Notable Capital’s Hans Tung on the state of VC and the upside to down rounds | Equity Podcast

This episode is presented by invest Puerto Rico if you believe your business Can go anywhere Puerto Rico is the [Music] Place hello and welcome back to equity a Podcast about the business of startups Where we unpack the numbers and Nuance Behind the headlines I'm Maryann aavo And this is our interview show where we Sit down with a guest think about their Work and unpack the rest today we're Joined by Hans Tong managing partner at Notable Capital formerly ggv capital A Change we'll get to later in the show It's a firm focus on investing in the US As well as in Europe Israel and Latin America Hans welcome to the show thank You for having me maryan it's always a Pleasure to be here today we're talking About a number of topics including Hans's thoughts on the overall Investment landscape why down rounds are Not such a bad thing What's going on in the world of fintech Which has had a little bit of a rough Start to the year Venture Capital as a Whole where we're seeing lots of musical Chairs going on and more let's get Started last year I had the pleasure of Interviewing you on equity and one of The things that we discussed was down Rounds which for a while seemed like They were almost an evil phrase but Became um much more accepted I guess in

2023 um at the time you you said you Felt like down rounds were okay and in Fact you know not necessarily a bad Thing especially when faced with either Shutting a company down or raising a Round at a lower valuation are you still Thinking that this year what are you Seeing when it comes to valuation yeah Every time someone asked me the question About down round I think of that episode In selom valley where they found to Realized wait if I just raise more money A Down Round I will still have my Company still have to shut it down it's It's a classic you know I've been in This business for almost 20 years and We're long-term in the way we approach Things I always know that it doesn't Matter about the markups it's just like Getting a report card or getting a test Exam score it doesn't really matter Until you actually have an exit IPO is Actually just a milestone not the end Game IPO is the beginning for public Investors to be alone for the right so You to think longer term the valuation Up or down temporarily doesn't matter as Much as generating a big outcome at the End and one thing I like about being Cal Is that you can be a lot of be quite Founder friendly so when things are Going well when major Milestones are Being reached you can always create Option refresher for the founders or the

Management team that have performed Through tough times so I just view Downrown as something that's more Temporary and as investors if you end up Getting a good outcome you have exits You have DPI you have distribution Ultimately that's how you're judged by Our um LPS so I think that whatever it Takes to scale the business is what the Company and the founders and board need To focus on of doing to manage the Business the best they can every step of The way yeah well I guess again like if The alternative is down round or Shutdown I think if I were a Founder I Would probably also choose a Down Round But speaking of shutdowns I read or I Interviewed Roger Lee from layoffs.fyi And this was a couple of maybe a month Or two ago I I lose track of time and One of the things that he shared with me Was a startling St statistica shutdowns Were up by like 70% startup shutdowns in 2023 compared to the year before are you Seeing that as well or is that is that Reflective of the market or one of the Things I was thinking just before I Before I let you answer is um there were So many more startups founded during the Boom times of 2020 and 2021 so that it Kind of makes sense that we're seeing More shutdowns overall but anyway what Are your thoughts on that I Roger is Very smart and thoughtful VC and I love

Having him on the board of stock ax I Mean his stats are correct I think that What Founders don't realize is that this Choice is not between shutting down and Do a down Route because in that Situation you will choose a down Route Every single time the challenge is when You are faced with the prospect of Holding on to your valuation or raise a Down Round if you don't do it you run The risk of shutting down later by the Time you close to shutting down no one's Going to be invest in you it's going to Be very very hard you know that's a Pretty straightforward decision right Exactly so the TP bar is do you wait or Do you try to continue to grow thr up Even if you're burning money just to Prop the valuation up and not have any Negative signals on the market a lot of Founders tend to choose to keep on going Because they worry that they will make Them look back if they're still down They would do a riff I see and my point Is that you should do that to bring your Cash flow management to a better Alignment of where the business at right Now and if it means that you have to do A down run because you growth slowed and You had the Riff that's okay okay yeah Gotcha a lot of Founders are not as okay With that scenario it's like a mission Of defeat and to me it's not at all it's A temporary adjustment and you need to

