Running of the Bears

Travis Jarae [00:00:09] Welcome, everybody, to this month’s Investing in Identity Forum. Your host for today’s session, Travis Drake, founder, CEO of Liminal. Joined by the typical cast and crew, Cameron D’Ambrosi and Dave Fields. Welcome to the forum, gentlemen.

Cameron D’Ambrosi [00:00:27] Thank you for having us.

Dave Fields [00:00:29] Yeah. Hope everybody had a nice holiday weekend.

Travis Jarae [00:00:31] Yeah, that’s great. Did you guys get out and do anything particularly fond of this great weather?

Dave Fields [00:00:36] You know, barbecue, family, all-American, wholesome things like that? It’s some hotdogs, ketchup, mustard, you know.

Travis Jarae [00:00:43] Catch up on your hot dog trigger warning.

Dave Fields [00:00:46] I am broke catch up and I’m not going to apologize for that.

Travis Jarae [00:00:50] I’m also a pro ketchup.

Cameron D’Ambrosi [00:00:52] It turns out my son is pro catch up, which is highly, highly disheartening.

Travis Jarae [00:00:56] Did you start to question if he is your son?

Cameron D’Ambrosi [00:00:59] No. I mean, I approached him this weekend to try mayonnaise to dip as hot dog in to, and he seemed to like it. So I think the worm is beginning to turn, is.

Dave Fields [00:01:09] Barely thirsty if he’s putting mayonnaise on a hot dog that. Okay.

Travis Jarae [00:01:16] Well, welcome, guys. Obviously, this is our may form, hence the discussion around hot dogs in the park. But so we’re going to talk about today is the bear market. Obviously, we’ve been dealing with this now for the better part of the last eight weeks. But really seeing this come to fruition through the month of May, that’s that’s really kind of shaking things up quite a bit, not just in your stock portfolios, but also for all of the private company founders in growth markets like identity. We’re going to talk about that here shortly. And then the acquisition by LexisNexis Risk Solutions with Behavior. A sec, a very interesting acquisition. That is no surprise. I mean, LexisNexis resolutions have always been very, very good strategically. So will be really interesting to break into a discussion regarding that acquisition. So let’s go ahead and talk about the bear market. Obviously, I think the majority of these sessions have been really talking about how great the market’s been, not just for identity companies, but for the entire market here in the U.S. But as of late, that has not been the case. We’ve seen markets go down 25, 30%. So I spent some time talking about how this market is currently functioning and what you as a business owner or an investor in the space should be thinking about. So we’ve listed out three questions based off of some listener feedback. And the first main question is what does a bear market mean for high growth sectors like identity? So thinking more broadly, Dave, you’re the the finance finance guy on the call, so maybe we’ll all kind of let you lead some of these here. What what does this bear market mean for high growth sectors like identity?

Dave Fields [00:03:02] Yeah, so quickly, I mean, let’s define a bear market, which is different than a recession, which is far more complex, actually far more complicated to define. But a bear market is usually just defined as a 20% drawdown from the most recent high to a local trough. Right. The S&P 500, which is really a, you know, more of a large cap, broadly diversified index, I think, on an intraday basis is kind of breached that 20% drawdown where, you know, the Nasdaq has been I think its peak to trough is closer to 30%. And I think it’s still in the like mid twenties, in the low twenties as far as like drawdown from its most recent high, you know, most of that is. So what does that mean for high growth sectors? You know, right now we’ve had a big compression in price to earnings multiples and valuation multiples like price to revenue or enterprise value to revenue. It’s largely the result of the market starting to reflect an increase in cost of capital driven by the latest sort of Federal Reserve interest rate hiking cycle. So lower multiples means higher cost of capital, so money is going to be more expensive. I think the nearest term impact for high growth sectors like identity is really going to be in KYC and onboarding. We have a risk rerating, so we’re going to less money is now going to be allocated to perceived high risk projects. That’s VC world like just plain and simple. We’re going to see less dollars flowing into customer acquisition. It’s going to be more expensive to acquire customers and VCs are now going to be less willing to subsidize that. So I think looking back over the last year or two, the high fliers that we’ve been talking about have all been in kind of the onboarding space, and that’s tied to things like instant or rapid delivery services, groceries, food, some of the different investing platforms, Robinhood, Coinbase, crypto. Broadly, I think there’s going to be less dollars on the equity financing side at elbow to them, and I think there’s also going to be less customer interest in them. So I think those companies are ones where it’s going to be interesting to see what happens. You know, COVID pulled, you know, a year ago we were talking about how much demand COVID pulled forward and these really phenomenal year over year growth comps that companies were putting up 200 or 300% sometimes, that investors were then extrapolating out into the future. And now people are going to revisit those assumptions. And if you go from assuming that a company grows 200 to 300% a year to say just, you know, a middling 30 or 40% per year, you’re going to find that, you know, that’s a ten X reduction you’re going to find. You may find that the price the price to sales ratio that investors are willing to pay for a business is also going to be reduced ten times. So, you know, people are talking about companies being valued at 50 to a. Times a year ago. Now we’re seeing things people talking about, you know, companies are going to be worth 5 to 10 times revenue. And just clearing that ten times threshold which was taken for granted in VC land for a while, is now going to become something that’s actually something that perhaps is maybe not impossible to get, but at least tough to get. It is going to really require some part effort. So I think we are going to see we are going to see just kind of a rerating in reevaluation of how much investors are willing to pay for growth. And we’re also going to see a revisitation of what that growth assumption is. So both of those things kind of have a a reflexive feedback loop on on investing in sort of startup plans and in particular identity.

