Accessing the Venture Capital Asset Class With Aaron Dillon
Aaron Dillon, AG Dillon & Co., discusses his passion to help advisors and independent broker-dealers access venture capital assets for their clients. Aaron's experience in private markets, as well as seeing a need to assist RAs and IBDs, led him to become a leader in navigating venture capital opportunities. From Instacart to AI, Aaron believes there is a valuable opportunity in venture capital.
Tune in to hear if the next venture is your Fat Pitch.
RECORDED APRIL 11, 2023
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Paul Barausky: 0:03
Good afternoon, everyone and welcome to the fat pitch podcast. I'm your host, Paul borowiecki, Chief distribution officer for CLE investment securities. And I'm joined as always by my co host Clint Sorenson of wealth shield the car free I think 27 Other items claim. Great to have you here this week and great to have this week's guests with us. Erin Dillon of ag Dillon. Erin, welcome to the fat pitch podcast. Thanks, Paul. Thanks, Clint. Appreciate you guys having me. Thrilled I always wanted to learn a little little bit more about VC. Would you tell everybody a little bit about your background and how you ended up founding? Ag Dillon?
Aaron Dillon: 0:43
Absolutely. So first, thanks for having me. I appreciate it. So ag Dillon and CO is a venture capital firm, right? We focus on helping RAs and independent broker dealers access venture capital back companies, for them and their clients. Right. And yeah, a little bit about myself. So kind of started my career at Morgan Stanley Wealth Management in the home office, like building financial products for advisors, had a stent at TD Ameritrade where I ran the mutual fund and ETF business there for both the RA channel and self directed channel and then co founded an ETF company called crane shares ETFs, which is a great business is trying to focus ETF Company. Today it has about $10 billion in assets under management, I was able to hang in there for about three years, we weren't taking paychecks, right. So I hung in as long as I could. But it's an incredible company still on the equity. And I had a few other stents, but the one that kind of probably sticks out was get a phone call Galileo was a bank account technology business that ultimately got bought by so far, and then SoFi went public. So I've had these kind of like, I had a lot of stock in Galileo, thankfully, and had these kinds of private stock events or private stock market events that impacted my private balance sheet. And that really kind of lit a fire for me for venture capital. So that's the motivating factor for driving, or kind of starting ag Dillon unco. I really wanted to help RAs and IBDs access this asset class for their clients so they can hopefully have the same type of goal. Yeah, now you're
Paul Barausky: 2:07
now you're helping bring it more to the high net worth and qualified assets and individuals. That's terrific, Clint, you and I spend so much time talking about private markets, whether it's real estate credit hedge venture, I'm sure you spent a fair amount of time talking to Dylan. What's on your mind right now? Both of you about you know, the BC market?
Clint Sorenson: 2:30
Yeah. First I'd like to say, Eric, tell some folks out there that they don't know about you if they've heard you before. So you went to the Ohio State right.
Aaron Dillon: 2:38
That is true. Huge book.
Paul Barausky: 2:39
I know that this what's over
Clint Sorenson: 2:43
it What sport did you play there? There?
Aaron Dillon: 2:47
Yeah, so I am you can't tell on video. But I'm six foot four. I played volleyball there, which believe it or not, is a varsity sport at Ohio State. And it was fun, man. Yeah, we went to the national championship actually, my freshman year we lost the UCLA. And then last UCLA again in my sophomore year, so those guys said I had our number. But yeah, second place my freshman year and then I suppose like, you know, tied for third and or were you sad or a hitter? Or whatsoever? No, I was the shortest guy on the team. Well, I'd say there's one other fellow that was shorter than me six, four, I didn't quite make the cut. I was a defensive specialist, believe
Paul Barausky: 3:22
it or not. A lot of times diving around.
Aaron Dillon: 3:26
Most of my life has been on the floor. Right? So
Paul Barausky: 3:30
I got it. I can tell that he's not in Ohio guy. But in New Yorker. That's right.
Aaron Dillon: 3:35
Yeah. 20 years, 20 years in New York now. So on the island here. So if you ever come through anybody, you gotta come and see me?
