E260: How Founders Access Liquidity in Pre-IPO Companies

You have a unique background, and you come from a fourth-generation real estate family.

How did the global financial crisis both affect you as an individual and as an investor? And how did that affect how you are today?

Oh man, I mean, that's a whole lot to cover, but it does really inform kind of who I am and what we did.

I mean, I actually graduated college in 2009, so kind of the worst year to graduate college in probably a couple of decades.

You know, my family's background is real estate. We did real estate for four generations.

We actually were lucky enough to sell our real estate portfolio in 2007, late 2007, right before the real estate market blew up.

And that really allowed us to get a lot of liquidity and actually my immediate family to kind of reform a much smaller family office and really be able to start investing in other things than just real estate.

Before that, we pretty much reinvested everything we had. as a much greater family back into that family business.

And so we didn't have a lot of cash or liquidity to invest in other private alternatives, let alone public equities.

And so getting that liquidity event really unlocked the ability for my family to begin to develop a portfolio for me to again to be able to explore my interest in private alts.

And so, you know, we started out like many folks, not knowing what we were doing. And so we invested in fund managers.
And then from fund managers, we started doing directs.

And then from directs, I started realizing what were my real interests? What were my strengths? What is something that I wanted to kind of take to the next level?

And I think a lot of what we're going to talk about today is kind of what we built with Coles and equity financing.

And as you mentioned, you were investing in funds and you decided to start this fund yourself, Colzen.

What made you want to become a GP when you were an LP? And tell me about how that came about. It goes back again to real estate, actually, interestingly enough.

So, you know, my first job out of college was I moved to Tucson, Arizona, and working under a partner of the family and someone who became a mentor of mine.

We were buying real estate subdivisions, model home communities that had gone back to the banks for 10, 20, 30 cents on the dollar. And it was just an incredible buying opportunity.

And it's where we felt most comfortable to kind of lean back into immediately after getting liquidity, you know, before we had done any other private alts.

And I remember we were buying these properties, you know, they had gone back to the banks. There was no home builders that were buying them.
So the developers lost their shirt.

And I remember I asked my mentor, I said, how do you have the chutzpah basically?

uh to to buy these things when it feels like the economy is coming crashing down and the world's coming to an end and he said well Philip, we're going to own them for cheaper than anyone else can ever build them for again.

And so it's just a matter of time before those valuations recover and we're going to be able to hold them and then sell them back to these home builders. And that really stuck with me.

And that's exactly how things played out.

We were experts in the space. We knew the underlying value and we bought them low.
And so that always stuck with me.

And it was something that I wanted to be able to replicate when my family and I started investing in venture.

But it took me until 2018 to really be able to find an opportunity to begin to start to do that. because so much of ventures is about direct investing, right?

Whether it's buying secondaries, which is more of a niche strategy, or whether it's investing directly into businesses or through a fund.

And so in 2018, I ran into my now partner, Sam Bulow, and he had a really interesting situation that's actually pretty common for any of your listeners that are executives or even founders.

of some of these venture growth companies. He had worked at a company for many years, and he had a large pool of vested options.

And he left that company about 18 to 24 months before the company's IPO. So he had 90 days to exercise his options.
Otherwise, they were going to expire worthless.

And he was really up against a hard one. You know, he didn't really want to walk away and let those options expire.

He didn't want to take a loan because loans have personal guarantees and terms and those weren't tenable for him.

I mean, it's like you have one hyper-concentrated part of your net worth and you're going to risk everything else. No.
And then he didn't want to sell secondary, right?

Because he believed in the upside of the business. He didn't want to give away half his shares to own the other half.

And so he worked with a lawyer and an accountant after spending, you know, 20, 30 days in denial.

And he came up with a rudimentary version of the structure that we now use where he found an investor and that investor was me.

And he said, hey, in exchange for fronting the money to cover my exercise costs, you know, my strike, pay my strike price and pay my taxes, I'm going to own a bunch of shares.

And then I can post those shares as collateral for your cash advance. And then when this company exits in the future, we can share on the upside together.

And that really was a pretty interesting structure for me. And I was already investor in the company.
I said, yeah, let's do the deal.

And then like any good story, it snowballed Eight or nine of his colleagues said that we needed the same thing. We created an SPD.
We took care of them.

And that really hammered home to me that this was not only valuable to him, but actually generally a problem for kind of late-stage executives.

So then if we kind of fast forward a few more years, actually in the mean, in the interim, Sam had gone and worked in some other businesses.

I was kind of hiring him as an interim CIO for my family office, but we kept on staying in touch and we kept on talking about going into business together.

