How does the 'AI divide' affect my company's valuation and exit?

​​Episode 118 - Jim Ferry Transcription Jason Kirby (09:02.079) Hey everyone, welcome back to $100 million exits. Today I'm excited to have Jim Ferry on the call with us, general partner at Volition Capital, managing 1.8 billion under management in the growth equity category. Jim, welcome to the show. Jim Ferry (09:18.584) Thank you for having me, Jason. Jason Kirby (09:20.223) So I just want to go straight into it for our audience. I don't think our audience truly understands what growth equity really means. And can you explain to the audience what growth equity is and what makes a company ready for growth equity? Jim Ferry (09:34.318) Yeah, growth equity, I think, sits between kind of early-stage venture financing and later-stage buyout. So we tend to invest in businesses that have found product-market fit, call it five million plus run rate, scaling well. For Volition, we tend to work with businesses that haven't raised a ton of outside capital. Many of the companies are bootstrapped to raise less than, kind of, 10 to 15 million of institutional capital. I think what's different about VC is VC tends to make a lot of bets, and a given fund, they know that they're gonna lose capital on a lot of them. And hopefully they have a couple of investments that carry the fund. For us in growth equity, because you're investing in businesses that have found product-market fit, you have much lower loss rates. So these are kind of real businesses that even if things don't go to plan, they tend to have some equity value to them and you're not taking huge binary bets. But the interesting thing is I still think that you can have really big outcomes. And we've seen that within our portfolio. So to me, it's a really good risk reward asset class from an investor perspective. And I think it aligns us well with founders as well, because we know that a lot of the founders net worth is tied up in the business that they have. And we're not kind of pushing them to, hey, raise a bunch of capital and have, you know, try to burn through it as fast as possible and you're gonna have a binary outcome and we don't really care if it goes to zero because we have another 20 portfolio companies. I don't think that's a great alignment on strategy. So that's why from my perspective, I'm biased. I think it's a good model and a really good asset class. And to your point, to your other question of when is a founder ready to take on growth equity? I think it's when you're feeling like Jason Kirby (11:17.843) I think. Jim Ferry (11:29.73) hey, we have found a product market fit and I'm either many times is ready to kind of scale the sales and marketing organization. So investing heavily in that to go after a greenfield market opportunity or sometimes it's to execute on a product expansion that will increase the total addressable market opportunity. And sometimes, you know, founders have built a really good business and They've gotten to a certain scale and they want to take some chips off the table. we do, know, a large portion of our deals have some level of shareholder liquidity in them. Part of that, I think, is it frees founders up a little bit to say, all right, I've gotten enough capital where I can buy a house. I can probably put my kids through college. Now I can kind of go for it. And they're a little, you know, risk averse in that sense, just by getting a little bit of capital into their pockets. We just don't want our capital to be the liquidity event. It's kind of a, hey, here's a little bit to hold you over in the meantime. Jason Kirby (12:34.431) So that's what I want to talk about because I think there's some bopaceness for the market on understanding like well How do these deals actually get structured like is it buying a majority is it buying a minority? What percentage is often allocated for you know secondary? liquidity versus primary capital so be great to kind of share how You maybe how you see the market doing it and maybe have a listen does it a little bit differently or aligns with the market Jim Ferry (12:58.734) Yeah, for the most part, I'd say growth equity tends to be minority stakes in businesses. There are some funds that have an ownership target of 20 or 25 percent or something like that. To us, I'd say our ownership tends to range in the 10 to 40 percent range. To me, that's really just an output of a math equation of valuation and check size. However, I think the median is probably closer to that 20 percent. Just that tends to be kind of market. But I think we're, I think growth equity relative to VC is a lot more open to some level of shareholder liquidity. Part of it is that, know, want it to volition, especially we want to take a concentrated approach to the fund. So our general philosophy has been, if you have conviction to invest at 15 million, you should have conviction at 25 million or 30 million or whatever it may be. We're definitely more open to. giving shareholder liquidity if the company has more scale or some level of profitability or breakeven where they've kind of proven the model, especially if they're profitable, because in theory, if they own a large portion of the business, they could just take dividends on the business over the next few years. So by getting some capital in their pocket enables them to, like I said, go for it a little bit more. But that's to say we've done a couple of majority deals where we're kind in that 51 to 60 % range. But I think we always want to be aligned that we're not making a lot of money unless the founders are making a lot of money. And it goes back to alignment