Step back in order to Spring Forward Later that's the hard part for most Founders especially young Founders to Realize yeah it's kind of like letting Go of that pride of okay it's okay if we Raise at a at a lower valuation better To do that then potentially risk losing The company later I I hear you yeah so Overall though the investing landscape How different is it so far this year Compared to last I think as a Continuation of what we see in the Second half of 2023 we still seeing some Down rounds happening in the market Obviously AI is an outlier AI is you Know way overv value right now you can Argue that we're only in the first Inning first half of a first inning for AI so people are willing to overpay but At the same time I remember what Happened in you know 1994 4 1995 1996 And also what happened with mobile Internet in 2007 2008 2009 you do see a Lot of crazy rounds happening at the Beginning of a boom but there will be Bifurcation and there will be companies That end up doing great and most Companies may not be and so got to still Be very thoughtful at choosing which Ones has a chance of being around for a Long period of time we do see AI being Very hot out of sectors being a lot Cooler in Cloud infrastructure which is A key area that notable invests we still

Seeing some deals getting done at high Valuation uh for sure it's still a hot Market in terms of the geography we Invest in you mentioned us Europe and Latin America we also invest in Israel And Israel despite the what was going on There politically the uh the Boom is Back in terms of funders excitement of Building great companies intersecting Cyber security and and AI so we still See a lot of positive development but For the most part I still caution Founders to not compare themselves with Sectors are doing well or too hot but Really focus on managing their business Their fundamentals I for one are still Very bullish on fintech we can chat more About that later yeah we'll get into Fintech in a minute but overall like in Terms of your pace of investing I think Last year you had told me it had slowed Considerably in 2023 compared to 2022 Compared to 2021 compared to 2021 right Sorry yeah so how is that how is your Pace of investing compared to recent Years have you slowed down continued to Take your time and are you investing as Much as you were say last year or about The same or and how is that comparing to Like a couple of years back yeah I think We're more at 20122 level so more than 2023 but 2021 is you know as an outlier Yeah that was crazy so we we're not Going back that anytime soon I really

Hope not I hope not it's not good for The business no and it's not good for System without naming names you do see Firms being impacted by what they were Doing in 2021 and make them slow down a Lot more uh now which is unfortunate Because many of them are great investors They're in great companies and it's too Bad that they cannot participate as a Result of just indigestion from 2021 and Well we were going to kind of get more Into the Venture World later so I guess Though if you can elaborate a little bit What you mean by that do you mean they Kind of Overinvestment the thing is that there Are some great companies being invested I'm not going to name any names but they Raised a large round in 2021 and even Though the business growing say not at You know 80% 100% year on year but They're growing their revenue at about You know 40% 50% year on year and they Can probably go IP soon in the next year Or so from a maturity standpoint and the State standpoint the revenue based Standpoint but because the valuation They raised the last round at in1 is so High that they're not at the level Valuation in the current Public Market Where the multiples have compressed Quite a bit so even though business-wise They're ready to go public valuation Wise they cannot be getting a higher

Valuation than what they got back in 2021 so they have to wait and as a Result the funds that invest in them in 2021 cannot get exits back because There's lack of liquidity lack of IPO Yeah and as a result the LPS we invest In those funds cannot get money back Either so we don't have that recycling Of money going back to the L piece then Continue to invest in new funds so the Whole system suffers as a result yeah That makes sense these companies are Still trying to go into those too high Grow into that valuation valuations that They commanded in 2021 right okay so You're saying and you to go back to your Point about pace of investing you said Currently it's about more like 2022 than 2023 does that mean you're investing a Little bit more this year compared to Last yeah yeah that's good yes we are Okay that's good I mean AI definitely is Happening so we're thoughtful but we'll Make investments and then the other Areas whether it's S&B Tech fintech Other applications even on consumer Internet side we are seeing things Picking up and we like many companies Our portfolio like Quin or even a new Younger company like gorgi with energy Drink designed by women for women and so There are things happening that we like Because of what we're seeing on the Demand side and also the supply side