And in 2022, something really interesting happened in venture growth.

And And this is where I'm going to tie together the kind of distressed real estate assets with this model and my thinking as an investor.

What happened in 2022 is everything had gone up, up, up like a roller coaster, a valuation rise in 2021. It was too frothy and everything came crashing down in the venture growth space.

And what that created was a really interesting problem for both investors and shareholders and optiones.

So if we take the kind of founder executive perspective, right, the people we serve, they had shares or the right to purchase shares through vested options that in companies that they believed in, but they didn't have the liquidity to pay for the strike price and pay for the taxes.

They also couldn't get any liquidity unless they were willing to sell at a secondary at a really steep discount. And so we had people who were very rich on paper and couldn't get access to liquidity.

And so having a model that didn't force anyone to sell at a depressed valuation became very, very attractive. And then for investors, we all know the famous adage, don't catch a falling knife, right?

It was a buying opportunity and it has been for the last several years. This is why the secondary market has exploded, but it's hard to know what's the fair valuation for the company.

What if it drops further? You know, I think I'm buying at a good price, but what if it drops further?

And when we're able to recreate a company for 10, 20, 30 cents on the dollar by using structured finance, by using this equity financing model that we created for Sam and his colleagues back in the day, we could unlock doing opportunities and deals in a variety of industries with a variety of companies.

And so we decided to form a fund at that point and launched this as a generalized strategy, you know, trying to do portfolios of 15 to 20 names.

And so that's been really the journey that we've now been on.

We had raised a, you know, a first fund deployed about a little bit more than half of that to date. A lot of that was deployed in 2024, and we're now deploying the latter half in 2025.

It was this strategy and the connection back to how do you create a distressed real estate-like opportunity? with healthy businesses in the venture growth space, right?

The businesses don't need our money. It's the individuals that need our money.

And how do we make this a really interesting, unique risk return profile for investors to be able to get access to these names and

at 70, 80% discounts?

To use a private equity analogy, it was a distressed seller in a good asset, perhaps overvalued, but you had more than enough collateral on the downside.

So you didn't worry of whether it was marked exactly to market or whether it might be 20, 30%

overvalued because you had that downside protection. Totally.

My partner likes to say, if you hit the side of the barn door, right, we just have to hit the side of the barn door. We have so much downside protection.

As long as we can underwrite against failure, right?

We can account for valuation risk really, really well.

You can't be off by an order of magnitude, but as long as you're within

strike zone, iterations of this strategy has been around for about a decade, at least that I've been aware of.

Maybe you could double-click exactly what problem are you solving for the senior executives, whether it be liquidity, tax, and any other problem.

How would you define the problem that you're solving for executives?

That's a great question. And there's actually two problems that we're solving.
And so we have to think about who our counterparty is, right?

Are we working with a shareholder, which is typically a founder, or sometimes an early investor, like a family office that has a big, you know, unrealized gain and a hold?

Or are we working with an executive who has options? And the problems that they're facing are similar. They both need liquidity, but they actually have different underlying problems.

And so I'll talk about both of these. But at the end of the day, like what we're really trying to do is there's found the founders and executives of the best companies don't want to sell,

right? They don't want to sell. If you gave them an alternative to having to sell, they would take it.
Right. And that's what we're doing is we're giving them a second choice.

We're saying, hey, you don't need to be a secondary seller to get this.

And at the same time, right, they're rich on paper. They've been at this five, seven, 10 plus years.

And at a certain point, when you're worth $100 million on paper, it makes a lot of sense, you know, both from your family's sake, from a portfolio management's sake, to take your, you know, take three, five, $10 million off the table.

So for founders, what we're doing to oversimplify it is we're kind of creating the equivalent of a cash out refi on their shares, right? They have embedded value.

They're rich on paper, poor, cash poor, and we help them unlock their first five or 10 million. And this becomes very sticky and viral within the company.

So if there's one founder, then typically the other founder wants it and it spreads.

And what we're trying to create for them is the alternative to having to sell typically at a discount, right?

Secondaries typically sell at a discount, sometimes not, pay taxes, and then most importantly, giving away their upside. So that's kind of the value proposition to the founders.

And we can talk a little bit more about what they need to believe about the upside to make this transaction worth it for them. But it gets a little bit more interesting for the executives.

And the executives are people like my partner Sam.

So they work really hard, typically at below market salaries, because part of their compensation comes in the form of options that vest over time. And as these vested pools of options accrue,

What people typically do is they don't typically exercise along the way. Why?