of both parties. Jason Kirby (14:37.535) And when these deals start to come together, typically with venture capital, there's an initial investment, then there's follow-on rounds that most funds reserve maybe 50%, 60%, 70 % of the capital for those follow-on investments. Is Volition set up in a similar way? Has growth equity like one check, or are they planning to acquire more as you go through the relationship and the business expands? Jim Ferry (15:02.542) Definitely the latter. I think as a fund, our strategy is to make sure you double and triple down in your winners. And that gets back to we want to have a concentrated approach to the fund where a large portion of the capital is in the best companies. Those are always the best funds. think what Warren Buffett has said that diversification kills returns. And I tend to agree with that. There's different ways to do that. For instance, if we're writing a $15 million check, that's on the low end for us in this fund. in that, like we want to feel like there's an opportunity to get more capital over time. And that can be through additional financings that maybe we preempt instead of them going to market. Or maybe we have a super pro rata right, which means instead of, if we own 20 % of the business, maybe we can put in. You know up to 40 % of the next round to get our check size up Sometimes it's M &A where they may not need the capital now, but they wind up looking at a tuck in acquisition of the more capital I think what's becoming more common is doing a tender a tender offer which Is a way where you can basically just go to all the shareholders and say hey We're willing to buy at this price per share who wants to sign up and sell a portion of their proceeds and we've done in the past to get more capital into some of the winners and we found that Once you kind of put some capital in front of a lot of employees on the cap table that maybe haven't had a big liquidity event, it can be life changing for them to get, you know, even a few hundred thousand dollars, pay off their mortgage and so forth. it tends to be kind of a win-win situation. Jason Kirby (16:43.017) good to get to this idea of the structure but now let's talk about like a bet that you've made you know technically investments but again there are it's less it's more of an investment I guess than VC. VC is more bets in terms of language but when it comes to like a contrarian bet that you've made or contrarian investment that you made where maybe the investment maybe wasn't obvious to the I see the investment committee or the the outside that you were the most proud of that you kind of Jim Ferry (16:54.316) Yeah. Jason Kirby (17:10.109) brought in and got done and like what was the outcome of that? Jim Ferry (17:13.998) Yeah, it was probably a sector that I think has widely been dismissed and it kind of goes through ebbs and flows, but it's the advertising technology sector. And there was a time when I remember talking to a bunch of ad tech companies and a few of them had really strong financial profiles, potentially better than like most of the companies we had seen that year. And we have a growth equity sourcing model. have 15 or so analysts that are talking to 20 plus entrepreneurs. each week. So you can kind of do the math. We talked to a lot of companies on an annual basis. And I talked to a couple that had grown over 100 percent, very profitable. But the general consensus internally was, it's ad tech. We don't like that sector. And my question was why? And a lot of people couldn't articulate why there's a hatred for this or negative connotation for this sector. So I spent a lot of time talking to public research analysts, anyone who seems smart, those writing articles in this space, talking to as many ad tech companies as they could. And we kind of created a playbook of here's what we think an interesting ad tech company could look like. And that led us for an investment in a business called Kinetics. This was a business that was riding the wave of digital video adoption for open web publishers back in the day. you know, when we exited, they wind up having I don't know, maybe 30 or 40 % of the com score largest 100 publishers using the Kinetics product, which was a video player that you could show your own video, but it would also make video for you based on contextually relevant content in the article. So for instance, if you had an article about Elon Musk, it might create a video slideshow or something on Elon Musk, and it can serve an ad in the mid role there. grew really well, just phenomenal execution from the team, very profitable business. It was acquired by a PE fund for one of our biggest exits from a multiple perspective. So just a really good story of like a sector that I think a lot of people dismiss. So as we're talking to the founders, we were really the only firm that they were talking to, because most of the other firms had that mindset of ad tech is not interesting, where Jim Ferry (19:29.07) My thesis was always, all right, well, 50 % of the ad spend is happening in the walled gardens of Google, Facebook, et cetera. The other 50 % is outside of that. Someone has to be the winner there. And this one wound up being a really good asset and a good winner. Great execution from the team. Jason Kirby (19:47.712) In a situation like that, when you're doing those deals, so going back to the deal structure, was that a situation where you came in and kept doubling down? Were there additional opportunities to get a bigger bite of the apple? Was it the first round? So tell us about the deal architecture that you had over time and how that