Supply chain there's a lot more Innovations going on lot more knowledge Sharing data sharing and moving things Through the cloud so suppliers and Marketplaces and wholesalers just end up Digitizing their transaction as a result Of that digitization or automation of Workflows you end up having more Efficiencies and more information Sharing across different players in the Ecosystem so you can cut down the Working capital needs you can forecast Better and you just have more visibility On what's going on in the supply chain And on the demand side you definitely See the rise of influencers Rise of G Z Consumers more women Shoppers more Active than ever before so the Casual Users the more of them online and they Following the influencers in compare Notes on social media so you definitely See a lot more things happening than Versus say 20122 or even 2021 as a Result of these Innovations on the Fintech side we're definitely seeing That because of AI and because of just More things moving to the cloud you Definitely see Automation and workflows Within the office of CFO whether it's um Banking services treasury Services spend Management tax and compliance AR AP Inventory management ledgering Reconciliation there's a lot of things Are being digitized and automated in a

Way that we haven't had before and that Makes it very exciting to be part to be In fintech yeah well obviously you know Fintech is my primary coverage area and Last week I found a couple of data Points that were I don't want to say Discouraging but just a little sobering Perhaps for one funding in the first Quarter according to CB insights was at The lowest level it had been since about 2017 is what they found and also I was Kind of analyzing YC's demo days and Realized that there were only it was Only about 8% fintech and the winter Cohort whereas a couple of years ago That was like 24% so we're talking about 1 third the representation obviously as You pointed out AI is kind of the space Right now but but still I was a little Surprised that it was a onethird Onethird of the number of fintech Companies and that funding had dropped To its lowest level in seven years what Do what do you think about that because I know you're still very bullish on the Space do you think that this is just Like a little little blip we shouldn't Get too worried about it I think for Specially for fintech given the high Inflation of environment that we had and A definitely High interest rate that's Coming down but not coming down quickly It is harder for people to excit about Fintech but if you look at the other set

Of metrics Financial Services as a Category just the public companies the Market cap of all public companies in The banking Insurance Financial Services Space is over $10 trillion and of that 10 trillion only less than 5% are in fin Tech companies like a PayPal like a Block and so if we all know that the Best fintech companies are growing Faster than the fin surf companies it's Just matter of time that low single Digigit penetration in market cap will Increase increase over time it will have It ups and downs they may not like E-commerce not have too many winners but The ones that can when can have a huge Outcount if I take semiconductor as an Example how many design houses do we Know that have done extremely well you Can count that with two hands it's Nvidia it's AMD it's Intel it's marel It's arm so number of winners may not be As many but oh my God who would have Thought that even two years ago Nvidia Be the second biggest market cap company In the world yeah so crazy I think is Ftech has that potential to have big Winners it's just that there may not be As many big Winners but the impact of The winners that will make will be Tremendous and as a result when we look At it we focus on the thesis on where Value is creating and migrating to and We're very bullish on Office of the CFO

Suite because in this environment High Interest rate and relatively High Inflation environment people want to Convert whatever they have assets they Have into cash as quickly as possible And as a result all the functions I Mentioned earlier anything that helps People to do that pay a little bit Slower convert receivable Into Cash a Little bit quicker and figure out ways To manage your supply chain so that you Can have more visibility and manage your Working capital better all this is only Possible through Tech and data and AI so Having more transactions that already Digitized already online and leverage AI To automate a lot of workflows there's a Lot of room to generate efficiency in a Way that's not possible two 3 4 years Ago even during the boom time in 2021 so I think that as an investor I'm Constantly reminding myself you know Human emotions do matter they play a Role but what you don't want to do is Buy high and sell low yeah and right now We look at what what the new bank has Done in emergy Market what a firm and Stripe have done in the US the great Companies will end up doing better as a Result of this downturn and they have Less competition you know holding on to Their talent from competitors yeah I Think statistic I had read was that fexs Are growing about three times faster