Because they don't have the cash or they're afraid that if the business isn't for sure going to be a success, that they're going to have wasted their money or that their options are going to go underwater, any myriad of reasons, or they're just busy working for the business.

And the longer they wait, the higher the valuation of the business goes. And the internal valuation of the business, which is the 409A, increases as well.

And that's what determines when you go to exercise, you pay your strike.

Oftentimes, the later stage businesses, the bigger liability is not being able to cover the strike price, which is to own your shares. It's being able to pay the IRS in that same tax here.

And being able to cover that is really painful. For some of the multi-billion dollar companies we've talked to, it's five, seven, $10 million per executive.

They don't have that kind of cash unless you're a repeat CFO or something like that. And so they need somebody to come in and exercise earlier, right?

If we can exercise at year five or six or seven, one, two, three years before an exit, we can literally save those individuals millions of dollars in taxes.

The other thing that we can do is we need to start their long-term capital gains clock.

So if you're a typical executive, you ignore all this, you wait until the very end, right before the IPO or after the IPO, and you exercise, you're paying the absolute highest tax liability, and you may not even have capital gains when you go to sell.

A lot of this could be, could be taken care of ahead of time by thoughtful collaboration between group like us and one of those executives or a founder, right, who wants liquidity and wants to diversify their wealth.

And talk to me about as investor.

So assuming that you can get into the round, which you can't always in some of these companies, and some of them aren't aren't raising money, but assuming that you can get in the round, when does it make sense to invest as a traditional venture investor versus via the structure?

And what are the inherent trade-offs?

Yeah. So

the dynamic that we set up with the founders and the executives that we're working with is they give us downside protection and we share in the upside together in the future, right?

So if we kind of break that apart a little bit and we think about, you know, how is this going to kind of play out for everybody in a few different scenarios, right?

And if we take the investor perspective here primarily, since that's what we're focused, that's what your question is focusing on.

Equity financing, having that downside protection, having a paid-in-kind interest rate that we're making, you know, a dollar-denominated agnostic performance off of cash that we're advancing, and having some equity participation in the collateral pool, it allows us to outperform in down outcomes.

It allows us to

outperform in flat outcomes, and it typically allows us to outperform through up to a 3x, sometimes even higher.

And so, when you want to do an equity financing structured approach to a later stage company is when you're realistic about how much growth is likely left in the business, right?

If you told me I'm 100% sure that this business is going to exit 5x up or 10x up, I'd say if you can buy secondary, you should buy the secondary, right? Or if you can invest in that last round,

you should invest in that last round because you're going to get all the upside. However, right, if you can't get access to those rounds, we can probably create access through this structure.

The company doesn't need to be raising money. We could be before a round, after a round, the company might not even raise more money at all.

We just need one individual who wants to work with us to generate liquidity to create the access. And so when I look at this, I'm really focused on data.
I like to play moneyball.

And if we look at most late stage companies, right, that are series D, E, F companies, you know, even if they're haven't raised that many rounds, they're seven, eight, nine years old, that maybe have one round left, or maybe they've raised their last round.

We look at the data and we said, where's the bell curve the fattest? You know, where are the most like, what's the most likely outcome from a late stage venture growth company?

It's not a five for 10X. It's actually somewhere between a 0.7x to about a 2.5, maybe 3x.
That's where the vast majority, 80% of the companies are going to exit.

The outliers are the ones that are going to do better and a lot worse.

And so if we bet time and time again where the bell curve is fattest, and we put ourselves in the position to get doubles and triples, 20 to 30% IRRs.

in a third to a quarter of the time that it would take to typically wait if you were an early stage investor to get your money back after 10, 12 years, that's that's the kind of investment approach that we take.

So that's the investor that would want to bet with equity financing would be somebody who's realistic, who sees a great company, but who knows that the upside isn't going to be a five or 10 X still.

When you run your portfolio simulations,

what's the standard deviation? What's the expected return from an IR standpoint, from a return standpoint? And how does that compare to similar venture funds?

The way we think about this is

we only work with businesses that we think are past the the binary outcome and that we think are one to three years away from an exit and we we have the ability to be pretty wrong around valuation and also if things take longer three four five six years we also have really good time value of money so we have a lot of room to kind of be wrong but as long as we can kind of pick a business that's past the point of failure and hasn't a planned exit we have a really good application.

And then what we do is we underwrite and we say, hey, we want to believe we can make a 2x equity multiple and a 20% IRR, assuming no future growth in the business, right? The business exits flat.

And our best guesstimate, it's going to take two years or three years or four years. We want to be able to double our money, assuming no growth.

