between what it's for and the visual effect of what you see when you get the hockey stick and stuff like that. I definitely think if you have a good company right now that wants that IPO, it will get tremendous reception from investors that are looking for great companies to put their money into. You can do that, but it has to be priced correctly. It really has to be priced correctly. So the ideal market is open. You could go to market today, you just might not get what you want today. There's a difference. And again, it goes back to tax policy and stuff like that.

Alan Wink:And do you think the IPO market's been negatively impacted by the fact that so many tech companies that went public over the last 36 months? When you look at the value of the IPO versus what the market value is today, so many are trading below the IPO price, and even with that IPO price, so many of the last one or two rounds of private investors lost money because the market value at the IPO was less than the valuation they invest.

Joshua Siegel:Well, again, that's someone looking to invest on hype, not fundamentals.

The challenge is when you're a public company, you really do have to adhere to public conceptions of expectations of what they want. So you need to be EBITDA positive, you have to be making money. You can lose sometimes if you're growing like crazy, but you've got to meet the expectations. And if you don't, you're going to get penalized because the public markets trade minute by minute, day by day, hour by hour. They're not waiting three years to see what happens. They want to know what's going on right now, and that's both a benefit and a detriment to being in a public market versus a private market. So you've got to be ready. If you're going to go public, you must be ready. Not only does the story have to be there, but when you first report, you've got to report solid numbers, and if you don't, you're going to get penalized. But again, the rationalization for the IPO is either to provide liquidity for investors and yourselves and your employees and any stakeholders, but also to get you additional capital to do what you need to do in the future. That's what it's for. So these companies that are trading below the IPO, a lot of them opened on height. They all thought it would just keep going up. The market goes up and down, so you got to expect it down.

Alan Wink:So let's continue on the valuation path for a second. Maybe get away from the IPO and talk about some of the smaller deals, the kind of deals that you invest in despite a mediocre venture capital market. Valuations are up across the board from pre-seed to series BC or DI don't know if that's good or bad for your business from an investor standpoint, but why are valuations up even in this mediocre market with all the uncertainty that we're seeing?

Joshua Siegel:So valuations are both good and bad. I'll get to the second part of your question first about why they're going up. The rationalization is there's a lot of still dry powder chasing ever fewer good deals, and so you've got a lot of money chasing it, but you also have money in a different area, meaning a different area of the venture capital ecosystem. You've got very large funds now that have raised 500 million billion, 2 billion funds and they have to deploy a lot of them don't want to wait to deploy that 50 million or a hundred million dollars check into something after it's been going five years. They want to deploy 25 million checks early so they have optionality and first right to get into a deal. So they're pushing up valuations at the preceded and seed stage like, alright, we'll take 20% of your business for 5 million, 20 million pre or 15 million pre whatever it is, and we don't care what it's really worth.

We just want to know that we can put 50 million in later when we know it's hit the marks of revenue and scalability and things of that nature. So that is throwing off a lot of things. You also have anyone putting AI in is like, I want a 25 or 30 x multiple on my million dollars of revenue. You're like, that's, we don't invest that way. Because the challenge then is when do you get out and you might not be able to get out until the company reaches 800 million or a billion dollars. It's tough. So we like to give eight to 12 x multiples on stuff. Sometimes we'll go a little higher depending on what it is, but we're not giving anyone a 20 x multiple on revenue. We're just not going to do it. We are very realistic investors from both sides of things. And here's the challenge for founders.

If you raise five on 20 and you don't get to your metrics when you come to see a series A investor, you're going to get crushed and it's not going to be good. And you may not ever even get that series A round. So you want to be realistic in your expectations and make sure that you're raising the right amount of money for the right amount of traction, for the right amount of optimization going forward. You don't want to just raise as a moniker because your buddy raised, that's a big problem. So the pre preceding seed are seeing ever higher numbers of pre-money valuations, but when you get to series A and the trainer stage where we are, we're going to correct that series B and C and D are actually compressed on certain valuations because unless you're meeting the metrics of those, you're not going to even raise a series B. You might have to raise an extension and that will start to get problematic. And investors are very, very careful when they raise because series B, CD, they're going to be like you making real money? What's the real exit? What's the real path? We're right a 50 million check, but we got to see the end and that's very important. So it's a healthy ecosystem. There's always a place for somebody.

We find our deals that we find.

Alan Wink:So when you look at the last couple of quarters, it certainly looks that VCs are concentrating their efforts on higher quality companies and later stage companies. In fact, in the first quarter of 2025, only 4% of the capital deployed went to first time founders. How can a first time founder or a pre-seed or seed stage company get the attention of Joshua Siegel and Acronym? What do you have to see to write that check?

Joshua Siegel:So I would say that some of the data is a bit skewed as well because you have really large multi hundred million dollar, even billion dollar rounds going into certain companies. So I would say that 4% is probably higher if you take out the skews, but it's still pretty low. And being a first time founder is fine. We like first time founders. We have no problems with first time founders. Probably most of our founders are first time founders. They're immigrant founders. They run across the board. They're everything getting our attention. The best way is a warm introduction. Have someone introduce you that knows me, either an LP, a portfolio company, your lawyer, your accountant, another VC. It could be anybody. Don't just shoot me a LinkedIn because that won't work. You've got to get a warm intro that somebody that knows me is like, Hey, I voucher this person.

