Alan's Thinking Cap | Capital Markets Update

Alan Wink:So why don't we start off, Bruce, maybe if you give us a quick elevator pitch on your background, which I found quite interesting in technology and also a quick elevator pitch on J four Ventures.

Bruce Jaffe:You bet. Thanks Alan. I've been in and around tech for decades. Coming out of business school in the early nineties, I ended up at a startup, cut my teeth on that. It didn't go so well. And so I decided to work for a real software company and moved up to Seattle to work for Microsoft where I had a fabulous career. I ended up doing all sorts of things. I was running global business development for median telecom. I was a CFO for a couple billion dollar division, and then I had the best job of my life where I ran the m and a practice for a number of years and built that and we did investments as well along the way. So that was a fabulous career. I was there until about 2008 and then I left and did a variety of things. I taught, I then became CEO of a company in Seattle, which was a whole lot of fun.

We scaled that sold to private equity and then after that it was act three and I decided to go on the other side of the table and become a venture capitalist. And so we started J four, which is a very, very super early stage firm. We invest in seed and pre-seed and we are doing tech, tech enabled businesses, sort of non thematic, although again, our focus is technology and we have a high correlation with Stanford. We've got a few of our partners are on the faculty at Stanford. Most of us went there and we take about a third or half of our deals actually come off of campus. So we're well connected into that ecosystem. The rest just come from our network throughout the country.

Alan Wink:Thank you. So Bruce, it seems like right now that VC investors seem to be overly cautious in terms of making new investments, but in Q2, the market heated up in terms of exits, they're about 68 billion of exits in the second quarter, which was the best quarter since Q4 of 2021. How would you describe the current climate? You're in it every day, what's going on?

Bruce Jaffe:Yeah, look, I think the hangover from the 2021 time period, which is still fresh on our minds in terms of that as the benchmark still exists, and so exit volume is up. I agree with that, but the backlog is so enormous that it from my perspective, really hasn't made a dent. That's especially true in the IPO markets. But even in the strategic transactions, there are so many companies that have scaled up, are in great position, are doing well, are ready for liquidity, and that is a long list. So from my perspective, I think we have a long way to go before it really feels like we're back in equilibrium.

Alan Wink:Are we going to have a problem in the future? Because I agree, there's a lot of companies that are of enough quality to go through an exit or an IPO, but what happens to the market could only absorb so much. What happens to the other company, they have to go out and continue raising money.

Bruce Jaffe:Well, yeah, I think we have two problems here, challenges to overcome and they're intertwined. The first is, as you say, what's going to happen with these companies? And then the second is what's going to happen with the funds who need to provide liquidity to their LPs, who then need to recirculate some of that back into additional funds? And so this is an intertwined challenge that we have that I think is going to be tough to untangle and it's going to take some time specifically about the companies you'll see. Well, we are seeing a couple of things happen. One is there's a resetting of price expectations that is both true of those companies who need money, and even more so of the true companies who don't need money and are sitting around with plenty of cash running their business, but any liquidity event that they see doesn't match where they were priced a few years back, and those companies that need money, I think it's a little easier.

They will let the market decide and they will raise. But again, that's also on the backdrop of the venture model has been impacted a bit in terms of the amount of capital flowing in. I then throw in the other factor where private equity, which is a place to go for many, many tech companies over the years, has its own issues. Same thing with exits, they exit off into one another, but with the interest rates where they are and where they look like they're going to be, that changes the private equity world a little bit. And so we've got a lot of factors that are going on, and I don't see those things changing dramatically to put us back where we were a few years ago.

Alan Wink:Do you think that VCs are more cautious now than they were in 20 and 21 and 22, those record years are becoming more cautious. Did you learn some lessons from those period of time that is now being applied to 2025?

Bruce Jaffe:I think the answer is yes. Are we more cautious as an industry than we were 10 years ago? I'm not so sure. 20 years ago, probably less. And so I think it was really an anomaly that happened a few years ago. And what we're seeing also is that a lot of companies that were, firms that were formed, we were actually formed in that era, have not done, their second funds, have not done, are not planning on continuing. So I think you find a lot of first time managers who are not sticking it out and going through this both because it's difficult to raise right now. And also because that was a funny time to enter the market.

Alan Wink:So let's talk a little bit of valuations. This is what I think most people will consider be a fairly mediocre venture capital market right now, but valuations are up across all stages. What's happening?