And then, if there is growth, we want to continue to be able to participate in that growth through part of our transaction that gives us equity.

And we want to be able to do really well, even if the company exits flat or down, right? That's how we're getting these doubles. We get almost a double still if the company exits 50% down.

And so that's really what we're

really targeting.

You know,

it really depends on the asset class and the fund and what stage of of of growth people are are looking at right i i i wouldn't presume necessarily to quote the data off the top of my head but but my perspective is if we can have a really good shot at a double to a triple you know a 20 to 30 percent irr with an average hold in a deal we're doing you know three years

that's a bet that i want to make i don't want to make that bet and above 3x you're still capturing the upside it's just not it's it

It's just not as great as if you had invested into the product. Yes, I'll give you an example.

We did a deal where if it's a 4x we get a 3.4 if it's a 5x we get a 4.2 right we're sharing some of the upside with the founder that's important right because it allows us to win the deal align ourselves with the founder make it so that they choose us as opposed to taking the secondary um and i say that's that's the best money to give away is a little bit off the top if it creates alignment if it helps us avoid the negative selection bias of people who don't believe in the future of their businesses right if we can avoid that which i think is probably maybe that's that's because if if they don't believe in the future of their business this becomes extremely expensive form of debt for them.

Whenever we present a quote to somebody, we don't just say, hey, here's a quote. You do the math, you know, figure out if this is better or worse than your secondary.

We give it to them in an Excel document, lets them play and model out different outcomes for themselves. We actually hope they have a secondary offer.
We say, here's our quote.

Here's their secondary offer. You can pick it in.
You can put it in or tell us it if you want, or you can keep it to yourself. Put in your taxes.

And then tabularly and graphically, we're going to show you different outcomes, apples to apples comparison, comparison, Coleson's financing versus your secondary. When are we better?

When are we worse? And typically, what a founder or executive has to believe as far as future growth is they usually have to believe they can double the valuation of the business before they exit.

And if they can do that, even if it's a flat secondary, the power of the appreciation of keeping their skin in the game overcomes the cost of our financing.

Their alternative, right, again, is selling often at a discount, paying taxes and giving away that upside.

And so they're worse off if the business goes down and they're better off if the business goes up.

And so we put that choice, that menu in front of a founder or an executive and we say, you make the call. And if they make the call to work with us, what do we know?

Regardless of what they told us, even regardless of the data they've shown us about the business, which on occasion can be inaccurate, we know that they actually believe in the upside because they're betting in their own self-interest.

And so we pay a lot of attention to the psychology of the people that we work with.

And if someone turns us down and takes the secondary, I go, great. We didn't want to do that deal.
They don't believe in the upside. They're not willing to bet where their own money is.

You mentioned you went from investing in via SVVs to your fund one. Now you're moving on to fund two.
What learnings do you take from fund one?

Perhaps some mistakes or some things that you wish you knew that you're now applying to fund two?

Actually, I'm going to give you a compliment here. You, you and your partner the other day, when we were talking to you, you said, Colson, you guys have structural alpha.

And I love, they'll be the first person to use this term, and I loved it because a lot of people use alpha, this term, like manager alpha, you know, and it typically has to do with like managers ability to pick right like maybe it's their network or they're better at underwriting it's like maybe right it's kind of hard you know to quantify that it takes you know maybe a decade to prove that you have alpha right but what's really interesting about our model is we can show you with the math that we have structural alpha and so what do you mean by structural alpha well it's it's the equity financing structure it's the downside it's the pick our stock fee that steps up over time and we were able to model this in portfolios of 15 to 20 20 companies.

So for our first fund, we modeled this in a in a portfolio of what we expect to be 15 names. And it was pretty shocking just how badly we could do.

So not only do we not have like manager alpha, like we actually are like bad at picking companies, like we select horribly. We could have four companies fail, three exit 50% down, and eight exit flat.

So we don't pick a single company that increases in value. across the whole portfolio.
We've had four markups already. So that's probably not going to happen.
But let's just assume that happens.

We would return

in a four-year hole, a 1.5x and a double-digit IRR to our investors. And how is that possible? We have to remember we underwrite to make a 20% IRR and a 2x equity multiple on a flat exit, right?

Flat exits and 50% down exits aren't failures for Colezan. So the power and the structural alpha that you've so eloquently called out and gave us a term finally to call it is super, super powerful.

And then if we imagine, well,

what if we still don't have any alpha, right? But let's just say we're not worse than the market. We just pick how we would expect the market to perform, that kind of bell curve I was talking about.