Paul Barausky: 3:43
Well, let's we set the stage for discussing VC. I think it's important that we all recognize, unfortunately, how strenuous and how tough and how adverse, the capital markets have been over the last, let's call it feels like a long time now, but really about 18 months. And, you know, I myself spent 12 years in New York, I moved down to Texas during the middle of the global financial crisis. I said to everybody, Hey, I can go broke more slowly here. I hope that's not the same case. What is this current environment doing to the VC space? What addressing all of your experience, one of the things look like? Yeah, I mean,
Aaron Dillon: 4:21
like, look, venture capitals is arguably one of the more riskier asset classes that you can be in, right. So naturally, I think, you know, assets flows have slowed down a little bit into the space. That's certainly an industry metrics have proved that out, right. But of course, not all venture capital is the same. You know, there's very early kind of venture two guys in a garage tech, venture capital. And then there's the stuff that I invest into, which is this late stage venture capital company. So it's companies like SpaceX and Stripe and Instacart and Canva. Data bricks. I mean, these are huge businesses that have valuations that are north of $10 billion, right. So like, if they were public, they'd be in the s&p 500. Right. So very different risk profile for those businesses. But you're right, Paul, like in general, across the broader venture capital space, the flows have slowed down a little bit. Right. So I think it's akin to probably what most asset managers are seeing right is conservatism.
Paul Barausky: 5:15
Quinn always talks about this. That's when Quality Matters. Right, Clint?
Clint Sorenson: 5:20
That's right. That's when quality matters. So talk about some of the quality companies. I love the fact that he said that a lot of these names would be in the s&p 500. They're that big. When you think about it, like traditional venture, you're thinking two guys in a garage, come up with a great idea, build an app, and so on. Top, but, but the companies that Aaron's dealing with, which I think is really compelling for advisors, especially if they're big enough to be the s&p 500. And I think that's a, you know, that's something that's vastly different than it was before. So maybe you dig a little bit into that.
Paul Barausky: 5:52
Yeah. Is that new Aaron, is this size thing is new. Now, you're
Aaron Dillon: 5:57
absolutely right, Paul. So that yeah, I would say in the last 10 to 15 years, this motivation for large kind of venture backed companies to stay private for longer is definitely a thing. I think it's a testament to just some of the trends that are happening just in the broader capital flow space. So a lot of pension endowments, and foundations continue to allocate more and more and more to alternative investments. Venture capital is a part of that. And I think, you know, Christy, as you guys know, you guys deal with a lot of advisors, right? Advisors are in the alternative space and family offices are in the internal alternative space to, of course, to venture capital is getting the benefit of that. So I think it's more and more capital enters the space, both from the equity side and the debt side, the venture debt side, I think it affords these folks the opportunity to stay private for longer, they can still continue to grow, right?
Paul Barausky: 6:43
I mean, for all intents and purposes, there hasn't really been an IPO market for over a year, right? Yeah,
Aaron Dillon: 6:50
it's been locked up. So I mean, now look, it is a coiled spring. So I think for some of these companies, when the window does open, they're gonna go right, like Instacart is like one of those companies that's out there that looks like they're gonna go as soon as they can. So, you know, there's some interesting dynamics to you got your investors venture capital funds, typically, tenure funds, right, that kind of old school traditional venture capital funds, you know, if you've been in a company for 12 years, your LPs are a little antsy to, you know, realize that game, right and get the cash back. So I think there's some dynamics like that, and that's why some of these companies would actually go public is to get liquidity for their existing shareholders, as opposed to getting capital to help them grow, right, which is maybe what the case was prior.
Paul Barausky: 7:30
So if I'm layman on the street, you hear about, hey, this guy got a hold of this, this guy got to invest in this company. How does someone like you and your firm get access to these signing companies? Yeah. So first
Aaron Dillon: 7:44
of all, what I would say, Paul, is if someone calls you up and gives you the old like Brooklyn, like, Hey, I got a guy that can get you some SpaceX stock, right? Like, you are probably getting your face ripped off on that trade. So I would call somebody who knows something about the space to make sure like getting
Paul Barausky: 7:59
a piece of a bridge in Brooklyn, you might be getting the
Aaron Dillon: 8:03
stock, you're just not going to get a good price, right. And I think that's the key thing is in this pre IPO space, you can shop your buy, right and get a good price, you just have to know the right people, right. And it's not impossible to do that. But it does take some time and effort to develop these relationships with what I would call like institutional traders. And then they have a really good kind of a good pulse, you know, thumb on the pulse of this of this market. But the offer on average that I've seen across the seven institutional traders that I work with is usually 25%. That's the offer. That's not the bid, ask for it. That's the offer, right? So you really got to know what you're doing. There's a lot of counterparty risk in the space, too. Right, Paul? But that's it. But yeah, and these institutional traders are the right place to go to go to, they're a little cagey. Because as you can imagine, there's a lot of flakes out there. And when they do go to trade, and they run down a trade for you, it's a lot of work for them to do that. Right. So they kind of like like the deal with what I call like real people. So you got to commit the time and the effort to develop a relationships. If you develop the relationship, there'll be good you you'll get a good price.