Bruce Jaffe:Well, I think again, we need to take a more sort of broader look. I was just reading a, I can't remember what it was, a blog post or an article about Sequoia's investment in Airbnb, which again wasn't that long ago. And I think that, and don't quote me on this, but it is something like they a half a million dollars for 20% of the company back when they did it. And so we are living in a time when those valuations for VCs no longer exist. We are in a totally different world. And so that's the real, I think, change from valuations, which is, what was it 10 years ago, 20 years ago versus what is it now? So yes, valuations in some instances are up a little bit, but they're up a lot compared to what was going on in the previous generations of venture.

Then if I unpack today's world, I will say that it's a tale of two worlds. There's AI and, and I would say that valuations in non-AI, and we can talk about what that actually means because there's a lot of gray area, but companies that are not sort of influenced greatly by the AI world, which I know we'll get into. I think our valuations are down. We're seeing many valuations down. Many valuations are also, as you can imagine, flat. And if you look at the details and some of the terms and whatnot, it's actually down a little bit. And so I would say that it's being skewed by the AI phenomena, and I won't say hype, I actually think it's a phenomena. I think it's actually incredibly powerful that is pulling the averages up.

Alan Wink:So you dovetailed nicer. The two other topics I want to talk about, one is ai and I pulled out some statistics that for the first half of 2025, AI deals represented 64% of value and 36% of deal counts. So what are you guys as an early a seed stage in investor, what are you guys looking at in ai? What gets you excited? What scares you about ai?

Bruce Jaffe:Well, I'll start with the last one. Everything scares us about ai. Everything from what's it going to do to us as humans? What's it going to do to our jobs? What's it going to do to our personal lives? If you're not scared by ai, you probably haven't played with some of the latest AI tools. And so I think it is really going to push us into a world of the unknown from an investment perspective. There are a couple of things that we think about. One of them, and I'll sort of tick through them. The first is if I think back to prior generations of technology innovation, whether it was first desktop computing, then internet, then cloud, and then mobile social taking over the ad funded models with search and whatnot, these phenomenas sort of grew up and for the most part, maybe cloud's a little bit different for the most part was difficult, the incumbent platforms to win and to really be a thriving force in those.

And when I was at Microsoft, it was tough to innovate inside against one of these platforms. You could think about what we did in mobile, and so those were really difficult. I'm not so sure that's true for ai. And so one of the challenges that we have when we're looking at companies that we didn't really think about before, you always think about competition and you always think about, well, what are the incumbents going to do? But you really have to think hard now about what are the incumbents going to do when they embrace AI and they already have technical solutions and they already have customers and they already have product. So that I think is one lens that we look at differently. Another thing we look at that we as super early seed, pre-seed stage investors, I can remember that just a couple years ago we would have a conversation.

We would talk about the business, we would talk about folks' credentials, their history, their wins, their losses, and then maybe after a few discussions we would get into a demo. Virtually every meeting I take now, I ask for the demo first. I actually want to see what are you building, what does it look like, what's happening? And so there's this change to I really want to see it, don't talk about it and don't talk about what you're going to do. I want to see what you're actually doing. And there's something there about sort of how fast we're moving and how you benchmark one product versus another in real time. So those are a couple of things that come to mind.

Alan Wink:It's funny, I was reading an article in the Wall Street Journal this morning that said VCs are now subject when they invest in an AI company, the leaders of these businesses, these AI technical professionals, are in such high demand right now that if you invest in a company that has the talent today, that talent might get an offer to go someplace else tomorrow. It's pretty risky investing right now. I think

Bruce Jaffe:It is risky. It is. The funny thing is is that a lot of that talent, I will say is being the scarce resource of that talent is at the platform level, at building the models, at refining the models. And those are the companies that have the wherewithal, the capital, the need, the necessity to really poach and to have the greatest talent. Yes, we need talent at the application layer and at the services layer, things that we see more of or what we're investing in. But I am a little less concerned about them being poached. What I will say though is there is AI is drawing talent. There are people who have been doing AI for a long time. There have been people who have doing things on the edges of AI and now we're investing their time. And so I think that there, yes, is there a lack of talent? Yeah, but there's always been in tech a scarce resource. Is it more scarce today? I think possibly a little bit, but I think it's catching up pretty quickly.

Alan Wink:It's funny. Bruce, you mentioned you were with Microsoft in 2008. Was AI part of the discussions back then at all?

Bruce Jaffe:Yes, it was. It wasn't called ai. We called about a semantic learning. We called it machine learning. We called it big data. We called it a bunch of other things. And there was a lot of Microsoft research that was going on, but I don't believe we envisioned it doing the things that it's doing, the way it's doing this age. Agentic ai I think is not something that I think most of us were, I'm not a technology pundit, but I'm just repeating what other people said around me. Most of us really weren't thinking in that model. And I think those are the types of things that I remember. I remember Bill used to have this thing that he would say, which is that we have these technologies and they're going to underwhelm us in the next couple years because they're not going to do the things that you think that they're going to do. But over a five, 10 year period, they're going to do things that you don't think they're going to do and they are going to blow us away with what they're doing. And I think that's what's going on with ai. We're trying to force the AI model into what we know and that's not the way it's going to work. It's going to do things that we don't think about today because doing them in a different way. And I'm convinced that that's what's going to happen.

