The Dry Powder Conundrum

Episode 297

State of Identity Podcast


Episode 297

The Dry Powder Conundrum

In this month’s Investing in Identity series, we discuss the latest movers and shakers in fraud and fintech and take an analytical look at the digital identity trends that are best positioned for deal activity this fall.
The agenda includes:
  • Sardine, a leading provider of fraud, compliance, and instant settlement solutions raises a $51.5MM Series B led by Andreessen Horowitz
  • Alloy, an ID verification platform for banks and fintech companies, receives $52MM in additional funding to accelerate growth and global expansion
  • We’re seeing record levels of accumulated dry powder. Although there’s been a recent slowdown in deployment, once the market resets, how will VCs put their money to work?


Travis Jarae, CEO at Liminal


David Fields, Partner at PTB Ventures


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Travis Jarae [00:00:11] All right, everybody, welcome to this month’s Investing in Identity Form. This is your host and guide, Travis Dray, the founder CEO of Liminal. Joined by none other than Dave Fields, partner at PTC Ventures. What’s up, Dave?


David Fields [00:00:28] It’s a Travis just getting ready for the fourth quarter. How about yourself? You know, summer’s over. Everybody’s gone back to work, right?


Travis Jarae [00:00:35] Yeah. Yeah. You know, here in New York, it’s feels like there was never any slow down for people in work. The streets are busy. And, you know, obviously, the markets have been pretty wild. Public markets, private markets, everything has been up and down, but lots of activity still, still happening on our end. It’s been pretty exciting.


David Fields [00:00:56] Yeah, absolutely. And I know we have some good data that we’re going to test a little later, so maybe let’s turn to it.


Travis Jarae [00:01:02] Yeah. Digging right into it. So, you know, for for this month, looking at September, you know, historically speaking, September is a month where we’re starting to really see a lot of the kind of the strategy or the strategic decisions that were made at kind of that midyear, you know, executive offsite, typically that we hear in June and July. You know, September is really where you’re starting to see those types of executive decisions starting to actually get executed on. So these could be early fundraising activities, big deals. It could be new product announcements. It could be shuffling of people. Lots of changing of the guard when it comes down to the senior staff. But, you know, typically a normally a quiet, quiet month in the news cycle, but obviously a lot happening underneath the surface. But we did see a couple of really big deals in September or at least announced in September that really caught our eye. And the first one was sardine raising, bit over $50 million led by Andres and Horowitz. You know, kind of putting this money into Sabi, starting the series B round here company hasn’t been around for all that long, but obviously this is a company with a stacked management team up and down. And now they’ve just welcomed new, existing, new and existing investors, including X, Y, Z, Nyk Sound Ventures, Google Ventures, Eric Schmidt, Vikram Pandit, you name it seems like everybody that you kind of want into this thing got in. We also heard that this this round probably happened probably earlier in the year. So, you know, obviously it’s a big round, you know, do one and a half million bucks. But we do think this one happened actually probably closer to a February or March timeframe so early in the year. So, you know, if you’re trying to kind of benchmark comps on this this particular round, you know, probably they probably go. But isn’t this old, old numbers? Right, those old revenue multiplier numbers kind of at 40, 50 X type of situation, but really exciting for to kind of see what sardines been able to do here.


David Fields [00:03:13] And also.


Travis Jarae [00:03:15] You know, we think that they’re going to take this money and put it to really good use. You know, Sardine is one of those companies that really has taken kind of a bottom up approach to to fraud, looking at kind of the transactional layer as well as kind of looking at the identity itself. So, look, we think that this money is going to go pretty far for sardine. And we think that, you know, this is one of those those big companies that will become even bigger in the future. So really excited about Sardine. And the other big one that we were looking at was Alloy, you know, another 52 million bucks coming up on the balance sheet series C, this time led by, you know, the folks over at Lightspeed and our good friends over at Avenir growth, you know, with participation from folks like Canopy and Bessemer and the others that were already in. I think this is a really good, good deal for the Alloy team. You know, they didn’t see a drop in valuation, still at over $1,000,000,000 in five, you know, and people are still using alloy more and more and more. Right. So we’re still seeing a pretty big growth rate, unlike the sardine race. We do know this deal happened over the summer. So, you know, this is really impressive from the team over at Alloy. And, you know, they’ve been pretty public about what they’re going to spend this money on, including kind of focusing on international expansion for fraud prevention tools. But, you know, we think that these guys have a decent shot at doing more than just fraud prevention. We think that they could be doing more in the compliance bucket with the AML transaction monitoring and other product suites that companies that alloy currently service are interested in and are currently being serviced by vendors outside of the Alloy platform. The other thing I think is really interesting about Alloy and worth taking note of, especially for folks like myself out there that are always keen to keep track of that product marketing trend. A bit of a rebrand. I don’t know if it happened now or in recent time, but rebrand to a identity decisioning platform versus orchestration. So I really like the rebrand here and I think, you know, gets us away from this kind of term that we’ve been using a lot over the last two years. Now, this orchestration term, and I like that we’re now making it actionable, right? Decisions are being made decision platform. So really like the rebranding here and looking forward to kind of seeing what alloy and sardine do with this new capital.


