The Weekly Digest #2
RIA vs distributors, thinking about exit values and how AI is here to help.
Short Takes
LPs and GPs, it’s often said that fund size determines strategy and that’s very true for portfolio construction. But, another element on fund size is what the total value of exits need to be. A simple rule is what I’ll call the Rule of 30. This assumes that a fund owns 10% of a portfolio company on exit. Multiply fund size by 30 and that’s the total exit value the fund needs to get a 3x gross multiple.
Example: a $500M fund means it needs $15B of exit value. 10% ownership at exit is $1.5B which is the 3x gross multiple. $15B of exit value in 1 fund means 15 unicorn exits or a decacorn exit and 5 unicorn exits. Assuming a portfolio of 35 companies, that’s quite a hit rate 🤔
Btw a 3x gross multiple for a $500M fund is about a 2.6x net multiple ($1.5B less $200M of carry / $500M). Aside from deciding if that $500M fund can generate $15B of exit value, an LP will consider that 2.6x for venture vs what they can get in small buyout with a shorter timeline for distributions and perhaps lower risk.
Michael Kim, Founder at Cendana Capital
The ongoing debate in our industry between distribution and RIA models has created an unnecessary divide. This polarization has led to oversimplified views where one side sees itself as the exclusive provider of advice while the other gets dismissed as merely selling products. This has excluded distributors from giving investment advice while with less than 500 active RIAs the problem of access to investment advice has only compounded. The elephant in the room has been lost to semantics. What needs to be solved is access to quality and unbiased advice which would be possible only by increasing the numbers of those who are qualified to give it. Distributors must be co-opted into this program instead of excluded since their customers too need advice. Besides building a new channel of professionals under the RIA umbrella it would be good to induct distributors as advisors as well. Both would be able to address the central need of their customers but in a manner in which their respective customers are ready to remunerate them.
Rohit Sarin, Founder of Client Associates
It's an uncomfortable thing to say, but every great company starts as one person seeing reality more clearly than most.
After 20 years of starting and seeding companies, I've become so much more confident in funding solo founders.
And I've seen enough co-founders get carried by the singular founder with the vision, the grit, the dogged resilience... yes, it takes a village, but there is an undeniable necessity of leadership here.
Alexis Ohanian, Founder at 776
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