Clint Sorenson: 9:07
Talk about your index parents, you got an index a lot of these large companies, which I think what's unique comes from obviously, your ETF and public. When you
Paul Barausky: 9:17
say index, do you mean benchmarking? Or do you mean an index?
Aaron Dillon: 9:20
It's a little bit of both, right? So I'm, yeah, no less. I'm a big passive investing guy, right, especially on an asset class perspective. I like diversification, right? I wrote like rules based methodology, a little less human emotion in there. Right. So that being said, and having worked at an index card worked at footsie Russell for a number of years, started ETF company, right. So as I moved into this asset class, you know, I kind of felt like there was an opportunity to create indexes that aligned better the way that people actually invested into the asset class. So, you know, traditionally I think people are familiar like the s&p 500 or the Russell 1000. It's kind of a rules based method all Do rebalances every year every every quarter every six months or reconstitutes. Every year, right? New stocks come in stocks come out, you know, every year, that's fine in the public markets where there's liquidity and just doesn't make sense in kind of the private markets, right for at least for venture capital. So I kind of set off to build indexes around that. And again, venture capital is also built by vintages. So you can't really rebalance. So I, I basically, every quarter, and I went back and back tested this for the last 42 quarters I believe I have now. So I have 42, individual vintage
Clint Sorenson: 10:34
indexes. Hey, describe, just for the audience. What's a vintage?
Aaron Dillon: 10:40
Yeah, so vintage would be as if like, let's say the three of us got together and said, Hey, we're gonna take some money and go and buy 15 pre IPO stocks, right. So I have a rules based methodology. You know, in this case, it's the top 15, pre IPO stocks, buy valuation using their best primary round valuation and global developed markets. So no, China, no Russia, no Brazil, right? No, India. So that's the rules based methodology. If we go out to market on January 1 2016, and we apply that rule based methodology, we identify the 50 names, we buy those 50 names, and then in the way that my vintage indexes work is we just hold those, right until they either IPO or acquired and if they're still private, I'll just continue to value them going forward. And that's the vintage and that mirrors real life. That's how the actual venture capital investing works, right? More often than not, people are not selling the companies that they hold in the secondary market. Right. So that kind of gives a nice snapshot. And I've done that Clint every single quarter. So if you imagine it's the same rules based approach every quarter for 42 quarters, and I take an average of that, so that, you know, you can either look at each vintage, I made an investment in second quarter of 2017, you know, into a venture capital fund. And Paul, to your point that can be used as a benchmark, right? Or you could use it as an investment philosophy SAIC does this rules based methodology work? If I put x amount of dollars into a strategy that follows that rules based methodology every year, this is the return profile that I could expect to receive. So that's the purpose of the investment club, I use them for that purpose, I have this event, I have this investment strategy that is just that it's intended to be the top 15 stocks by valuation and having 42 quarters of back tested performance, I think gives investors some
Paul Barausky: 12:29
question for you. That's obviously a very, you know, quantitative looking at past track record. Do you do any qualitative research on these companies?