Travis Jarae [00:07:01] I think that’s extremely, extremely interesting. I was just going to echo those sentiments. I didn’t want to step on some of Dave’s future wisdom based on our our pre recording conversations. But, you know, I think it’s it’s going to begin to shake out some of the hands that have been reliant on, you know, VC pumping a bunch of dollars into segments like, you know, I don’t know. Pick a pick a sector 15 minute delivery customer onboarding. Right. If that well, of unlimited $30 coupons dries up, you’re going to start seeing that ripple effect flowing down into all of the other providers living, you know, in that ecosystem. Yeah, that’s a good point. And takes us to the next question here, which is, you know, what are some market indicators that you’re watching to make decisions? You just talk about both you guys just talked about some of the different use cases that identity companies are are trying to tackle. Not necessarily those are indicators, but maybe those specific use cases have indicators. But I guess, you know, what are some of the market indicators? They can go from identity indicators to maybe camera and talk a little bit about some of your thoughts on what you’re what you’re looking at. And then, Dave, really just curious again, you know, kind of your finance take on some of the market indicators that you’re keeping an eye on for the market broadly. You know, specifically private market by private company market broadly and as well as for identity. So Karen, what are your thoughts on indicators and what are you watching right now? Yeah, you know, I think looking at some of the industries that have been bellwethers for this surge in onboarding, whether it’s ridesharing, whether it’s crypto, looking to those to see, you know, our volumes of new accounts, our transaction volumes are going to start plummeting and and extrapolate that out into what that means for some of the platforms that have been overly reliant may be on on a handful of super high growth sectors, too, to hit their numbers quarter over quarter.