Alan Wink:No, I think that's very well said. I could see Bill Gates saying that you had mentioned before the terms of VC deals today, and I know it kind of goes through cycles of who has the upper hand, either the investor or the founder slash entrepreneur. Where is it today? Who has the upper hand?

Bruce Jaffe:Well, who is the upper hand look? I think at the end of the day, if you have a company that is absolutely fantastic, outstanding, crushing it and you don't need money, well then you have the upper head. If you have a company and you need the money in the end, the money has the upper head. I think that's pretty much a truism. I will say that terms in general are much more, what is it founder-friendly than a decade ago. The introduction of the safe notes are very founder friendly. There's some good reason for it, but that has fundamentally changed where a very early stage investor like ourselves sit when it returns to our rights. So that in itself is founder friendly. We don't see other terms nearly as often as a decade ago that give rights, that give participation rights, give other sorts of features. So I would say we're still in generally the founder friendly mode versus over time, maybe it's shifting a little bit. We were once the pendulum swung a little bit too much the other way in 2021, but we're still in what I would say quite founder friendly.

Alan Wink:And does J four typically invest in safe notes, convertible notes or price

Bruce Jaffe:Rounds? Yeah. Well, we are a price taker, so we don't lead rounds and we don't set terms. We sometimes facilitate and help someone do that, but that's not what we do. And when you're in the seed space like we are, those are generally safe noes. Now, very rarely do we see a convertible that actually occasionally we see priced rounds. We're comfortable with really anything. But yeah, I'd say that three quarters are safe notes Now.

Alan Wink:And you spoke before about fundraising. I don't know if J four is in fundraising mode now or not, but I think one of the biggest problems facing VCs today is the exit market. The IPO market's been relatively slow last 24 months. You said before it's very difficult to return capital to LPs. LPs don't get the return to capital. There's no recycling into new funds. How difficult is it to raise a fund today, the first six months of 2025 and you annualize it's going to be the worst fundraising year in the last 10 years. How difficult is it for fund managers to raise funds today?

Bruce Jaffe:I would say that difficulty are relative. So I'll start with relative. It is relatively much more difficult with all caps than it was certainly in 2020, 21 that year. I would say it's more difficult than it was in the prior 10 years to that. Now that said, great managers, great opportunities will find their way to get it done. So those stats that you quoted feel right. I think it is challenging that, again, that doesn't mean different funds completely stop. I think it dissuades some new managers from doing from coming in again. But there is, so that's at the micro level. At the macro level. At the micro level, sure there are LPs looking to deploy money there, LPs looking for new fund managers. There are LPs thinking that there's an opportunity now that the scarcity of capital creates great opportunity for funds. And so you'll still find that at a micro level. So it's doable, but it is more difficult.

Alan Wink:You must see literally thousands of deals a year when you're evaluating a new opportunity for J four. What do you look at beyond the pitch deck? And I went back to your website and I saw J four invests in exceptional entrepreneurs for addressing large markets. What's an exceptional entrepreneur? What are the characteristics

Bruce Jaffe:Of that's not focused enough for you, Alan? Well, I believe that when you are in the early stage that we are where you're lucky to have close to product market fit, you probably have a couple of customers you really haven't dialed in your go-to market, there's competition that you know of and that you don't know of. We are so early that we are making a bet the founder is going to persevere, figure it out with other people's help of course and thrive. And that's why we have to bet on the founder. We spend most of our time, ideally it's founders. We like teams better than solo founders, although we do invest in some solo founders. So we need to see that we believe that this team has what it takes to create a huge venture scale outcome. We also need to know that what they're working on is in a space that can afford a huge outcome.

And so both of those things has to happen. And that quality of, I shouldn't say quality, the character of the person comes in different flavors. We don't need to. It's nice if it's someone who I'd like to go to the ballgame with and that's not really what we're looking for. I'm looking for someone who I believe I can. I do need someone I can trust and I need someone I can trust with the business and I need someone who I believe is going to win. And that comes across in different ways. And we're not always right by definition, that's the part of the venture model, but we need to be able to look our partners and our LPs in the eyes and say, I believe each one of our investments has the opportunity to create a massive venture scale business.

Alan Wink:Interesting. So where do you think the VC landscape is going in the next five years and is the model broken?