materialized. Jim Ferry (20:06.966) Yeah, so this was an interesting one. We were the first and last capital in the business because they continue to grow so well and they're very profitable. The investment was part primary capital for the balance sheet. So they had a cash cushion and part of it was for the team to take some chips off the table in the form of liquidity upfront. But unfortunately, this is one where there wasn't any any opportunity to get more capital in overtime, which is a little bit rare, but. We've had a decent amount of portfolio companies where our initial check is the first and last that they ever need and it kind of takes them to exit. Jason Kirby (20:43.219) No, that's great to hear. And just walk us through what it looks like when a bet doesn't go well. You you're effectively supposed to not lose money in these deals. It's not venture where you're going to lose, you know, 80 % of your portfolio or whatever it might be. What's kind of a deal that you thought you did all the homework, you prepared for everything, but maybe it didn't materialize as planned? Jim Ferry (21:06.988) Yeah. What I'd say is like, obviously, no investor wants to have lost rates, but it is just the nature of the beast of this industry. In a way, you know, if you're not if you don't have a loss here and there, maybe as a fund, you're not taking enough risk on the upside. High risk, high reward. Obviously, that is a fine line. And I'm not saying we ever want to lose capital. But sometimes that is If you look at any fund, all of them have all had one that doesn't work out. I may refrain from talking about the individual company, but I'll talk about some lessons learned on some that maybe didn't go the way that we thought and maybe something that I avoid today as an investor. We had two companies, I'd say, that were more around hyper-local regional rollouts. What I mean by that is they think like, you know, they go into a city and they launch in a city, they kind of grow that city and then they go to the next city. And what we found there is, especially where we play these businesses, if they are, I don't know, five to 10 million of revenue, they might just be in a locality that's close enough from a geographic perspective where the management team can help manage those. And what we found is as they continue to expand from Southern California to Texas and Chicago and Miami, now every one of these cities has a hyper local nuance that you might not understand unless you live there. So you got to hire a team that understands all these idiosyncrasies and management isn't there to... kind of walk them through, hey, here's the playbook that we have seen work. So punchline is, I feel like what happens in a lot of these hyper local rollouts is you tend to have a few markets that are really good, a bunch that are kind of middling and a few that kind of aren't working. And it's hard to push everything up into that bucket of, hey, all these unit economics work really well. So those are kind of a couple of like that. Jim Ferry (23:30.319) model I tend to avoid because of that today. And these are ones that didn't play out the way that we initially hoped. Jason Kirby (23:37.608) And so that's kind of example like the the pattern recognition you saw this one playbook looks good originally But you know didn't really materialize as planned despite maybe there might be examples of market where it could have worked but in that particular case did not so I want to what kind of talk about the market today and we've seen a massive shift in the entire market since 2020 and 2021, the peak of the market and then complete collapse. now we see the market come back, but kind of a concentrated market in terms of this focus of AI. What's kind of the conversations you're having at the boardroom level with the companies you've backed over the last couple of years? Like, how are you kind of coaching these founders through these moments? What's kind of happening behind the closed doors? Jim Ferry (24:24.822) Yeah, I mean, I think every company is or needs to be an AI business or you're going to fall behind. And I think there's a spectrum of adoption on that with every company within our own portfolio. Actually, we just had our our annual Volition Leadership Summit where we get all the portfolio companies together in a room for a couple of days. We did it at Fenway Park here is a great kind of Boston venue. And the theme, obviously, was AI. We had a lot of great guest speakers and panels, but I think the best sessions in that were when we just did 20 minute quick hit demos of what portfolio companies are doing internally to adopt AI within their operations. And that can be kind of front-facing to the end consumer on the product side or back office related. That was invaluable. Cause I think what we're seeing a lot is their It's almost an 80-20 rule where like 20 % of employees are kind of driving 80 % of the AI adoption at a given company, but they tend to be siloed. I think you have a lot of people that are tinkering and experimenting and making their day-to-day a little efficient, but they're not architecting this at the corporate level to drive change for the entire organization. I think that's what a lot of people are missing these days. And that's where A lot of what our leadership summit was focused on was, how do you get everybody on board with this and try to standardize a lot of the skill files and agents that everyone can work with across the organization to make sure everything's talking together. So that's, think, where a lot of the conversation is at the board level. Jason Kirby (26:12.073) So let's