Dave Fields [00:09:10] Yeah. I mean, so, you know, my take, you know, market indicators, you know, the biggest thing I think probably most people are familiar with this right now is that, you know, a lot of this has been driven by inflation and inflationary expectations. So what I would encourage people to do when they’re reading sort of the financial news and economic reports is not just pay attention to what inflation is, but what is inflation relative to expectations. And typically you’ll see financial news reporters discuss what consensus is before a major economic release. And then they’ll they’ll talk about how the market has been moving, and they’ll define that narratively through how things were relative to expectations. So I think the thing to pay attention to right now is like how long are people expecting inflation to persist for and what, what what are the implicit assumptions? And then why that might why might that be wrong? Right. And I think there are a number of things to look at where inflation, there’s plenty to read and look at where inflation could end up being higher, persistently high, persistently high. Or it could end up or it could still end up being somewhat transient or transitory. And by that, I mean it could be tamped down within a 12 month cycle. Some of the things we’re seeing as we’re starting to see, there’s been a shift from know during COVID, everybody was buying goods. So a lot of a lot of inflation was has been in the price of goods. And now we’re seeing people reallocate from goods to services, more travel, more dining out, things like that. And so some of the information expectations are really weighted towards one consumer bucket or the other. And so it’s not necessarily it’s not true at this point in time that inflation is just broad based. And everywhere we’re seeing inflation cool. And in certain areas like the price of used cars, certain goods prices are actually are starting to come down. But then the things that are concerning are obviously food and energy, which are largely driven by by the conflict in Ukraine and both Russia’s role as as a world energy supplier and Ukraine’s role as something like which is not something I knew prior to this conflict. But they supply something like 25% of the world’s wheat. So that’s going to have huge knock out impacts. And so I think those are ultimately the things to watch. You know, the time frame that I would say is like I don’t think people should be day traders, but, you know, so like you don’t need to watch this stuff on a daily basis. But I think you need to think about the things that you’re reading on a weekly basis and then think forward 6 to 12 months taking that to be Sea World. People are talking a lot about down rounds right now, but we’re not really going to see downtowns happen because nobody takes it downtown until they have to. So for everybody that’s raised at these really inflated evaluations and raised huge rounds in the last kind of 12 to 18 months, they’re hopefully unless they’re really spending like drunken sailors, they’re going to have cash for, you know, a couple of years. And so there’s going be a lot of startups. They’re going to be able to weather this, even if perhaps they did raise at an inflated valuation of now they need to earn into they’re going to have time to do that for the VCs themselves. That’s going to delay when they need to mark to market their portfolio. And I think a lot of VCs right now are, you know, previously with the fundraising cycle, just like, you know, startups have a fundraising cycle where they’re raising every and typically it’s been 12 to 18 months or 12, 24, maybe a little longer, depending on your cycle, consumer’s a little shorter enterprise. It’s usually a little longer. VCs have a fundraising cycle of their own little piece prior to the last kind of five years of this frothy or market environment, this is typically raised on like a three year cycle and invested funds over that three years and then spent the rest of the fund life on on portfolio management. In recent years, it’s been much more like a 12 to 18 month fundraising cycle where the likes of, you know, Sequoia Andresen Excel. You know, those people were raising an almost annual basis. I’m certainly Tiger Global, who we’re going to talk about has been raised on an annual basis. So those that fundraising life cycle is also now going to become more drawn out, which means you are going to have less dollars available to the market itself. Everybody’s going to kind of take this wait and see approach, and you just have to watch how that flows through and you have to recognize that each of these things sort of impacts the other. And so as far as indicators, in the next 3 to 6 months, I’m watching inflation. I’m trying to thoughtfully read inflation reports to see where things high and where things cooling. And then it’s really going to be over a 12 to 18 month cycle now that we’re our timeframe that we’re really actually and understand how is this actually affecting the V C both investment cycle and then the fundraising or the capital raising for the funds themselves. So that’s the kind of like the lens that I have at this moment in time.

Travis Jarae [00:13:58] Yeah, I think both of those I think all of those ideas are extremely grounded in reality, you know, from, from my end looking at. The market right now. It is a little bit longer term. Well, before the market went bare, if we’re gonna call it a bear market here, which I think we should, you know, where we’re saying ahead is this consolidation is about to start happening, right? Acquisitions are going to be happening. We’re going to see more companies acquiring the technology, the IP that support their solution in market. I think we’re going to see a lot of that. So I think there are some false indicators that are going to start to spring up here, which are acquisitions, but undisclosed valuations. I think those were probably going to happen regardless. And so we may see more of those deals happen, but I don’t think that is a strong indicator for how our current market and identity is is doing well or not doing well just because those are things that were already in process. I think the last question we have here from the audience, which is what is your advice to startup founders and investors with money at stake in the identity market right now? Obviously, I think, you know, both you guys gave some pretty good ideas around what market indicators you’re interested in. Obviously, that’s pretty good advice to startup founders and investors. But generally speaking, you know, Cameron, what advice do you have given everything that you’re seeing right now for that founder that, you know, might be at maybe saying, hey, I need to go raise some cash or, you know, even even yet maybe the founder that says, I have cash, but I’m worried that this is going to continue to continue to be a hard, hard market to raise funds in for 12 months. Great question. Look. Far be it from me to be the expert here in terms of fundraising, I think I might defer somewhat to you and Dave on that subject matter. But the advice that I would give them if they came to me is focus on the core of your business. I think there are folks who got caught out chasing, you know, hockey sticks in in areas like crypto that were, I think, too good to be true. And and if you took those numbers at face value, I think somewhat unsustainable. You know, you just are not going to see a market segment with like 100% year over year user growth that can continue indefinitely. There’s only so many people in the world to join these platforms. So, you know, I think for the companies that are looking on, looking at how to get through this market, it’s focusing on the core product and focusing on building a broad base to build your growth upon and not just chasing, you know, home run shots, mixing some metaphors here, but, you know, take your take your at bat, slow and steady. Don’t swing it. The first pitch that you see and look to, you know, diversify the areas of growth that your business can focus on so that you don’t get caught out when, you know, I don’t know, crypto drops another 20% and there’s no growth to be found. You know, diversify which segments you’re playing in and look at some of these more holistic cross application uses for digital identity that we’ve been beating the drum about to maybe be that bridge over troubled water for you. Yeah. Dave what? I mean, what are your thoughts for investors here? I mean, do you have any do you have any thoughts for investors on how they should be thinking about the current market?