Bruce Jaffe:Well, people have been saying the model's been for a long time and yet the model hasn't changed. The model has evolved a little bit and I think the evolution over the past five, 10 years. And I think that evolving has ironically not been around about the business model of venture. It is actually around the venture capital firms model themselves. And so there's been a lot of talk, I don't have the stats at my fingertips, but a lot of talk about how the top 10 20 firms control the 80 90% of the dollars and they are just so massive and they just have so many different funds and they cross the world. I think that is the evolution that has probably been most interesting. And so if you kind of fast forward to what does that mean? Well, I would guess that there's more of that.

Are there crossover VCPE funds? Are there crossover VC buyout funds? Are there more funds? We have funds as part of enterprise. We have corporate venturing a little bit in venture, not that much. And so does that something. So I think it's something less around the model of the actual execution and the economics and more around, Hey, what do these firms look like? And I think that's where we're going to see the evolution. There'll be some innovation. We're working on an innovative fund that we have ourselves, but I don't think it's going to move the model, move the market. I think it's just going to be sort of look in the big picture more of the same.

Alan Wink:Do you think their level of expectation is lower now than it was five years ago? Are the returns they're looking for more modest than they thought about five years ago?

Bruce Jaffe:It's a good question. I don't know. I hope so because I think those were unsustainable. So they ought to be, again, I look back at a longer history and I say, look, is venture part of your portfolio construction as an lp? I think it's a great asset class, can be a great asset class. And does that fit for the kinds of returns that have happened over the past 10, 20 years? I think if you do a point in time 2020, 21 when those exits were happening, those are going to be tough to repeat.

Alan Wink:So I want to ask you one of my favorite questions, and I love the response I get from this questions I asked different investors across the country, you've been in the venture game for a long time. You worked for large, what were originally venture backed companies in your career? What's the one deal that you wish you had back?

Bruce Jaffe:Well, is this the company that I wish I had invested in or is this the company that I wish I had bought when I was at Microsoft?

Alan Wink:Both. Okay. Okay. If you have one in each category, that would be great.

Bruce Jaffe:All right. Well, the company that I wish I invested, it's a two part question. The company that I wish I invested in, I actually did invest in and I didn't invest in it because I liked the company and I liked the guy and I really liked the guy and he convinced me to go and be the first seed check. And so that one was a real lesson learned and that's been a great outcome. And then the flip side is there was a company around the same time called Offer Up, which I didn't invest in. It was a Seattle company. It was going to be an angel. And I didn't invest in it because the timing wasn't right. And that was also a lesson learned. If you're going to invest, don't come in and out of the market. You have to be disciplined. I saw a company, I saw an entrepreneur, I liked it.

It fit my thesis. And for whatever reason as an angel, I didn't do it. It was a timing issue. And so then that was also a lesson learned. The Microsoft deal, we didn't do that. I wish I had done was Facebook actually. And so yeah. And so Facebook, we had an opportunity to do it. I'm not sure Mark would've actually ended up doing it, but there was an opportunity back then and for a bunch of reasons it didn't really fit with what we thought we wanted to do and we didn't do it. But world would be a little bit different now had we done that

Alan Wink:Much different. Much different. So along the same lines, are there certain public tech companies that you admire that you tend to take a look at more often, use 'em as bellwethers?

Bruce Jaffe:Well, I think the one that I do now is my, I mean, I've always used Microsoft. I love Microsoft. I'm a product of Microsoft. I use Microsoft products, not exclusively, but there was a decade there where I always had pride. But the other side, the reaction always wasn't the same. But that reaction now is that same way people admire the company again. And so when I can use Microsoft as the example, as the analogy as the bellwether, that's my go-to.

Alan Wink:So we have only a couple of seconds left. So let's do what I call our lightning round. With one half of the year already behind us and we're into the second half of the year for the next six months. Just give me an idea of whether these are going to be up, down or sort of remain the same dollars invested by VCs.

Bruce Jaffe:Up

Alan Wink:Exits IPO and M & A

Bruce Jaffe:IPO will disappoint. It's probably going to be up from its low. Now m and a is going to accelerate

Alan Wink:Fundraising.

Bruce Jaffe:Fundraising LP fundraising. It'll be the same. Yeah, it's going to be the same. It's going to be a slog.

Alan Wink:Valuations

Bruce Jaffe:Exit. Valuations are going to go up early. Stage valuations for venture are going to, outside of AI are going to compress.

Alan Wink:Thank you. Bruce. I just want to thank you once again. This was a great half hour. I really enjoyed the conversation and look forward to continuing it in the future. I just want to say thank you from everyone here at EisnerAmper, really appreciate it.

Bruce Jaffe:You bet. My pleasure. I always enjoy all them.

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