talk about that. Cause like I do that with companies all the time right now. We have a literally just cut off a call with a client today where we've been pushing them to do what we call like an AI day. You know, it's like, just, it's a, it's a hackathon towards a certain destination and everyone has to show their homework, like show what they did, show what they built. And, and then I kind of plan like, you know, see who your performers are. Jim Ferry (26:22.222) Mm-hmm. Jason Kirby (26:36.255) And who's stepping up? Who's 2x-ing? Who's 5x-ing? Who's 10x-ing? And who's staying the same? And what do you do about that now that you have that data? What are some examples of what you've seen work well for these companies to adopt AI when they maybe weren't an AI company from the start? Jim Ferry (26:57.196) Yeah, I'll start with what's working at Volition because we're in the same boat. We're trying to adopt AI for all of our day-to-day processes and workflows and to make everyone's life easier. And what we've done is every Monday we have Volition AI Labs is what we call it, 4 to 5 p.m. And using AI, we created a website where you can sign up to demo something. And this could be something that is highly practical for everybody in the organization. It could be something that you just thought was cool or a new tool that you found, or even a tool that someone told you about on a call that may not even be relevant for our day to day, but just something that should be on our mind as we think about our portfolio companies could use it. And that's been a good way to knowledge transfer to the entire organization. So everybody shows up with their laptop and we're doing stuff in real time. So a couple of weeks ago, we have a bunch of sandbox laptops that we build open claw on just because it's in data and we don't want it to touch all of our data and we have a lot of sensitive information, maybe PII from companies that sends us data. having the sandbox laptops just to play around with is great. I think compliance holds us back and a lot of people in the financial sector. So that's kind of our work around for that. But at the same time, it's just been great for knowledge transfer. I've actually... Jason Kirby (27:57.993) you Jason Kirby (28:12.639) you Jim Ferry (28:21.934) pushed a lot of our portfolio companies to do this is to once a week have a demo. It's kind of what you talked about demo day, but it's a demo hour. So it's more quick hit bite size stuff every single week record it for those who can't make it and make sure that you're sending it out to everybody. But I do think that you just need to be intellectually curious and tinker with it with AI to understand the capabilities and. I think there's been a lot of portfolio company management teams that have had like an epiphany since Opus launched, you know, whenever that was February. And there's some really cool stuff that people are doing. Jason Kirby (28:59.611) I think it was a moment of kind of reality when it works, you know, when Opus came out and... you 4.6 hit or there was maybe it was 4.5 and then open clock came and like you see the reality of like, this is as simple as a prompt and getting a meaningful result, maybe not a hundred percent, but getting pretty far there. For any company leader, if I'm not seeing them take action in one way, shape or form, that's just like, okay, you are, you are the legacy. You will be the business that gets overwritten in history if you do not tap into this and just tapping into it is just Jim Ferry (29:09.614) Yeah, I'm losing track now. Yeah. Jason Kirby (29:36.851) Now it's table stakes, I feel. It doesn't mean you get a higher valuation. It doesn't mean you get better. It's just like you just survive and get to play the... You get to the dice again and play the game. I feel like that's such a key piece to today's economy. But I want to of shift gears. When we were talking offline about liquidity in this market, something that is rare. Jim Ferry (29:38.829) Yeah. Jim Ferry (29:45.591) Yeah. Jason Kirby (30:05.564) and everyone's desperate for as we're kind of seeing the IPOs happening and SpaceX getting ready to go and multiple others kind of gearing up for IPOs and hopefully driving a lot of liquidity to the market. What's happening in the private markets? What are you seeing kind of at your stage of this kind of growth stage that would ideally be the next stage to either &A or potentially IPO? Like what are you seeing in the market from your perspective? Jim Ferry (30:33.365) It's kind of the haves and the have nots right now, I'd say. And there is still a large delta in public market valuations and private market valuations. I'd say the private market historically tends to lag corrections in the public market by six to nine months, if you look at a lot of the sell-off cycles. And so I don't think it's hit private market yet. It's amazing that You know, you can look at SaaS multiples for a given subsector that are trading at three times revenue. And ultimately it's really a cashflow multiple that they might be trading on. None of the businesses that we're looking at, you know, 10 to 30 million probably have cashflow or a meaningful amount to be valued off of that. So it is tricky. And I think that a lot of them are still. saying, well, my last round was our seed round was done at this multiple or this price. So we're expecting a 2X right up from there. And that's just not based in reality for a lot of startups that had inflated early valuations. So they're now in this zone where those deals are just not getting done because there is a spread on the bid and ask. Now, when it