Would you have a chat with them? And I'm always happy to chat with founders that just want 15 or 30 minutes of our time, but when I'm chatting with a founder that's really pitching me, I want to see your deck. I want to see your financials. You better be ready for very tough questions because this is real business and if I'm going to write a million dollar check, I've got to poke holes in whatever you're doing to know if it's going to survive. So we do that. I don't want to waste anyone's time. I want to make sure that if it's for us, it's for us. And if it's not, we'll send you to somebody else. We're always happy to refer deals to other people and be helpful, but this is a business and so we want to be sure that we're using our time wisely.

Alan Wink:So let's get a little bit more granular. What are sort of the characteristics that you need to see in a company, in a business model and a founder that you need to see must haves before you would move it to the next level?

Joshua Siegel:So typically we want to see about a million in a RR. We want 80% plus margins, so fully bake cogs in there. We want to see a pretty efficient sales cycle where if it's enterprise sales, you're getting sales done in four to five months. I don't want to see a nine to 12 month sales cycle. We do have that in the portfolio, but we really don't like that. I don't want to see payback periods of 10 to 12 months. I want to see payback periods of five to six months. I'm not worried about rule of 40 at this stage of the game. You're too early for that to really come to play. I want to make sure that the amount of money you've spent to get to a million is realistic and efficient. So if you've raised 10 or eight and you're only at one, that's no good.

That doesn't work, right? If you raise two or three or four and you're at one, that's okay. I want to make sure that you're efficient on routine structure. Do you have the people needed to scale out or have you at least identified the people to scale out in terms of the, and there's all kinds of other KPIs and the payback periods and the cocktail TV and things of that nature that we look at as well, cocktail TV fully baked in. Better be above five to one for SaaS, otherwise forget it. We won't even touch it. So that you have to know as well in terms of the founder, nobody's better at selling your solution than you are. So if you're a founder or there's two of you, somebody needs to be the salesperson and somebody needs to be the technical person, especially if it's enterprise software.

We don't like it when founders say to us, well, we're going to raise this money and then hire head of sales. You are the head of sales. You shouldn't be hiring head of sales yet. There will come a time when you will do that. But founder-led sales is critical. If you're the technical founder and you need someone that's a little different where you're hiring a salesperson, but I don't want managers in the company. I want eat and kill. Everyone's got to be selling. Everyone's got to be generating revenue. It's not just some guy being like, well, this is how you do it. We don't want people that will tell you how to do it. We can tell you how to do it. Just do it. So we definitely want those doers. Founders can have all different kinds of characteristics, but really the guys that hustle, the guys that can do anything, the guys and the men and women, not just men obviously, and people that know how to manage their time, they are charismatic in the way that they want people to work with them. They're easy to work with, they're very good at getting to the customers and understanding the customers as things of that nature. They're able to recruit people, they're able to raise capital. All those elements are important. Some of that you can teach. Some of it is just good right off the bat. So those are some of the characteristics that we'd like to see.

Alan Wink:Okay. You mentioned earlier, and I've been, I hear it all over the place that one of the real difficulties in the VC market right now is just the lack of exits, whether it public offerings or m and a activities, and that just creates a major problem with your LPs in terms of the return of capital in 2024, did Acronym have any exits? Can you talk about them?

Joshua Siegel:We had an exit in an earlier fund. The Acronym main fund hasn't had exits yet because it's still relatively new. So that fund has had up rounds with a lot of stuff. But in my previous fund that I ran, we had an exit. We had a couple exits actually, but the big one was a company called Carpay Lotion, which exited to another PE group. They've done very well. They've doubled year over year for the last three years there, and we're still a stockholder in it, so it's doing very well and we've returned capital to our LPs. So they were all very happy about that. That capital actually returned tax tax-free because it was under something called qualified small business stock, which is one of the things that we make sure that we do. So all the LPs were super happy about that. No federal capital gains for them. If you were living in California, you had to pay taxes on that. It's just the way they worked. But if you're living in New York or one of the other 46 states or 44 states that follows it, you pay no taxes, which is great.

Alan Wink:So I think no discussion with a venture capitalist today would be complete if we didn't talk a little bit about AI and machine learning. And you mentioned before that valuations are pretty frothy in those areas. First, do those frothy valuations concern you as an investor and as the person running Acronym? Where do you see the opportunities for the fund in the AI space?

Joshua Siegel:So the FRO evaluations are definitely of a big concern, and again, we're very disciplined on that. So I'm happy to pass on a deal, even if everyone thinks it's amazing, I'll be like, look, it doesn't fit our thesis and what we do, and again, we're financial motivated investors, so we want to make sure that we have that return. So we have to be careful. Sometimes we'll say no to deals that end up being amazing, but we're like, at the time it just didn't make any sense. So that's very important in terms of where we see the usefulness. A lot of the software companies that we invest in are utilizing AI on the backend and even the front end. So we're investing in really the application layer and they're using AI to either develop scripts for coding or customer success, or it could be all different kinds of things.