We just pick on average. We're an average manager, but we still have the structural alpha.
Well, then we're getting 2.3 to 2.5x, 24%

plus IRR, net of fees.

And then if we say, well, Coleson's actually decent at picking and some of this positive opt-in bias that I was describing that only founders that believe in the upside would want to work with us, that serves us a bit.

We do a little better than just the, you know, the average of the market, and we get the structural alpha. Now we're in the high twos, even 3x equity multiple, 20 to 30% IRRs, right?

And that's that's super, super exciting.

There's two other, there are actually three other learnings that we have.

Second one is we're super sticky. So

this is all about education.

So once we're in a company and we work with an executive or a founder and we educate them about this, we do a transaction, inevitably the co-founder wants liquidity, right?

And then we say, well, what about the options, right? Do you guys have options? What about the C-suite? And so we come in, we do three, five, maybe a $10 million transaction.

And then there's going to be two to three times that amount of

liquidity needs within the company. And so we become sticky and a programmatic solution.
And that's one of the things I'm super excited about when it comes to fund too.

I want more discretionary capital so I can do more upfront. And also I want to lock in.
90 days, 100 days. We actually had one deal that the founders let us keep open for 10 months.

We did three closings on it, same terms. The final closing was two months before markup because they valued having this liquidity so much, they wanted us to keep it open.
So we're super sticky.

The final two,

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Some of the biggest endowments and pension funds, you know, they're LPs and Dreesen Horowitz.

They're LPs in any fund, probably any company they want to be in, right?

But what about people?

right that don't have this kind of clout behind them what about international investors right all of these people want access to these these names but they're not necessarily an lp in one of these funds and we can get access to companies in between rounds when the company's not raising money we just need one individual or more right who wants liquidity and there's always an individual one of business so access is becoming one of the biggest things let alone you know our risk return profile and then i think i think the final thing is

You know, I realize we're highly synergistic with other professionals in the venture space. So again, coming back to education, we educate lawyers and accountants.

They love us us because we give them another tool to work with our clients. You know, you should never take a deal when you have one offer, right? Secondary.

It's like, well, what can I compare that to, right? That's huge. Wealth managers, even more synergistic with them, they end up dating these founders and executives, right?

Providing a lot of financial services for free, in some cases, for years ahead of a liquidity event because they're trying to win that relationship. And it's totally worth it for them to do that.

Well, what if they can go to that person and say, hey, I can help show you how you can pull forward more wealth earlier, right?

And maintain alignment with your shareholder base and not have to sell secondary.

So we actually refer, once we've done transactions to wealth managers and remote wealth managers refer their prospective clients to us. And we've developed a really synergistic cycle with them.

And then, you know, finally, like traditional VCs, unless they're buying secondary, we're not their competition.

And if you think about, you know, you're a VC, you're on your fourth, fifth, sixth fund, your first couple of funds, these companies have matured. There's a clear couple winners.

Do you want the leadership of your best vintage portfolio companies cashing out, selling secondary, misaligning themselves with you and the other investor base? And the answer is no.

You acknowledge that they need liquidity. You might even offer it to them as a service.

But what if there was a strategy, you know, our equity financing strategy that allowed them to leverage themselves towards the future success of the business, maintain alignment with their shareholder base, while at the same time, recognizing that it's reasonable and fair to get them a little bit of liquidity today.

So that's that, these are all things, learnings we've had kind of across fund one, and we want to leverage as we scale here.

I was checking my notes before this podcast, and I first talked to Bob Pitty and Steve Gold in 2014, VSL Partners, about this new asset class.

And there's a couple of firms at the time doing these structured liquidity programs. And I've always thought it's a great idea.
Yeah. What I can't square is why it hasn't grown bigger.

One is, why do you think it hasn't picked up as much as one would have guessed? And two is, do you think it will become more mainstream in the next five to 10 years? I mean, let's be very clear.

I actually did a little research ahead of this because I remember I saw something on LinkedIn the other day that stood out to me.

I do believe that pre-exit liquidity solutions are already an asset class. If there was a really interesting graph, I'll quote you the numbers here.

If you look at June 2024 through June 2025, there was more liquidity, 61.1 billion generated from secondaries, more liquidity generated from that than the 58.8 billion generated from IPOs.

So it is massive, right? Now, it's so much easier to buy secondary, right? Especially if

you have a massive multi-billion dollar fund, you structure these huge company-wide tender offers.

You're a big bank, right?

Those are easier transactions to do. They're very straightforward.

Secondaries have largely been considered a niche. Well, it's becoming less niche, but there's niches within the niche, right?

And these alternative methods, I think, happen to think our mousetrap is one of the better ones. Everyone does things a little bit differently.