comes to liquidity, I'm finding that once again, it's more the have than the have nots where You need to be very durable in an AI world in order to get through some of these large P fund investment committees. And we've taken a couple of companies to market right before the SaaS apocalypse. So truly could not have gone to market at a worse time. But we had already launched and we kind of kept the process going. And these were really good assets where if we went to sell nine months ago. they probably would have had eight to 10 bids from potential buyers. And both of them kind of got one bid that just wasn't interesting. And I think the feedback, both of them were represented by an investment bank. And the feedback on that was there are a lot of PE funds that are trying to get their house in order right now because they bought software companies at 10 to 15 times ARR or something. And now those Jim Ferry (32:52.436) If they were to take these public, might trade at mid single digit ARR multiples. So they're working through that. Some of them are multi-asset class and now they're overexposed in technology. So partners are trying to do deals, but investment committees are closed, which is something that we see in a lot of these correction cycles. both of those businesses are great businesses. Jason Kirby (33:13.248) I want to unpack that a little bit more. But what does that mean, like investment committees are closed? And give a little bit of context to the audience that may not be familiar with like how investment committees work. Jim Ferry (33:22.83) Yeah, so a typical private equity fund, they all have their different flavors, but I'd say there tends to be a quote unquote lead partner on a deal that is putting their neck in the line and saying, want to do this deal. And they're going to a broader investment committee of the other partners. A lot of the numbers set up in different ways. Sometimes it's a unanimous, everyone needs to raise their hand to say it's unanimous vote to do the investment. Sometimes it's majority. Sometimes, you know, it's you can do it, but one person, if one person says no, they can block it. So There's different structure everywhere, but I'd say pretty much every PE fund has some type of investment committee where they're reporting all the data and market findings. And as I mentioned, we've seen this in other market corrections where the partner that's looking at the company wants to make the investment, but gets shot down by the broader team and investment committee. It's funny, it's an odd dynamic because ultimately you have to do deals and these are large B funds that have huge pools of committed capital and they need to deploy that over a certain period of time. it feels like this is one of these things that is point in time, I'd say. And if you fast forward as the dust settles a little bit on AI and people... figure out their conviction or thesis in this space, I think that there is probably going to be a flurry of activity in the market of all these funds that were sitting on the sidelines for a while that need to just deploy the committed capital from their LPs. Jason Kirby (34:53.502) Yeah, I've been curious about that because there's just so much. I would say like the point you brought about the bid and ask spread, you know, what the sellers are expecting and what buyers are willing to pay something we're seeing in multiple different markets where it's like founder wants out or investors want out, but it's such a depressing number to take and or. They raised venture before they have a pref stack and clearing that pref stack now becomes nearly impossible and or meaningless, you know, once they do clear it. Like what, what kind of conversations are you experiencing or having that, you know, are addressing this? Like what's maybe anonymized examples you could share. Jim Ferry (35:34.636) Yeah, I mean, luckily, as I mentioned, we tend to many times be the first kind of true institutional investor in the business or maybe there's some smaller angel or seed funds. So a lot of the businesses that we invest in don't have that enormous prep stack, which is a good thing, I think, because we don't have a lot of companies that are in that zone of, hey, if we exited now, the preference stack is larger than the value of the business of the founder in theory walks away with nothing. I think in those scenarios, they usually do a management carve out just to keep them involved and motivated. But that's less of an issue. But I do think that for some folks, they understand their exit timeline has shifted because they're going to have to grow a few more years relative to multiples to get the outcome that they wanted. And I think there's some founders who are kind of looking themselves in the mirror and saying, Hey, I know that we wanted to have a five 10 X plus outcome here, but we may be in this two to three X zone now just based on valuations and it's a hard pill to swallow, but it is a lot better than nothing. So I think that there's some founders that are saying, Hey, we could continue on this path for another three years and we still might be in this band of outcomes. That's okay ish. Should we just take the liquidity now? So it's a conversation that is different for every company sector and board dynamic, but those are the couple of the combos that we're having. Jason Kirby (37:11.9) I think that's tough to have, I guess from when you see these spreads and the misalignment of say, investors need liquidity now and they'll take the loss, so they'll take the, maybe not a loss, but maybe not as much as they had wished, where the founder's like, no, I