Dave Fields [00:17:33] Well, look, I mean, as far as investors, I think I would echo the comments kind of I made above around just like how you how carefully you actually need to read inflation reports and refrain from in particular in this country projecting political narratives onto what’s happening with inflation in markets. Right. So. You know, the whole world is experiencing. It’s like you said, everybody likes to say right now that, you know, this is either the fault of the Federal Reserve or this is a result of Democrats spending like drunken sailors because they control the legislative and the executive branch. But inflation is not a U.S. phenomenon right now. So while the Federal Reserve, in their interest rate hiking cycle in response to inflation, is certainly driving the market currently, it is not correct to assume that historical, political and policy actions have produced this inflation. And I guess that’s my kind of personal bugaboo when I just listen to people about like, who are people that I want to listen to or not. I think when I hear these like political framing, I hear political framing the discourse, I kind of just reject that outright. And I say, well, look, I mean, you know, you know, like I said before, Ukraine, the Russia Ukraine conflict has played a big role and the whole world is experiencing inflation right now, not just the U.S. So it’s not just about US policy politics. One thing I do want to come back to, though, is for is for founders. You know, people used to talk, you know, you always say, you know, no, you’re unit economics, but also understand capital efficiency. And so for those that haven’t, particularly those rent the seat or perhaps even series a stage and what I would encourage you to read in Google are articles written by other VC firms, one of which is Bessemer in their efficiency score. And then Kraft Ventures burned multiple. Both of them are ratios that try to relate. The both of those are attempts to quantify capital efficiency, specifically by framing how much new RR you’re generating and how much you’re spending to generate that new RR. Right, so ah yes, great. You’re growing. But like, you know, are you selling dollars for for $0.65 or are you actually like, you know, doing something that generates real value and you’re doing that in like a thoughtful and considerate way. So I would read both those two articles and I would absolutely learn those ratios and make sure that you’re calculating them in your fundraising decks and then, you know, injuries. And Horowitz also put out a recent article called like How to Weather a Downturn, which has all sorts of like great advice and people should read that. So we don’t need to repackage that all here. But I would say, like if you’re a founder, like go read that stuff. Like you need to know what nice.

Travis Jarae [00:20:14] I think it’s all very, very helpful advice. Also, I love the word bugaboo when I just start throwing that into regular conversation going forward. But I think this is a is a huge topic, one of the spend the majority of our time talking about it. Obviously, this is what we spend most of our day here at Liminal, helping companies think through CEOs and investors alike. You know, how does this particular market play a role into their growth or existence, frankly, over the next two years? So if you if you listen to this and you have some additional questions, we’d love to definitely talk to you more about that. And you can reach us out directly at the info at Liminal Dot CEO Channel. Let’s go ahead and start with the LexisNexis and Behavior Stack acquisition. So here, obviously, you know, covers quite a big chunk of the map already. LexisNexis resolutions or L and R’s is a prolific player in the space. Obviously, one of those incumbents that has just continued to dominate the market in terms of product awareness, product feature, set and acquisitions. They both add on some really large chunks to this business over the past past five, six years that have been pretty meaningful. Things like threat metrics, as an example, have put them really above, above the rest and in terms of just thoughtful strategy. But of course, the other big players like Experian, Equifax and TransUnion have made very similar moves and have done a very good job at not just staying relevant but competing meaningfully well, but this acquisition of behavior, seq I think is a really interesting and strong move for LexisNexis. Obviously we are covering at the top section of our map behavior in that lighter blue LexisNexis resolutions and the darker blue for behavior, you know, helping them in authentication, biometrics by the detection and prevention solution segments. These are so segments that are square in this landscape, right? So you can’t really go wrong with beefing these solutions up, acquiring new IP, being able to find new ways to service your customers in this part of the map. It also seems to be a nice bridge that opens LexisNexis up to other areas of this map, whether that’s customer I am or something. On the data privacy and content management side, building out some more identity graphing resolution components. Really, this is a very strong position. So really like this acquisition. From my end. But Cameron, what are your thoughts on Lexis-Nexis and behavior? The SEC. Look, I think we’ve seen this in the behavioral biometrics space for some time. It is not that behavioral biometrics isn’t a technology that has promise and application. It’s something that is challenging to sell as a standalone product because to do something meaningful with those signals that come out of a behavioral biometrics solution, you need tight integrations with your IAM piece with the rest of your fraud detection and prevention suite, with your identity proofing, your mobile identity and device intelligence. And so if you are offering a solution that is just a standalone, you know, widget, as it were, it can be really tough to see it implemented successfully and more critically for customers to see the value in adopting that solution. So the fact that Biersack is rolling into the broader NRC platform, which encompasses so much of the landscape that we see here today, I think makes a tremendous amount of sense because, you know, if RC can get the integration right, which, you know, I think I wouldn’t bet against them in doing, they can really begin layering in all of the best features that behavioral biometrics has to offer, which in my opinion, are an extremely low level of friction for good customers. It’s not necessarily that it’s going to pop bad guys that you wouldn’t have otherwise caught. It’s that your good guys, your good customers can breeze right in and not even think that they’ve been challenged at all because the website recognizes that they’re not a bot. You know, they’re from a trusted geo location, an IP address, a device we’ve seen before. You can come right in and transact. I think that adds a really powerful, you know, arrow to an RSS quiver, which I think previously has been anchored a bit more heavily on those deterministic elements, on, you know, traditional credit or or, you know, identity attribute based approaches and platforms. So this is a great, great addition for them and really excited about what this portends for the breadth of the solutions they’re able to offer.