We have a company called Sales that uses AI to funnel outbound sales emails for lots of different companies to fill the funnel for the people that are going to close the deal. So that's an amazing thing. They're doing very well and we're really happy about it. They're not using their own LLM, it's using something else, but they're using AI to effectuate their own platform, which is great. So I think you definitely have to be careful and understand what the AI actually is to make sure that whatever it is this company is doing, it can scale. And you're not just paying open AI or philanthropic or anyone else most of your margin just to get scale, right? That's bad. So you got to be careful in that regard, and a lot of stuff can be used at a base level and have a real impact on what you're doing as a company without having to spend a fortune.

Alan Wink:So you gave me the perfect segue to ask the next question, what's the one deal Joshua Siegel missed on?

Joshua Siegel:So we don't keep an anti-portfolio. There were deals that I was like, oh yeah, we looked at that, we shouldn't have done it. I would say the only one in recent memory, which we passed on, it was like the valuation was ridiculous at the time was perplexity. We had someone send it to us at a 500 million pre. It had no revenue. It had some users, but we were like, we can't do this as a fund because our thesis, we need to stay on thesis. Occasionally you might be able to do something, but in this case we were like, this is ridiculous. We can't do this. So that might be the one deal in recent memory that we passed on, there are deals that we haven't been able to get into because we're like, oh, this is amazing. Why didn't we see this? But it's more about we've missed a couple of deals because they were too early for us. We did keep in contact, but then the lead VC in the early part was like we're taking the whole thing. And so that happened. So it would be great, have that flexibility, but you got to be a larger fund to be able to do that, and it's just tough. We are good of where we are and we target a net of fee return to LPs of six to eight x on every fund and mostly tax free. That's what we like to aspire to, but it takes time and energy and a lot of work.

Alan Wink:So let's go back to the public markets for a second. The Wall Street Journal reported yesterday that the magnificent seven stocks had their worst start of the year since 2022. All seven stocks were down at least six and a half percent. Those seven stocks lost market cap of about two and a half trillion dollars in the last almost four months. Are there particular public company tech stocks that you follow, that you use as sort of bellwethers of where the market's going?

Joshua Siegel:We don't use specific stocks, but certainly the magnificent seven are a big part of our thought process. It is the market overall because if a big company is going to buy one of our companies, they need to really look at it from the standpoint of like, is it going to save us money? Is it going to help us generate more money or is it a solution that we need to have in our stack and we're not going to pay to build it ourselves, we're just going to use our corporate stock and buy it. The challenge with the market is you can't look at the market in three six month increments. You got to look it over to the long haul. The US economy is resilient. It does what it's doing. It's great. Sometimes you'll get a blip, right? Sometimes someone will say something or do something, but in the end it's going to keep going.

It's very resilient. You as an investor just have to sort of embrace that to be like, I need to be in this for the long haul. You're not day trading and knowing where everything's going to move, then just put your money in the market and then what's going on? We meaning venture capitalists, we're an alternative asset class. We're not taking 90% of someone's portfolio. We're taking like 3%, right? Just like your real estate portfolio, maybe 6% or 4% or 10%, whatever. But if you need liquidity and stuff, you want to be in the capital markets, not in venture is for longer term higher gains that are interesting. So, I definitely think that the market will start to correct. I think a little bit of a correction that we've had now is a healthy thing. It gets people thinking about stuff. There's still a lot of other stuff that's going to happen. There's a lot of political stuff that can happen, which affects the financial stability of the markets and of companies, and you got to be able to roll with that. But fundamentally, if you have a good product and you have a good service and people are buying it, you will eventually succeed. You cannot look at your stock price on a day-to-day basis.

Alan Wink:I have to tell you, Josh, this is the first time I've gotten a question like this from any audience since I've been doing these webinars. You're going to appreciate this one. The question is, how would you get started as an investor with your group?

Joshua Siegel:Potential

Alan Wink:LP here?

Joshua Siegel:Get Alan introduce you to me. I'll happily chat with you, and if you're a founder and you're listening, get Alan to introduce you or reference this in an email and let me know. Again, we try to be very helpful. We're very serious in what we do, but we're always trying to be helpful. So even if I don't write you a check, if I can do something for you or a connection or make an introduction or reach out to somebody who could be like an amazing customer for you, I'm happy to send a note and ask. We always try to do that.

Alan Wink:So Joshua, we have only a couple of moments left, so I just want to do what I'll call the lightning round. I'm going to give you four categories and I want you to compare where you think it'll be in 2025 versus 2024. First, is VC dollars invested up, down, remain the same?

Joshua Siegel:I think it'll go up

Alan Wink:Exits, IPOs and M&A activity?

Joshua Siegel:Up, but towards the latter half of the year.

Alan Wink:Fundraising by VCs?

Joshua Siegel:Even might a little valuations are currently up and I think they're going to continue to do that.

Alan Wink:Well, Josh, I just want to thank you so much for your insights and participation today. At this point, let me pass it back over to Bella.

^{Transcribed by Rev.com AI}