have the stamina. Who kind of pulls the trump card in that situation, in your experience? Jim Ferry (37:39.53) Yeah, I mean, for us, we want to be good partners. We try to be founder friendly. And the flip side of that is there's been scenarios where companies are doing well. And I think we might be open to riding it for another year or two. But the founders have come to come to us and say, hey, I feel like I've created a lot of equity value for all the shareholders and we want to go test the market. And for the most part, if a founder wants to sell, you got to be supportive of that because they're the ones running the business. You know, I'll give you a real scenario that even the company that we have a company that has been, you know, probably at the crosshairs of being impacted by AI and they had an acquisition offer that would be, you know, probably, you know, in the two X zone return for, for volition. And we had a long conversation of, Hey, do we, is this something that we want to do? Or do we want to put our heads down, adjust to the. adjust to the macro market. And we kind of had this product roadmap for something that, you know, we're really bullish on in this AI world, but it might be a slightly different product. I don't want call it a pivot, but more of a transition of the business. And we've had a couple of companies do that. There was one in kind of the hiring space that got hit pretty hard by AI, because it was mostly focused on engineers. And then they almost scrapped the old product, but kind of use that sequentially to inform their build of a new native AI product that went zero to three million run rate in under four months, which was actually way faster than their other product was growing. So I think great teams can adjust and evolve to the market and just kind of take their existing core infrastructure and product and maybe point it in a different direction in an AI world. Jason Kirby (39:31.208) So we're talking a little bit about &A and what kind of leads to the discussion to run a process and what that buy side might, know, the bid and ask might look like. But when it comes to the actual process and the company saying, now's the time, let's sell. What's kind of the experiences you've had that founders might not be aware of, of what actually happens behind closed doors in these negotiations on the &A front? Jim Ferry (39:59.968) Yeah, you know, I think something that founders think about is, okay, when I sell this business, I get to go move on and do my next thing. But typically they got to sign up for a couple of years in the transition period, at least to ensure a smooth transition. Sometimes though, and we've seen this and I think it's good for PE firms to be upfront about this in the process that they might want to put their own team. in place and they feel like they have an entrepreneur in residence or someone on the bench that they've worked with in the past that they want to put into the business. So I think just having that honest conversation in front of what the expectations for the founder are is important. From a negotiation standpoint, what I tell a lot of founders is I think if we work with an investment bank, and this isn't to talk bad about investment banks, I think that they've done a great, we've worked with banks that have done an amazing job at getting us. above the valuation that we expected. But sometimes there comes a scenario where maybe an investment bank is just trying to get the deal done so they get their fee in the final hour and we're willing to negotiate a little bit harder than them. So we need to make sure that we're aligned there. That's something that I think is very common and I don't blame the bankers for it for what it's worth. If they feel like they got a fair price for the asset, they want to make sure that the deal gets closed. Yeah, I think that like sometimes founders are shocked at the diligence process of like a large PE fund and how in depth that is because they're writing a massive track in some instances and they're going to know your business better than you do potentially. And that can be mentally draining. Jason Kirby (41:46.113) What causes these deals to blow up in the final hour? Or, not in the final hour, but in the process? What have you kind of seen be the common pitfalls that lead to a deal going bad? Jim Ferry (41:59.502) Missing your projections mid process is like a death sentence, I'd say. It's funny because if you miss your projections by 15%, someone's probably going to retrade on you and try to change the deal or walk. But I always think it's funny, if you beat your projections by 15%, no one's going to retrade on the up. So I tend to guide our teams to be more conservative on the financial projections than they might usually be in a process and you kind of want to exceed them, that's going to give people more conviction. So that's one. Two would be if there's a big market correction, which I think just happened. think that there were a lot of, I've talked to a lot of banks and they had a bunch of companies that might have been under signed term sheet and all of sudden the SaaS apocalypse sell off happens and there were a lot of deals that didn't get done or were re-traded in the final hour there. It's funny, I think that there are some strategic or PE funds that may have a reputation as like re-trading in the final hour without a lot of, or any like yellow or red flags around missing plan or market corrections. So that's a tough reputation to have and people tend to know that. The word gets around. So those are the ones where if it is, It is someone who has retraded on other