Travis Jarae [00:25:19] Yeah, that’s a really great point. Dave, do you have anything else to add here?

Dave Fields [00:25:25] Generally, I think very well said. I would emphasize Cameron’s point about challenges of selling. You know, ultimately challenge the challenge is when you sell something that’s, you know, a set of features and not truly a product. It’s tough to go to market. And so I think we’ve seen that happen with a number of different behavioral biometrics players and in some of the acquisitions. Right. That these are ultimately a set of features, not not something that’s, you know, just sort of a standalone product. And so that’s a tough.

Travis Jarae [00:25:56] That’s a good point. In as it’s closer to summit or to the summer here, we typically take a good look back at the landscape and see what we need to change. There’s a few ubiquitous features, a solution segment types on here biometric authentication, both being those ubiquitous features as we see some of those feature sets proliferating across multiple solution segments. So, you know, maybe they’ll be on the map next year, maybe they won’t be. But we definitely expect to see more of these product features in all of the different product solutions across every vertical, frankly. So it’s a it’s a really great point. And with that, let’s go ahead and put this one in the books. I guess, you know, we have as far as Lemnos concerned, we have a couple latest our latest research report is on our website. If you haven’t already, take a look at the reasonable identity and how to get there. Market Opportunity Research report published that back in February, continues to be a major driver for conversation product roadmap strategy thinking. So if you haven’t already downloaded that one and read it, that would be definitely the one we recommend. And then for our members, we have the crypto economy and its roles in the digital identity ecosystem. That’s our latest outside in reports of a few more coming up, which I’ll talk about here in a second. And then our recent blogs, of course, we have the digital identity landscape for this year. That’s the one we’ve been using during this Identity and Investing in Identity Forum. So what if you want to dig into it? We have an entire microsite dedicated to breaking down each of the solutions segments and what Golden COG strategy is, and a few videos to help break down this this framework for you to use in your day to day. And then, last but not least, what to look for at liminal. So we have our identity network. So this is member only contact again outside and report. And so right now we’re looking at the Signicat of the world how our identity network starting to form starting to be successful in terms of new business model iterations really interesting. We we’ve combined probably the past 12 months of work into this are really interesting content should be coming out over the next week and a half for our members. We have our limitless summer networking event again for our member content. So you’ll be able to if you’re a member, you’ll be receiving an email shortly about that. And then last but not least, we have our other outside and report coming out here in June on PI conditions of person, identity, ecosystem conditions. So what are those conditions? We’ve identified five five conditions, privacy, data protection, reputation, commerce and inclusion. So you’ll be able to read more about how we’re working with product managers to build consumer identity products that work. And. All right. And that will take us to the conclusion of this month’s investing and identity form. Thank you again, Cameron and Dave, for joining for this great discussion and we’ll look forward to seeing everybody in our next forum in June. Thank you.