Than Financial Services overall well I Mean I can speak just from experience in Covering the space I think obviously it Was oversaturated 2021 2020 just Everything got to be a little bit too Much too many of the same types of Companies became really hard to Differentiate so you know we're just Seeing a weeding out and now the more I Guess quality players are the ones Sticking around and continuing to grow But now we're going to take a short Break but when we come back we're Talking about notable capital and the Changing Venture [Music] Landscape what's next in Tech that's not The right question it's where Puerto Rico more than just a Tropical Paradise It's an Innovations Paradise where Startups and Global players coexist in a Vast and vibrant ecosystem where Talent Runs deep highly skilled and bilingual Plus the island offers the most Competitive tax incentives in the US if You believe your business can go Anywhere Puerto Rico is the place find Out more at invest pr.org Runch all right Hans last month it was Announced that ggv had split into two Firms one Granite Asia and one notable Capital of which you're heading up Correct here out of Meno Park can you Share a little bit with our audience

About the decision behind this because Ggv Capital was primarily known as a Crossborder firm for many years what Drove this decision and what does it Mean for you all as investors yeah GV Had been around for 24 years since 2020 And it was born as a crossb venture Business as you mentioned started in Both cynical Valley and Singapore I was Not part of the fing team but back then I look at GB as one of those few firms That was able to have Global viewpoints And knowledge and I always thought that That's kind of cool to be able to to Know that and have that an advantage to Invest and also to help your Founders as Well I joined ggv in the US in 2013 and Have been part of the amazing run that The team had and then in 2023 in September last year we announced a Decision to split and we completed ahead Of time on March 29th uh this year and It's definitely Bittersweet I respect my Former colleagues in Asia a lot I think Jish and Jenny are among the best Investors in Asia and their new firm Will be called Granite Asia for us in The US we picked a new name notable and We have four managing Partners it's Glenn Solomon who has done an amazing Job of growing our Cloud infrastructure Business myself and then Jeff Richard Who focus on vertical software and S&B Tech as well as Orin who has done an

Amazing job with Investments Israel and Cyber security in general and we have Four other amazing Partners in IR on Platform and in finance and other areas Who are just superb so I'm very proud of The team we have here and we're focusing On investments in the US in Latin America in Israel uh in Europe with us Being the biggest and Israel being Second and we've seen a lot of Opportunities in Cloud infrastructure Side which cover AI as well and then Also on the second bucket business and Consumer applications and as I mentioned Fintech is part of that business Consumer applications and so there are a Lot of things to do here and we pick the Name notable because that's we want to Put a focus on the founders we're Investing in notable Founders notable Causes notable ideas notable people and Even notable uh investors so we're proud Of what we have going forward and will Be a lot of the continuation of the Thesis that we have for these regions Here in the US and related areas and I Think that we're set up for success for The next uh you know decades to come Yeah some of the companies for our Listeners who may not be aware that ggb Capital has invested in over the years Include a firm block divy homes Clara Rup peak turtl in India outside of Fintech Airbnb slack slice stockx zenes

And one quick question I don't know if You can comment Hans but how much of This decision was a result of being Concerned about tensions between the US And China I I think the tension's there And it probably you could get worse Definitely a lot more vol ility than Ever before I think that's a new normal And as a result it makes sense for us to Focus on the regions that we want to Focus on so notable we're not invest in China we only invest in the region di Menion us Europe latm and Israel so it's A conscious decision that we made and we Respect that our former colleagues in Asia have their own point of view which Is building a firm by Asians for Asians And that's totally okay the world is Big So there a lot to do and we have to Focus in some ways so these are the Regions and these are sectors that we Choose to focus on there a couple of Things I'm hearing about just the world Adventure as a whole is just a lot of Movement in general I think that there's Been talk about how there are operators That became investors and then decided Oh this isn't as fun as I thought it Would be let me go back to operating or Joining a startup we saw that with Sam Blond leaving Founders fund recently Ryan Peterson who I think it was also Founders fund that he went to and then He went back to flexport but I think