We are a niche within a niche, right? And so we're not doing massive transactions, right? We were starting out with $3 to $5 million with a founder. Then we do another one with another founder.

It's another $5 million. And then maybe there's a bigger opportunity for another 10 to 20, maybe even 30 if we took care of the whole executive team and their options.

But again, the big banks, they want to do loan structures, right? They want personal guarantees. They want time-based terms.
Those aren't viable. Not for people who are being cautious

with their balance sheets and not wanting to risk every single thing they own, you know? And so we're able to come in here with a much more nuanced model.

do far fewer transactions just with the top people in the company, get full access to financials and do kind of a bespoke solution. And I think there's a place for that.

And I think there's a place for many sub-strategies like that within the space.

And even if we just chip away at a few billion over the next decade, you know, from what's already over a $60 billion space, it's all the business that

we would be happy to do here for the next five plus years. So we feel that the TAM for what we're doing is unlimited at this point.
Yeah, my sense is that the TAM is there.

It's somewhat fragmented in that you start with smaller transactions. So a lot of people don't want to go into a fragmented industry.

They also don't want to go in and have to educate people for a decade. I've chronicled several asset classes on this podcast, like GB Stakes with Dial, now Blue L.
Yeah, and had to go out and

evangelize for their market for many years. And look, they are an industry ventures which just sold to Goldman Sachs.
They had to do a similar thing within secondaries in the venture market.

So, it's no easy feat,

but

it does seem like it's something that will get sizable.

And the alignment with shareholders and what I would call the contagion of the ASCLAS, meaning that when the founder, now the co-founder, and it really dovetails really well into this idea of companies staying private longer.

When I talk to a lot of top CEOs off the record and I talk to them about their IPO plans, they essentially say, well, we don't have to go public.

And frankly, most of the time, A, I either don't want them to go public or B, there's not really a great rationale for going public.

Now there's some edge cases and some specific reasons, but there's a lot of companies that shouldn't go public. Companies that have not achieved their mission, somebody like the SpaceX

or even something that

doesn't do well with quarterly financial reporting and quarterly incentives. So I think overall, this market is going to grow.
I just can't put my finger to why it hasn't grown already more.

for lack of a better word. Look at how many secondaries happened over the last 12 months.
I think it is growing.

And I think there's now, there now needs to be more nuance, more, more optionality, even within that category now. We need to break that apart and

provide people the liquidity that they need. And I think importantly with us, you know, again, I agree with you.

And I think this is, you know, if you had just asked me, like, what are the risk factors, right, associated with our transaction that we spend all of our time thinking about? It's like, hey, I'm not.

I have a bunch of downside protection, right? I'm collateralized by 4x the value of my cash and shares. But if the business fails, right, I end up with a zero.
So that's one risk factor.

At the end of the day, you're common, you're not preferred. It's like I create a layer above common and below pref, right? And so I,

the business can't fail, right?

I, I, no matter how much downside protection you have, the business goes to zero. Infinity times zero is zero, right? So we, we need to believe that we're past a binary outcome.

You can never get that down to a zero risk, right? So this is why we do this in a portfolio. so that we can absorb a loss or two if we need to.

The other risk factor is, and you were getting at this a bit, never exiting, right?

We've seen this, which is, God, they have these businesses, there were so much money and they're just not exiting, right? And you see your IRR just starting to go down as an investor.

You buy secondary and you have no power to force an exit, right?

Well, we have real costs that accrue, right, to these founders and executives that we're working with, right? So we make this reasonable and cheap for them if they exit soon.

But our pick we had at a weighted average 15% pick for fund one. I mean, by year three, four, five, that's accruing and compounding on itself.
That becomes very expensive.

Our stock fee steps up over time. That becomes very expensive.
And so we're fair in our quotes. And we say, you think you're going to exit in two or three years.

If you don't, and it takes three or four or five years, it's going to be more expensive for you. And you're going to have to continue to grow to outpace that.

If we get to the point where you have raised another large private round and we're getting too expensive, Let's explore a solution together where you sell some secondary and you buy us out of our contract, right?

That's totally on the table.

And so we're really thoughtful about structuring our returns so that they become appropriately punitive if there's never an exit that's happening so that we can kind of incentivize and to some degree, not force, but highly incentivize, you know, an artificial liquidity event to occur with those shares.

As you're speaking to LPs, is there like a positive polarization to this strategy, meaning some people love it, some people don't love it?

And what's kind of the on-ground feedback you get from LPs for a strategy like this? Generally,

I think that it requires a little bit of an effort, right? I think one of the biggest barriers is as soon as you ask somebody to learn something new, right?