David Fields [00:05:48] Driver’s course for you. Just, you know what do you and we talk about the transition kind of decisioning platform rather than orchestration a little more active now is that do you think that’s purely just product marketing language or do you think that there’s also actually a real change in the product and how it’s used by their clients?


Travis Jarae [00:06:10] Yeah, I think we are. I think it is a change, right? I think it’s a change that’s beyond just product marketing. I think orchestration vendors are now more workflow managers where I think decisioning platforms or decisioning vendors, you know, you are hearing the split is always not kind of coming up with the new naming nomenclature here, but where you see decisioning platforms really helping companies actually make decisions based off of the data that they’re seeing. And this could be based off of networks data, right? So you can say like, okay, you know, this similar type of consumer or customer coming to the platform is going to, you know, go, you know, have a better pass rate if they do these five things. And we’re going to promote these five things during the onboarding process, that’s a decision that’s being made, not just a workflow manager. So I do think it is a bit of a difference there. And I think companies with massive scale and lots of customers that are seeing many transactions have a have a right to perform decisioning versus companies that might just be putting together a, you know, a vendor platform to allow a workflow manager to be created more of an orchestration approach.


David Fields [00:07:30] Interesting. Yeah. I mean, that’s a helpful explanation. And now in do you think that there is a you mean actually that’s I think that’s the first time I heard the phrase right to perform. Is that a Travis original or is that is that seen elsewhere? I mean.


Travis Jarae [00:07:47] It might be a Travis original. I don’t know. You know, we talk about the right to win all the time, but, you know, it’s not really about winning. We’re talking about can you actually perform these, you know, these actions that you’re claiming that you can do? So I think it may be a term that we need to start using more often.


David Fields [00:08:03] Yeah, no, it’s a good distinction. I like to know.


Travis Jarae [00:08:06] What kind of mood moving along is. Obviously, this is some big bucks here. And like I mentioned, we’re going to see a lot more of it. But, you know, I’ll turn it over to you talking about kind of what we’re seeing with the market, you know, specifically around the venture capital market.


David Fields [00:08:20] Yeah, I think, you know, it’s interesting, you know, thinking back to our comments kind of beginning, we talked about, you know, kind of getting back to work, maybe some different perspectives here. You know, you comments you on how busy everything’s been. I know I’m liminal. On the strategy consulting side, it’s been a big year for you guys, very active, but there’s definitely been a slowdown in VC land. I think, you know, it’s tough to it’s always easier to pass along at a data and actually get something that’s like truly quantifies where where we kind of are in the market given the nature of private markets and just how there’s just not as much disclosure. So this piece caught my eye and it’s by John and who’s a venture capitalist at a firm called Decibel and Kate Clark in the information. And they tried to quantify where they you know, where the market sits as far as accumulated dry powder. And dry powder is really a reference to the committed but uncalled capital that VCs have in their funds. So these are funds that are yet to be deployed or invested, and their point in their analysis shows that we are at record levels of dry powder. Some of that is that’s largely a reflection of the fact that for the last decade, so much return was available in private markets and venture capital markets. That is crazy and bonkers as the market was going and startup fundraising land. Of course, that means that the VC funds themselves are also raising money at a record pace. And so now we’ve had a slowdown. We’ve had a slowdown in the deployment phase of capital, but VCs are sitting on record amounts of capital. And so what this suggests is that at some point the dam is going to break and there is going to be this sort of market reset. And we’re to see this money put to work and we’re gonna see valuations reset. I know at the beginning of today you talked about a company that we think raised that kind of that 40 to 50 times R multiple. You know, at the time, you know, you had probably when that deal was completed, you still had companies like October trading over 20 times sales. So, you know, getting a multiple of twice that in the private markets, not totally unexpected. But now we see that OCT is back sort of in that high single digit, mid to high single digit range. And so what’s that going to suggest for valuations? And so ultimately, will we finally get that reset between buyer and seller of startup equity, where startups are going to need to raise capital and they’re finally going to come to the table and sort of be forced to accept that the market is where the market is. And we’ll finally start to see some some transactions clear. And it’ll be interesting to see where that reset is. I think, you know, in identity land, there’s still a whole bunch of trends that augur well for the industry. We’ve seen cybersecurity, data, privacy, security. These themes have continued to resonate. They’ve seen some investment. We talked about alloy. Alloy obviously raised over the summer. So this is still a strong market that we know is attractive but has attractive underlying fundamentals. But at what price? And I think in the next probably, you know, fourth quarter and and certainly I think the beginning of the new year, I think we’re going to see a lot of deal activity and we finally will get that shake out that we’ve been talking about for a while.