He's still investing but anyway there's Just there's kind of musical chairs in The Venture world right people leaving Venture all together or just going to a Different firm or starting their own Fund or and as you mentioned earlier There's a lot of pressure right now on The VC world because LPS are are kind of I don't want to say freaking out but Like okay where are our Returns what do You think is going to happen here are You seeing a shift in the world of Venture as well Venture definitely ups And downs what we're seeing as you know Is that some of the firms choose to be Bigger and may even eventually go public And they they're going to be more Multi-asset classes some of the firms on The other end are going to stay Nimble They'll come out of some of the best Companies in valy in New York and start Their own uh firm sometimes so GP only One single GP and then in the middle you Have operators like Sam Sam's great you Spent time on a work spring board and I Attended several meetings as well and I Found it to be fantastic very insightful I know Ryan from being a small investor In flexport so there are going to be a Few that can do both and they will Decide at any point in time what's the Best role for them and right now we're At poting Venture where exits are hard To come by used to be you know for the

Last 10 years IPOs the bull Equity Market drove a lot of returns but you Also remember days you know prior to 2010 where m&a generated most of the Exits here in the US I remember those Days very well as well and and today Looking back last two years I see for Example my portfolio Poshmark that was Acquired by neighbor after they have Gone public first then acquired by Neighbor I see companies where people Were asking to buy shares in our private Companies my private portfolio some of The names you mentioned as Investments Made by our firm I did many of them and So I see that interest to buy secondary Positions or m&a or some go public like Iata file for going public and we've Been since 2016 2017 so you see a lot More variety of ex's possibilities than Before versus the last almost 10 years Mostly through IPO so for those of us Like that yourself been run for a long Time you see the ups and downs and That's perfectly fine yeah I would say I'm surprised by I guess I have not seen As many Acquisitions take place over the Past couple of years as I had expected With such a dry IPO Market I had thought We were going to see more m&a activity I'm a little surprised by that I do find It interesting that we're seeing more Startups highly valued startups op to Gain liquidity through secondary sales

Obviously stripe has done so more than Once right there are others in the Fintech space I think that are going That route as well like brex and I think That for some people it's a little Frustrating it's like okay well when are They going to go public I mean my Goodness like if stripe can't go public How can anybody go public I don't know The secondary sales I mean what what do You think about that I I think that Would be a bigger bigger part of the Equation going forward we're even seeing Startups trying to facilitate sell of Employees options or tp5 planned kind of Equity what it's public company or Private company so I think you will see More of that going forward and there Will be investors globally both here and Abroad that will want have access to Some of the best names from here in the US in s Valley in New York so I do think That there will be more choices and dur Co one of the best things is that other Cities start getting more notoriety you Know you live in Austin you see the Growth of Austin ecosystem I've seen That for New York and la and other Places so as a result more people Working remotely building teams remotely Investors participate in the growth from All over the world it just despite the Rhetoric and politics the world is Becoming increasingly more Global and

More distributed oh 100% well I guess we Need to wrap up Hans but I'm so grateful For your time always talking to you Thank you so much for coming back on the Show can you just give our listeners a Sense of where they can find you online Do you have an ex account or what about Your firm yeah notable cap is our email Address notable cap.com and you can Email me Hans notable cap.com as well as I have an X account Hong and also you Can look me up on Linkin so we're Extremely accessible both as a firm and Also as individual investors so I was Happy to hear from your audience I don't Think I've ever had a DC give out their Email address on Equity Before that's brave but awesome so Thanks for doing that and you can find Us at Equity pod on X and threads we'll Be back on Monday so be sure to join us Then Bye Equity is hosted by myself Alex Wilhelm and Tech rench senior reporter Mary an aeto we are produced by Teresa Loans solo with editing by Kell Bryce Durban is our illustrator and a big Thank you to the audience to development Team and Henry pette who manages Tech Runch audio products thank you so much For listening and we'll talk to you next Time

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