deals. We want to make sure that we're kind of locked down of, hey, make sure that we're aligned on this deal. If you retrade, we're going to walk. Jason Kirby (43:39.873) Do they listen? Do they still re-drape at the end of the day? Jim Ferry (43:43.598) I think if you call them out on it, people tend to be a little more transparent. Jason Kirby (43:50.005) That's fair. Maybe they just come in with the original offer they were intending to retrade to at some point. And for fun here, we kind of mentioned some multiples, but I think a great visibility of what you're seeing, if you can kind of just share what markets you particularly focus on and what's the typical multiples that you're seeing companies get priced at right now. Jim Ferry (43:54.413) Yeah. Jim Ferry (44:11.318) so I tend to focus on a lot of high volume transactional internet type businesses. So think looking at a lot of stuff in the payments world, supply chain, logistics, marketplaces, whether B2B or B2C advertising technology, et cetera. And, I know it's like, a boring answer, but there is no standard multiple these days. And I'll give you an example where. If you're a native AI business that is in hyper growth mode, you can get wacky multiples. We saw a business that went zero to, I don't know, 17 or 20 million run rate in nine months that was funded at like 1.3 billion or something like that. And so you can do the math there on that multiple that is outrageous, but someone's banking on, they're going to continue on this trajectory for the next nine months. And then they're buying down that multiple. So it doesn't look so crazy down the line. Now, the risk of that is you could be six months in and if that growth rate drops off a cliff, you're, you're thinking, my gosh, we are so far out of the money on this one. so you gotta have a lot of conviction. and then we've seen, you know, traditional SAS company get valued more like public comps think. kind of mid to mid single digit ARR multiples. If you're thinking the ad tech space, I think that a lot of deals are getting done at 10 times EBITDA right now. So it's a wide range depending on the subsector. And as I mentioned, it's the have and the have nots where if you're kind of chugging along, you might be unprofitable. haven't integrated AI in any meaningful way. you're not going to get the 10x ARR multiple that you were probably a year and a half ago. So it's a wide range, but it's subsector dependent, I'd say. Jason Kirby (46:22.204) Well, wasn't giving me the juice I was looking for there, but you know, I'll take it. And so if a company's out there right now, they're doing, call it the five to 15, 20 million in revenue, maybe raise a little bit of money to get off the ground. What's kind of the questions they should be asking themselves as they explore the next transaction? Jim Ferry (46:46.894) I think they should be asking themselves, are we truly a native AI business? Because that's going to become the standard. And I think there's been a lot of argument around the definition of quote unquote native AI. One of the better definitions I've heard is if the LLMs, the frontier models went away, does your business still operate? the end is your business, okay. If the answer is yes, and you're using AI, you're probably AI adjacent. You're not AI native. And I think the more you can become AI native, it's probably a signal around the growth rate that you can scale almost infinitely without adding a ton of head count. And that means that you can probably get to the cashflow numbers that a lot of the public comps are trading at these days. I'd be asking yourself that and looking at what your competitors and peers are doing with AI. And if you don't feel like you're behind, you're doing something wrong because no one's ahead. Jason Kirby (47:57.665) When you say no one's ahead, I guess add some color there. Like what's kind of the insights that you have there in terms of what that means. Jim Ferry (48:07.982) I've yet to see a business that across the entire organization is truly native AI. think that there are pockets of the organization. For instance, engineering is the easiest one where I think they've been the fastest to adopt and tools have been readily available, for them to kind of go full native AI when it comes to coding and creating new product and shipping at velocities that were otherwise impossible before using AI. I think customer service and support is probably the next operational bucket where we're starting to see some efficiency gains. But I feel like there's still a lot to be done across the rest of the organization where finance is dipping their toes in the water. The sales team has some automated skills around emailing, but are they truly native AI in terms of their go-to-market in the way that they're finding prospects and sending outreach, et cetera, probably not. So that's what I mean is like things are moving so fast that it's hard to even implement everything into your organization to become truly native AI. If you take a day off of Twitter, you're behind. So I think everyone should feel that way and just try to stay up on it as fast as much as I can. Jason Kirby (49:33.259) Fair enough. And when it comes to like, you these companies that have to make the decision, because there's AI efficiencies. So, optimizations of the backend, ideally to improve EBITDA margins or gross profit or the profitability of the business by reducing costs while ideally not reducing performance. But what about kind of like... AI product, what kind of leading the company towards an AI solution to kind of keep up or is that maybe less important in the