Aaron Dillon: 12:38
Yeah, so I do a qualitative, especially on the ones that I would call like, in my coverage area. So it's kind of like, if you put your stock research hat on, right, Paul, and you took a look at it. And the nice thing about some of these later stage companies, is there a lot of public information out there about them, right? So but of course, I subscribe to a lot of very expensive market data, right? So if you ever need anything, give me a call, I'm sure we can help you out, instead of buying it yourself. But yeah, we'll look at that data, we'll pull that together. We'll also take the information that's out there publicly in the market, either it's from a new product perspective, or number of users, etc. And we publish reports on the top 50 companies by valuation for those stocks to
Paul Barausky: 13:16
very cool. I got a question for you. I've been thinking about, especially coming from the real estate side, our debt keeps getting more and more expensive. Talk to us about if these companies are staying private for longer, and they may not wanting to living off of their p&l, they're not going IPO. What did they do in terms of debt? I mean, I'm sure it's got to look different than it does from a real estate guy's perspective.
Aaron Dillon: 13:42
It's certainly a I think, a riskier asset class, and then real estate, right, from a bankers perspective, or lenders perspective. But there's definitely debt out there. I think for the companies, you know, every company is different, obviously has different risk profile. But it's certainly happening. It's not as cheap now that the Fed Funds rates like 4.8%. Right, but it's certainly happening and venture debts a little different to Paul, like I you know, like, typically, it's more of like a bridge loan, right to get from, you know, where they're at today to the next kind of primary financing round, I think you'll see a lot of folks will tap the debt markets, if they don't like where the equity market is at any given point, like kind of like a scenario where we're at right now, like valuations have come down. So they don't want to go out and kind of print do a formal print in the primary financing round, or primary market on evaluation, because that would kind of post a decreased are they called down round, right? From a venture capital perspective. So you do venture debt, and hopefully that gets you to a place where the markets have improved, and they can go out to market and then continue to show that nice, kind of smooth valuation increase in their company. So that that I think is what's happening. So the short term ism of that loan or the shorter term of that loan, I think, maybe makes the interest rate less important, right? For these companies, but yeah, some venture debt certainly has a place I think with with a lot of these firms.
Clint Sorenson: 14:59
Right now. Silicon Valley Bank was the big player in the venture debt space. Right. So I know they, you know, you're seeing credit lock up across the space is all this deposit outflow from regional banks, you've got to think this is going to present or manifest into further opportunities on the equity side. I mean, don't you think with valuations coming down and bound to come down further, for some names that need to raise capital, we don't you think they're gonna have continued to have down rounds with pretentious and amazing opportunity? I mean, some of these companies are highly, they have a ton of quality. But at the end of the day, they just have to raise capital, because they're growing so fast, and they've got to be able to deploy it. And so if they can't go to the debt markets, like they used to, maybe some of them still can, but credits locking up, man, it's got to present a really awesome opportunity for good terms for equity investors, what do you think? What do you see,
Aaron Dillon: 15:47
I would say a couple of things. Clint. So one is for investors that are living kind of in this market, those opportunities are already there. So like trades that are happening on the secondary market are happening at what I would call real valuation levels, right, the company may not be going out to the primary financing round, but the secondary market and I will call, like, institutional investors are very much akin to like, look, this company's not worth $40 billion anymore. If you look at their peers, the publicly traded peers, other people in the space, they're all trading down here, their secondary market trades that have happened, you know, at these kind of depressed valuations. There's also these things called 409 a valuation. So if you're a corporation, and you have an employee stock option, plan, the IRS requires you to value your company or a third party value your stock and evaluation your company every year, some companies do that ever, actually, every quarter Instacart is one of those where they do it every quarter. So that's kind of a good nice stamp evaluation stamp for you to take a look at. So yeah, so there's definitely ample opportunity out there to your point, some of these companies are very high quality, double digit or more annual revenue growth. They're tightening up expenses, just with everything that's going on. So they've done layoffs, or they've gotten real tight on expenses. So it kind of increased net income, right, our kind of margins, but their stock prices are down. So in some cases down like 50%, there's one company called DL d e l, right. It's like an HR company that helps us businesses hire foreign, like developers, really tech folks, and they'll manage all of the taxes and the legality and everything of hiring those people for US company, their revenues up north of 400% in 2022. And their stock is down 50%. So and yeah, that's a company with intent, you know, just about a $10 billion valuation. So like, there's some just incredible opportunities in the private markets where there's this massive dislocation around quality versus actual stock price,
Clint Sorenson: 17:43
all driven by liquidity is
Aaron Dillon: 17:46
all driven by liquidity. You got it? You got
Paul Barausky: 17:49
I mean, a time you get that liquidity drain on liquidity, it seems it just runs the gamut from everything your business cycle. Clinton always talked about this your stock cycle, your credit cycle, and it's a vicious cycle. When you're all said and done. Another everyman question from me, as Clint heard me say, the guy in the half of the class that made the top half possible. How much of the VC world is tech related? Is it half? Is it 70%? You deal with 90%?