Travis Jarae [00:11:44] Yeah, it makes a lot of sense. And you know, from from your perspective as an investor, do you see this as a as a threat to maybe kind of other investors in the space? Or do you see this as, you know, who should be threatened from this dry powder market correction scenario?


David Fields [00:12:03] I mean, you know, it’s it’s it’s a delicate, you know, and some of it’s a delicate dance, right? Because it will also see. So we’ve seen a slowing already because of market fundamentals in the public markets. And so now what remains to be seen as a company, the the venture capitalists that are most comfortable with their ability to raise their next fund are going to be the investors who are going to be the most aggressive. So I think what we’re going to see is. Is amplification of this sort of sort function in the market where the best investors with the best track records are going to be able to go out and invest very aggressively over the next year, year and a half, because they’re going to know that they can raise another fund. And investors who aren’t as certain are probably going to be much slower to deploy their capital. At least that’s what I would expect. And so I think when you look at ultimately technology investing is disinflationary, right? We’re figuring out how to create more things to make certain goods and services more abundant at cheaper prices. That’s fundamentally what what technology innovation does. So as as kind of rates top out and we worry about inflation, there’s still going to be incredible incentives to invest. And it’s just going to be who who kind of gets to sit at the table and kind of make some of those decisions. And so that’s kind of how how I see things going.


Travis Jarae [00:13:29] Yeah, it makes a lot of sense. And, you know, I think for, you know, as a strategist, you know, looking at this and thinking, hey, there’s there is going to be more money. Right. That’s one that’s the truth here. There’s going to be more money coming into the space. It’s going to be smarter money. Right. I think a lot of people have gotten a lot smarter on this market. And it might it might mean that, you know, that new product expansion of that new product idea, that new market expansion that, you know, companies is counting on for growth, might not get the funds that it needs, but they will get the funds to stay with their with their core product in their core market. And they need to prepare for for slower growth. But they they still will have a chance to to continue to to to survive and to win.


David Fields [00:14:21] Yeah. I mean, I think the you know as we have an increased cost of capital right so just the hurdle rate on investments now higher. And so I think investors particularly in the last six months to even a year, you know, we’ve seen more and more people talking about things like, you know, the, you know, efficiency scores and SAS or or what your burn multipliers and things like that. And so I think it’s more and more incumbent on startups right now specifically to make sure that they’re actually it’s no longer just growth at all costs. It’s now efficient growth is kind of the new mantra. And so I think it’s it’s you’ve really got to be able to prove and quantify things versus just having a pure theory for why something is a good idea. Right. And so I think I think we’ve probably seen some you know, you can point to a few different markets where, you know, instant delivery services or rapid delivery services where we’ve kind of had this race to the bottom of like how how tight can get that delivery window. Was it really worth the money? I don’t know. Whereas now you’re actually going to have to you know, companies, I think, are going to scale when they’ve already proven out that they’re capital efficient before it’s just a big market or there’s a lot of demand there, if that makes sense.


Travis Jarae [00:15:33] Makes a lot of sense. So now very interesting and I think we should definitely keep our eyes on this, but expect to see some of this market correction coming into play here over the next few months. No, thank you for that, Dave. So I’m going to move us forward here to, you know, what to look forward to at Liminal coming up here. So this is really for our members of a lot coming out with our member content. We have our Q3 quarterly briefings as well as our updated Q3 market trends reports. These are obviously our our two and a big look backs on the quarter. So stay tuned for for those. I think we have some really interesting insights in this market right now as well as are updated outside in report on same so one that obviously our members you guys have been asking for us to to dig in to for some time so here we are will will definitely be adding the same outside and report to your research repository shortly. And with that Dave wanted to thank you for your time and really excited for this past September and looking forward to a very interesting and exciting Q4.


David Fields [00:16:44] Absolutely. Great.


Travis Jarae [00:16:46] Thank you.


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