market today? Jim Ferry (50:11.842) No, I think it is important and it's sector dependent. So like some of a marketplace investment, tech was never really like the differentiator. There was the ability to balance supply and demand and create a viral effect for continued growth. So they're probably have less risk for this AI disruption. Granted, they're adopting AI more so on the backend and kind of implementing cool little tools on the front end. But if you're, I don't know, some type of workflow automation software, you're at risk of being displaced by AI. So you should get out and ahead of that and think about how can we disrupt our own business? And there's a little bit of the innovator's dilemma. You might need to blow up what you've built to... create something that is native AI and more of an agentic or headless software product that you had before. Cause I think that's where we're seeing a lot of these true native AI products is you can access them a lot of different ways. It can be in a traditional kind of point and click software way. It can be in the platform. They'll have some type of agentic agent where you can ask stuff or make edits on the reporting or you can just talk through an integration or MCP into Slack and that's kind of how you're accessing it. And it's really just becomes a system of records. So I think that's what I would consider native AI is when you can have somewhat of a headless solution from a software perspective and yeah, it doesn't need to be, you know, traditional point and click. Jason Kirby (51:55.755) Fair enough. Jim, I want to ask a couple questions here. I want to get your take, your kind of hot take on a couple of these. First, what's the fastest way you can tell a company has a real moat or a real edge versus just hype? Jim Ferry (52:10.83) I would say if they have something that, the question that we ask ourselves is time on this company's side or is it going to hurt them? And there are a lot of different ways for that. It could be first party data mode, distribution mode, could be non-public APIs that they have into something. So I'm looking for something that is unique to this company that other companies don't have. Jason Kirby (52:36.145) And what do most founders get wrong when they take growth capital? Jim Ferry (52:40.654) I would say you need to align with the way that your investor thinks. Our investments, whole periods tend to last longer than the average marriage in the United States. So you need to like the person that you're working with and make sure that you're aligned on how you're thinking about the outcomes of the business. As I talk about, more growth equity focused, thinking 1X, 5X plus. If you want more of an Andreessen type VC and raise $100 million and burn 20 million a year trying to go for it. We're not the right investor, but like, Andresen's a great model. That's worked for them. They've been great investors. make sure that you're aligned on the investor that you're working with, I think. Jason Kirby (53:23.231) When should a founder sell? Jim Ferry (53:25.806) You need to feel like you've created enough equity value, but I think this is a really hard decision because you need to leave enough meat on the bones for the next buyer. Where I've seen that go wrong is you maybe start bumping up into TAM limitations and there isn't a ton of additional growth and you probably waited too long. So need to feel like things are going right. Historically, we've kind of looked at the data. If you're able to post-growth equity investment over 40 % plus, compounding for like a four year period, you should probably sell it because at some point it comes down from there based on our data. So that's kind of a mental number that we have in mind. Jason Kirby (54:07.978) And then what's one hard lesson you've learned that's completely changed how you invest? Jim Ferry (54:13.262) Especially this day and age, I'd say you can't get too caught up on what the current financials are because it may not be the best predictor for the financials five years down the line, especially now. And this gets back to the question of is time on this company's side or not as it relates to where AI is going. So yeah, think there's been times in the past where I'm like, this is a great financial profile. It's growing well, but If I remove the financial aspect of the business and just say, hey, why is this company interesting five years from now? Maybe it makes you think twice about it. Jason Kirby (54:50.186) Amazing. Jim, I really appreciate you coming on the show, sharing your insights, and kind of showing what the other side of the equation looks like in kind of the founder world. And what would be the best way for someone that was inspired by the conversation and or wants to connect with you or learn more about Volition, what's the best way for them to do so? Jim Ferry (55:10.37) Yeah, you can go to our website volitioncapital.com. We have a lot of information there. If you're a founder that's looking to raise, we'd love to hear from you. My email is jim at volitioncapital.com. Pretty simple. And I'm getting more active on Twitter, so feel free to follow me at jimferryvc. Jason Kirby (55:26.496) Still calling it Twitter. All right. Feel like it's like a political statement if you choose either one. I'll spare you. Yeah, I'll spare you. thanks for coming on the show. Really appreciate your insights and look forward to sharing this with the rest of the community. Jim Ferry (55:27.948) Yeah, X, whatever you want to call it these days. That is not political. Old habits die hard. Jim Ferry (55:46.327) Awesome. Thank you for having me, Jason.