Aaron Dillon: 18:19
Yeah, so I would say VC backed companies have to be companies that have potential for like a 10x return, like 10,000% returns, you know, the companies that start off like two guys in a garage, right? Start off and get VC funding have to have this thing called a huge Tamar target addressable market, right? You gotta change the world. They don't want to invest in companies, they're going to do like, you know, 10%, year over year revenue. 100%. So like, businesses that can scale like that people have to be usually technology is really, really software. Yeah, like software driven, like not even hardware, really, it's really software driven. I mean, there's exceptions, of course, with like Elon Musk. And what he's doing with SpaceX or Tesla, right, was another venture capital back company that was like physical items. But by and large, these are software companies, right? You do see some venture funding in the biotech space, right? So you'll see some site more science driven type companies, pharma companies are also kind of received VC funding, but those are, you know, capital comes in, and if something hits, you know, it can be a massive move, right? The things that are hot right now, just to kind of hit on a couple trends that are happening in the VC space is it's AI. AI is massive right now, almost every company, whether you're a FinTech company, or software as a service company, or any of these businesses, they're all integrating AI into their business models and their product set. So I think if you take a look at where the capital is going early stage capital going in the next like 10 years, everything's gonna have AI in it, right? Yeah. coming down the pike. So that The latest trend as of this seems like stretch GPT went out in December.
Clint Sorenson: 20:04
This seems like such an exciting space. Like I just don't understand why any advisor would be talking about public markets and they could talk about this. Now, talk a little bit about how you design this your product, right, the index, the way you help advisors get access to the market, understand the market, you really did it with the adviser, the independent adviser in mind. I mean, I think it's such a fat pitch for him to be presenting this.
Paul Barausky: 20:29
But for Aaron answers the I just wanted to make the comment, I'm sure also for some, it's just not going to be suitable in their portfolio, right? I mean, it's gonna gravitate towards high net worth and higher. I mean, I would guess that's the first line of demarcation.
Aaron Dillon: 20:43
So the funds that I run are for accredited investors only Paul to your point. So that's kind of a million dollars of investable. net worth or more, right, so yeah, so that's certainly the case. Plus, it's it is illiquid, it's an illiquid asset class. So, if you've got clients that need access to their cash, this is probably not the space to be in. But to cleanse point, I think, for those that have that type of investment horizon, or maybe Paul might be more appropriate for someone's IRA account, right? If you want to think of somebody who's not having longer steps that might be
Paul Barausky: 21:11
thinking longer term, if it goes up or not. Yeah, thinking that it's gonna be a higher return risk reward profile.
Aaron Dillon: 21:19
You got it? That's exactly it. So but Clint, to your point, I worked really hard to build this business around the advisor, right? I mean, naturally, the funds are for any clients, right. But it's a tip of the cap, the way that I built the funds and put the instruction of the funds is to make the advisors life easy, right and accessing this asset class, and help them meet their fiduciary responsibility. And also to you know, these funds are built for individual people, I think most alternative funds are built for pensions, endowments, and foundations. And you just kind of like, yeah, sure, I'll take some family office money, or Yeah, sure, I'll take some IRA money, right, but it's not the primary focus. So I think when you start with the funds structure that's intended for an individual person, and then you kind of work from there, you end up with a front structure that looks very different. So I've just hit on a few examples. So the funds that I run are called 506 C funds. So 506 C fund, I can run a TV ad to market the fund, most private market funds are 506. B funds, you have to really like know somebody right to get in. And so it's very different. So advisors love that they can stand in front of a seminar, they can post something on social media, they're not running afoul of any my issues, they don't have compliance issues themselves, that makes it much easier for them to sell. It feels more like selling a mutual fund or an ETF for them. So I think
Paul Barausky: 22:36
back to what Clint said before he there's a lot of excitement around this area. I mean, you hear about these names, like I said before, Hey, I heard so and so got into this, and they got into this. So I was in I'm a little older than you two fellas, I was in New York City during the first.com bubble, right with pets.com. I went to I think Merrill was the lead on that. I don't remember what they were in it. I got my puppet in an office member the dog? Yeah. Like, by the way, it's kind of funny that chewy is just the same company. too early, too early to get it that it's like you always hear Hey, why did this person get that or they got that. So the fact that you can take an exciting sector with opportunities, like Clint said now and try to build it with I'm gonna say consumer and investor. Yeah, that's a very noble effort.