I think there's people who really love that. And I think there's a lot of people who go,

I don't know. Like I get investing in the round or getting the fund manager and then they invest in the round.
It's very obvious, right? It's an obvious solution. There's not a lot to learn.

I have to teach somebody about what is a variable prepaid forward contract, which is the mechanism we use.

How do we layer that in with some few other strategies to unlock these contracts? And it's not immediately obvious, right? So we need to spend some time in education on both sides.

It's actually pretty easy to educate the founders and executives and get them on board. It kind of sells itself, but I just show them the math.

But for the investors, they have to be willing to learn and be comfortable with some structure.

It ultimately becomes a strength and this structural alpha is a selling point, but you have to be willing to spend some time up front and learn about it.

So I think that's probably the biggest barrier. And then, you know, as you know, right, whenever you're starting out, it's the the cart before the horse.

It's like, well, you got to have raised money to raise more money. We want to see you being, you know, a fund two or fund three manager.

You know, we're finally there. We did it organically.

But I think that a lot of people too, they want to see you kind of have proved everything out before they're willing to really make a bet. And so I think that's another headwind.

To kind of summarize that, it's being willing and open to learn about something you're not familiar with. And then, you know, being able to tolerate emerging manager.

Being a startup founder, then being a VC, now investing in GPs, I cultivated this perspective that it's a question of when, not if somebody invests.

Cultivated this perspective from my mentor, Eric Anderson, who started AtomApp, Compass Therapeutics, now Alloy Therapeutics. And he always said, don't wait for investors to make a decision.

Always keep on executing and make it inevitable that those investors invest.

So it's always a question when I'm meeting with somebody for a new strategy, I'm always wondering, well, are you a fund one, fund two, or fund three?

How much conviction do you have to build internally until your investor, if it's somebody that I want in?

And I just, by focusing on this extreme long game, you make the time to do things like education and really bring investors up to date and give them the necessary information.

And the truth of the matter is, a lot of institutional investors will never invest in fund one or fund two, especially on a quote-unquote new asset class.

And the reason for that is there's too much career risk for them. And that's fine because then you'll get them on the fund three, fund four, and they'll be larger check sizes, they'll be more sticky.

So, kind of taking this long-term perspective while also paradoxically making sure that you have the

singles and doubles, and the investors that will make sure that you close the next couple of funds is something that I think the best fundraisers cultivate and into one strategy.

We've really embodied that.

And one of the things that we've really found is a huge unlock is, you know, we have relatively small discretionary checks that we're writing, but we raise co-investments and we deploy $5, $10, $15 million

between our fund and the co-investments, right? And so we're able to bat way, way above what we would be able to do.

You know, we really have enough discretionary capital to write a couple million dollar checks at this point.

We're able to bat three to five times that level because we have LPs that are excited about the deals that we're able to secure. The deals speak for themselves, right?

You're like, I can't believe you have access to this company. I can't believe

so-and-so just invested and you've recreated this company at a quarter of that valuation. I'm going to invest in this deal, right?

And so I think you can prove it on a deal-by-deal basis and over time bring people along with more discretionary capital.

I still remain steadfast that any strategy, even a strategy like this that gives us a bunch of downside protection within a company, it's still best when we portfolio into this.

You know, we view ourselves as generalists and I feel really strongly, I don't only want numerical diversification, I want industry diversification.

I think there's so much volatility in markets these days, so many political factors, so many factors that cause certain industries to get hit, and it's unpredictable, right?

And that volatility is happening in shorter and shorter durations of time. And so, it's important to not be too focused in only defense or whatever it is, right?

That you or only AI, because something could change that could really hurt the entire industry. And so, we really, really try to have breadth across the portfolio so that as one industry is hurt,

another industry does better. And then, when you layer that in with the kind of structural alpha that you help term for us,

I think you get a really, really interesting risk return profile in a time where there's so much opportunity at the same time, so much risk.

What is one piece of advice that you would have gone back and given yourself before starting Colzen that would have either accelerated your success or helped you avoid cost of mistakes?

Oh, man, that's so interesting. So I think that that concept of

diversification across multiple industries, we kind of organically have fallen into that, but

just observing how the environment, the world is these days, like it, I feel so grateful because we, you know, through a series of referrals, just had gotten this really organic portfolio.

So I'll say that I feel really fortunate for that, but I wish, and going forward, and I wish up until this point, that had been this really thoughtful approach. I actually think going forward it is.