Aaron Dillon: 23:31
I don't know what. But Paul to I mean, to that point, I mean, I'm sure you've probably seen this, everyone's gotten that call, right, where it's like, I got a guy who's got shares, you got to make a decision. Now. I mean, I can't tell you how many advisors I talked to be like, I would love to get my client into names like these into this asset class. But I'm a fiduciary, and I can't do this in 24 hours, these people call me up and you got to make a decision in 24 hours, I can't move that fast. That's where we've built this company. It's, you know, it's hard to help advisors make that go through that process. Most venture capital firms won't call on an advisor at all, they call in, they get no one calls them back, no one will come and see them. All of these things that advisors need to do to meet their fiduciary responsibility. There's no venture capital firm that does that. So that's what I'm hoping to do. You know, for advisors, more and more advisors is, you know, they need me to come and present to the Investment Committee. No problem. I'm there, right? You want me to come and talk with your best client about the state of the venture capital space, I'll do it. You want to do a seminar or a webinar so that you can go out and promote and hopefully drive new client acquisition and new households in your business? I would love to do that. Right. So those are the kinds of things I think you'd see like a mutual fund company or ETF company traditionally do with advisors. And that's what I'm doing just for venture capital.
Paul Barausky: 24:48
You mentioned some of this before for an investor who's already experienced with alternative investments, right, they've looked at the more what I would call are the basic food groups and gas real estate credit? They kind of know this VCs out there to your point, they've gotten the hustle phone call from a 917 or 212 or 6461. You know, what are some of the things that the average Joe should look for in a VC company, not just all the time to in light of the market environment we're in, I think I'd asked, I would really ask both you, but you first there and living in this.
Aaron Dillon: 25:31
So I would highly recommend that folks look at the late stage space, and until it's self serving, because that's what I do. But I look at the late stage. And the reason for that pause is someone can tell you what you're going to get before you buy, invest in the Fund. So if you went to an early stage venture capital fund, you're believing in someone's investment thesis, and investment methodology and kind of their historical track record, you have no idea what company you're going to buy. So it's a little different than like, public market investing, where someone can be like, Look, you know, I'm this person, I've ran this track, I have this historical track record, we're running this new strategy, you're like, Okay, this guy's good. They're gonna buy these stocks, right, I know what they're gonna get into, like, I have an understanding of that. You're talking about kids in a garage, two people in a garage. And they don't know what the next business is going to be of two people in a garage, right? They might be able to say like, it's FinTech, or it's biotech or whatever, right? Or a SaaS software as a service, but they don't know what's coming down the pipe. So this next tranche of entrepreneurs might be garbage, maybe they're great, maybe they're great, but the manager, you know, doesn't live in the right part of the country to get access to those people. Right. I mean, it could be any, any number of reasons. So I'm not saying that that's not a great place to be, I actually think early stage investing is a great place to be right. But if you're an investor, and you want to have a little bit more control, especially if you're new to the space, which is your question, right? If you're kind of your average Joe coming in, I think it's nice to know what you're going to buy before you buy it. And when you're in the late stage space, you can literally look say I want to buy SpaceX, I want to buy Instacart, I want to buy stripe, or I want to buy this basket of names. And you can do that you can do due diligence on it, you can understand what you're getting ahead of time, you can negotiate fees properly with the fund manager, you can understand the terms of the fund, and then you can invest in I think you have a lot more control and much better risk profile for you.
Clint Sorenson: 27:21
Yeah, no, I want to follow up on that. And so when you're thinking about these companies to also like it from a timing perspective to just when you see the general trend in the overall market, a lot of these names down, what's your index down? If you're looking at like a vintage started? Maybe pre 22. so late 21. A bit. What do you think your DAX is down from that point?
Aaron Dillon: 27:41
Yeah. So you're talking about the broad based index? Clint?
Clint Sorenson: 27:44
Yeah, just your broad base VC index. I got to point on this. One asked.
Aaron Dillon: 27:48
Yeah. So since 22, it's probably down versus 20. It's probably down 50%. On average. Yeah.
Clint Sorenson: 27:55
Yeah. So think about that. You've got exciting names, growing businesses, large names, but because of liquidity preference, which is really what we're witnessing, we're just talking about, right? People have a preference for liquidity. First, it starts with banks, when you raise when you raise interest rates, then it trickles down to investors in people, right, it always trickles down. And so when you see this liquidity evaporating from the marketplace, these names down and such value is still having growing businesses, it seems like that's a great narrative for an advisor, when otherwise, you're talking about public markets that have been rather choppy, not really great valuations, I feel like that disconnect this year has been the most apparent. So talk a little bit about how you know the quality of some of these names. And let's go through the example you brought up, I saw you on a panel in Atlanta notes panel, and you were talking about high net worth investors or advisors, and how they were using these type of, you know, names, right to raise capital and to attract liquidity. And to have this, you know, readily available for pouncing on this marketplace. I thought it was a great strategy. So far, that was a lot. But what do kind of, you know, some of these names, high quality things you've done with advisors? Because I think it's, it's been great. I've seen it right from afar, but I've seen it.
Aaron Dillon: 29:08
Yeah. So I would say, well, it's just in the point on the liquidity because I definitely think you're right, there's definitely a liquidity premium right to the returns, or potentially you could get i But Clint, what's interesting, and this is like, the dirty little secret is in this late stage space, you can sell this stuff in the secondary market, so you can buy it on the secondary, and you can sell it in the secondary, right? So you're getting this benefit of this illiquidity premium, right, but it's liquid, it's a pain to trade, okay, but that's why a guy like me to do it, right. So zero the worry about it, and you can get best execution. But that's the key thing is like you can get in and you can get out okay? And you still get the benefit of that that liquidity premium, right. So I would just offer that like I wouldn't I wouldn't shy away from the space for any given reason. I think the slate state space is pretty split. It's really a proper shadow stock market, I think, okay, to the public market for the size of this company. But
Clint Sorenson: 30:00
I mean, how does venture perform historically versus
Aaron Dillon: 30:04
IRR or North like the best, the best to kind of the top quartile is 20%.
Paul Barausky: 30:09
I assume theses gonna be a lot like we see in real estate, which is the difference between top quartile and bottom, you got the difference from Pluto to Jupiter.
Aaron Dillon: 30:21
In the late stage space, it's a little different, right? Because there's less companies just totally failing, like in your average, tz, you got it, man. So like, there's this thing, there's this idea in venture investing called the power law, right? You can like Google that. So if you have like an A, basically, if you're a startup, you know, venture capital investor, you have 10 companies you're investing into five of them will go to zero bankrupt, right? Three of them, you'll probably get your money back. One of them, maybe you get like a 2x return. And then the other one, you get like a six or seven or hopefully higher, you know, X return, and that one company delivers the full like 20% a year return for the entire fund. Right. So that's called the power law. You know, that's certainly the case, right? Well is you kind of have you
Paul Barausky: 31:02
just made the case for being in a fund versus somebody trying to take the single home run, especially if you're passive and you have no input. So we're kind of winding down on our normal amount of time. But I got some I always love to ask people to you're obviously an expert in your field. So when you are looking at a company, either for your fund, or just as an armchair quarterback, something else, what are two or three major red flags for Aaron deal on? Like, no matter how good I think your business ideas and reminds me when I was single back in New York, there was some things that were big red flags, I had them for the girls, or I know mine were what our Erin Dylan red flags for these VC companies. Yeah.