So finding ways to have, you know, diversification and not put all your eggs in one basket, even if you're a specialist, right?

I think it's like, how do you, how do you create, how do you hedge a bit?

I also think that the importance of relationships, you know, it's interesting. I'm a family office.
I've been to a lot of events as an allocator and as an LP.

I've also been to a lot of events as a manager. Sometimes I'm wearing both hats.

We're all inundated with deal flow, right? I get so many emails. I don't even read them, right?

And I'm sure I miss great opportunities all the time. You're only as strong and you're only able to coast capital as far as your

either direct or through one degree of separation relationships are strong, right? You know, we have over 100 LPs at this point and it's growing and that that becomes a flywheel, right?

And then all the other people that have listened to us and actually taken the time and maybe they said no to fun one, but they're going to come back for fun two.

It's like you have to put in the relationship building early on to earn the trust to even be considered, right? To even be considered.

Don't don't presume that someone's going to take you seriously from a cold out meal, you know, email or a LinkedIn outreach. It's just, it's not, it's no offense to you.

It's that you don't, they don't have the time, right? We don't have the bandwidth.

And so i feel incredibly fortunate to have a lot of social capital uh to be meeting people like you um every time we meet somebody the web kind of continues to grow and so i think you have to be patient and really be willing to kind of build that out and it takes a while it oftentimes doesn't get addressed but as a gp you have to pick your relationship shot on goals you could only manage so many relationships and all of them have to be to a certain level of depth to have any chance of success so you really have to be very purposeful in who you're investing as both short-term and also long-term relationships.

Like we discussed, fun, three, fund four relationships. You want to spend some of your time developing on those as well.
Yeah, absolutely. Couldn't agree more.

What would you like our listeners to know about you, about Colson, or anything else you'd like to share? Honestly, just kind of having curiosity, you know,

if you're somebody who likes to learn, if you're somebody who wants to look at something different from a different perspective, would love to connect with you.

We'd love to provide more education on what it is that we're doing.

I feel really lucky to be able to facilitate what I refer to as non-zero sum transactions.

In business, so oftentimes we do a buy and a sell at the same time. And when you do a buy and a sell at the same time, if that asset goes up in value, the buyer wins and the seller loses, right?

And vice versa. And what's so cool about the model that we use is we're effectively buying today, but they're not selling or they're not giving us shares until tomorrow.

And tomorrow is whenever there's a liquidity event.

And that allows for time to occur in between the buy and the sell and for appreciation to occur over the course of that time and if it goes up we can win and so can the founders and executives we work with and that becomes incredibly valuable i mean it not only feels good like i enjoy what i do but the people we've worked with refer us their co-founder they refer to us their best friends they refer to us other executives and people to work with we do no inorganic marketing at all

because people like to work with us right we treat them respectfully We give constructive no's early. And then when we do a deal, it's clear that it's a win-win and that we're aligned.

And then we celebrate together when there's a markup or there's an exit, right? And

that's the kind of business that I didn't even fully recognize or anticipate would be as fun as it was until we really started doing it. And

for those of you that are involved with family offices, I guess the other thing I'll I'll leave you with is

a farming analogy that my family came up with that talks a little bit about our perspective on kind of continuing to create value and planting new seeds.

So, if you think about a first-generation family office, that principal that created that value, they planted a seed, right? They started a business.

Oftentimes, them and maybe the second generation will grow that business, grow that plant. And then, after you grow something, at some point, you need to harvest.

I think this is one of the hardest things that we're seeing, right, in this baby boomer generation, that second to third generation family office, harvesting and knowing when to harvest is really, really hard.

And so picking that opportune time, we were lucky enough to combination of luck and seeing, you know, seeing the future there with the housing recession, we were able to sell at an opportune time.

And then you have to decide once you've sold, once you've harvested, what are you going to do? Are you going to be a perpetual allocator? That's okay.

I would argue that you need to find new seeds to plant. It's great to be an LP.
You should be an LP in many cases for most strategies, but what's something that you're good at, right?

Do you want to continue to start a new business in what your family was good at? I've done done that in real estate. You want to start a new strategy? You want to own something.

How do you continue to create value, right? And bring value to other people in the world.

And so I think that's something that for these next gen in the family office world is something you really need to think about, which is what are the seeds that you want to plant to continue to create value.

And it doesn't always have to be even just for profit either, right? It can be, it can be for other causes, but

when you've harvested, there's a cycle, right? And the cycle needs to continue.

Well, in those words, Philip, thanks so much for jumping on the podcast. Look forward to continuing the conversation live.
Thanks, David. That's it for today's episode of How to Invest.

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