Aaron Dillon: 31:49
So I think there's maybe two things I would hit on if and this happens, maybe not the late stage space. But certainly in kind of that earlier stage space is there can be some hot dots that people run around and chase after, right? So you got to be aware of that, make sure you're not just getting the next sexiest thing out of Silicon Valley and throwing a ton of cash at it. Right. I think that's kind of one thing. The second thing I would say too, is you got to have it's called CAC, customer acquisition cost, okay. So that's the amount of money it takes to acquire one customer. And if that's really high, for a company, you probably got a problem, right? That needs to be, there's this idea called product market fit. And usually when you hit product market, fit your CAC, your cost per client acquisition starts to come way down. Right? That's kind of what it's really about, you need to find executives at companies that are really dialed in to their target market, that are tweaking and building products that fit that market that have product market fit, and they're being good stewards of capital, and every dollar that they're spending, they're maximizing the customer acquisition potential from that dollar that's being spent. So yeah, that's a red flag, if you see a company with a huge CAC, you know, take some $3,000 to acquire one customer growing quickly can be it can be tough.
Paul Barausky: 33:05
Audience so far audience don't get trapped into Chase and a trend just because it's sexy, and essentially go beyond the burn rate. Look at what it truly costs to add an incremental revenue or customer.
Aaron Dillon: 33:19
That's right. Those are two general general rules of thumb. I think those are two good places to look at.
Paul Barausky: 33:24
But AI be a really sexy thing right now that people are throwing money out. Yeah,
Aaron Dillon: 33:30
we it would be and that's where it. So I think it would be and there's a lot of AI companies, right? So I think that's where it's important. If you're going to get in early stage, like if you're late stage, you kind of already know who the winners are, right? Like open AI is going to be a winner. It's degrees of success for those folks at this point, right? We got deals with Microsoft they got so is it going to be a 2x return or a 20 Extra tariffs for open AI? Right. But you know, when there's 150 new AI companies that get funded in the next, you know, in the past quarter, or the next two quarters, like which of those are going to make it and which of them aren't most of it. Like as discussed earlier, most venture capital firms go to zero funded companies go to zero, right? venture backed funding companies go to zero. But, you know, I think it's good to understand which part of AI is actually going to work. I think AI is one of those trends that's here to stay. I do think it's still hasn't quite worked out how from an investment perspective, where you're going to be able to capitalize on that and make money
Paul Barausky: 34:29
and who makes money. So, Clint, you want to ask Aaron a final question today. I got all my as always mind that the dumb guy questions. Ask a smart guy. Yeah, no.
Clint Sorenson: 34:40
No. How do advisors get in touch with you? How do they learn more about ag Dylan and Co? Where can they find you? I think that's a good parting question.
Aaron Dillon: 34:48
Yeah, there's probably two great places to go one, you can go to the website. It's ag dillon.com. Right. Or you can go to LinkedIn. If you go to LinkedIn, I publish all the research there too. So if you want to get a flavor of What a research looks like. And kind of how we think about the pre IPO space and just really kind of daily or weekly updates on the market in general. That's a nice place to go. And then we got contact information all over the place. I
Paul Barausky: 35:12
mentioned advisors, can regular investors high net worth individuals go look at that info and try to well, yes, so since
Aaron Dillon: 35:21
all the funds are 560 funds, it's all public. A lot of the fund information is available. Yeah, on the website there. So it'll look and smell and act more like a normal, you know, mutual fund or ETF company. It's really excited.
Paul Barausky: 35:33
I'm done with boring old real estate. I'm telling you, a lot more people want to talk to you at a cocktail party than
Aaron Dillon: 35:43
Well, this client asked earlier about advisors. I have a lot of advisors. We're bringing in new clients with this, like we have a SpaceX fun we're about to close up here in about a week or two. And this one fellow down in Dallas has pulled in, I think, at least three new household relationships. Just
Paul Barausky: 35:58
a lot of fun beats talking about how like they're going to change the signage at Twitter in San Francisco and paint over the Shiba oni or veneer. That's what the client wants to take us
Clint Sorenson: 36:14
out for the week. Yeah. Thanks, Paul. Thanks, Aaron. Thanks for telling us about the fat pitch in venture capital and in particular in late stage venture capital, lead you help a lot of folks lot of advisors so we're very happy to have you on the podcast. Thank you for your time. Paul's always your excellent
Paul Barausky: 36:35
Yeah, let's have a run back when the football season starts because I know my Nittany Lions are gonna beat the buckeyes this year.
Aaron Dillon: 36:43
Paul, we all became man, we're all big 10
Paul Barausky: 36:47
All right. Thank you everybody. We'll see you next week on the fat pitch podcast. See you guys