The power of data in private markets 

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Rebecca Thorton: Welcome to another episode of What's the Deal? I'm today's host, Rebecca Thorton. There's been a lot of activity happening in the venture capital market, and J.P. Morgan recently acquired a data company called Aumni. And that's what –we're here to discuss today. I'm delighted to welcome the CEO, Tony Lewis, and our colleague, Mike Elanjian, head of digital private markets for J.P. Morgan. Welcome.

Michael Elanjian: Thanks, Rebecca. Nice to be here.

Tony Lewis: Thanks for having us.

Rebecca Thorton: So Tony, let's start with you. It's safe to say that your career started off in a unique direction, as you were headed down the path of big law. Tell us how you came to co-found Aumni.

Tony Lewis: Well, I did work, for a number of years, in so-called big law. That was Latham & Watkins and then later, Wilson Sonsini, predominantly as an M&A and venture attorney. And a couple of themes emerged while working at each of those institutions, and the appetite for market data related to the investments that our clients were putting to work, continued to grow. And at the firm, you try your best to share information from attorney to attorney, but it's a real struggle. And so, you do your best as an associate, to think about those last five to 10 transactions you just did, to provide market data on any given financial, legal, economic term that our clients were looking to invest across. So, I knew that there was a strong desire for more market data. And also, I worked in venture capital for a while, and it was very clear within this venture institution, that we wanted, as a partnership, to make more data-driven decisions. There was this need in the ecosystem that we identified at Aumni, for accurate, structured data of the legal and economic rights underpinning investments in any private alternative asset. And that's exactly what we set out to build. And to date, Aumni has now analyzed about $3 trillion worth of company investments, and we have this wealth and data pool now, that we can provide these market analytics back to our venture clients, which include about 400 venture institutions today.

Rebecca Thorton: That's a great pivot for us to learn a little bit more about our other partner here. So, Mike, let's move to you. You've spent your time in banks, always working on the next innovative project. Tell us about how that brought you and Tony together.

Michael Elanjian: Yeah, thanks, Rebecca. I've spent my career really investing in building businesses, both externally in third party companies as well as building new initiatives at firms and really running innovation projects at banks. And as J.P. Morgan has been increasing our presence in venture over the last several years, one of the critical pain points that we constantly hear from our clients is just the lack of data in the private markets. And unlike the public sphere where there's an abundance of information available to investors and corporates to benchmark an industry or company, or even get broader market insights in trends, in the private markets, access to that sort of data is either impossible or incredibly difficult to access. So, in that context, we really prioritize trying to find a solution and a partner that could help us shine a light on what's happening in these markets, and that's really what led us to Aumni and Tony.

Rebecca Thorton: What was most compelling about their solution?

Michael Elanjian: The critical thing that we liked about the Aumni offering is that they provide portfolio analytics and solutions to both GPs and LPs, and as a result of that, they can piece together to really give you a sense of aggregate anonymous view of what's actually happening in their space. Because their database, which covers a huge portion of the venture ecosystem, is built on the core underlying legal agreements that underpin the transactions, they can give our clients a trustworthy and reliable view into private market activity, which aligns with how J.P. Morgan wants to do business.

Tony Lewis: To add to that, in Aumni fundraising journey our first price equity financing round, we received two term sheets with different valuations, except for the higher valuation deal had liquidation preference mechanics that paid the investors two times their money back. Whereas the lower valuation term sheet was the standard formulation in the market, which is a 1X, nonparticipating preferred. What that means in practice is that investor gets one times their money back before participating pro rata with the rest of the common stockholders. And so, for us founders, it was really challenging to make that decision with no data on hand, despite the fact that we were very experienced venture attorneys. And our thesis was that if we introduced deal structure early in the history of the company, we thought it was more likely that deal structure would continue to exist throughout the life cycle of our subsequent rounds of financing.

Rebecca Thorton: What do you mean by deal structure? 

Tony Lewis: By deal structure, what I'm talking about are legal levers that impact the financial outcome of all investors, and particularly common stockholders.

Rebecca Thorton: So how would Aumni help with that today?

Tony Lewis: Well, Aumni is compiling this master database to give insights into the legal economic rights, and in particular the concept of deal structure. So this is where the liquidation preference is going, for the most part, to the preferred shareholders and sometimes the most recent preferred shareholder, the latest money in. And if I would have had that data at the time, I think I could have convinced that investor to match that other valuation that the competing institution was offering us, and we ended up going with that investor regardless, at a lower valuation because we thought that they were best for the business. And I found optimizing for your vision the right team and best fit was better than optimizing for valuation. 

Rebecca Thorton: I love that example. And I think it really brings to life the power that data can give you as you make decisions in your business. So maybe we can double-click into the data a bit. We've had some pretty tenuous markets over the last 18 months. Earlier this year, Aumni put out a report on the private markets, that really delves into some of the insights that are possible with your dataset. We all understand it's been a difficult period for venture, but what data does Aumni have to quantify the shift and better understand how businesses are behaving?

Tony Lewis: Yeah, so everyone in our client base is also asking those same questions, "What are you seeing in the market? What's your database showing?" And I would say that we have near realtime performance metrics underlying the database, and that we're ingesting all of this investment data as they're basically being completed in the ecosystem. And so the analytics that we can drive for a client base in the ecosystem is very up to date. And so what we've seen in our database is that valuations really peaked around 4Q '21 or 1Q '22, and those valuations were up almost 100% year over year. I thought I would just share some data points between the peak and now, and what we're seeing in valuation, but also maybe some things that are more unique to Aumni in terms of deal structure. So, at peak, the post-money valuation for a series A company was $80 million. Compare that to the most recent quarter that we just got out of, it's 42 million. Series B, 265 million peak. This recent quarter, down to 115 million post-money. And if I aggregate C+ transactions, the median post-money valuation was $1 billion in Q1 '22, and that dropping all the way down to 398 million this prior quarter. And so, obviously there's been a big valuation reset, and what we're also seeing is an increase in deal structure and down rounds. With down rounds, for example, in Q1 2022, only .4% of the transactions that we ingested into our database had down round applications on the price, meaning that the post-money valuation of that most recent round of financing was lower than its prior round of financing. 

Rebecca Thorton: Based on your experience as a founder who raised $100 million, what challenges are you seeing and what would you counsel other founders who are raising capital in this current market?

Tony Lewis: I think now's a real challenging time for founders. What you have is evaluation peak approximately 18 months ago. It happened to be a time with a lot of deal volume. It also coincides with the median time between financing rounds, between C and A, A and B, and B and C happens to be approximately 18 months as well. And when raising that capital, I bet many companies were budgeting between 24 and 30 months of runway. And so they're right now at that decision time. Do we go to market and raise capital? They know valuations are down and some of them, the reset is 60, 70%. So, the questions that they're asking themselves are do I extend a runway by making further cuts to the team or just raising hiring? Do I do a bridge-round financing, not reset the valuation, but maybe take a valuation haircut and dilution related to that note financing and get enough money in the balance sheet that I think that I can weather the valuation reset? Or do I just do the priced round right now, reset the valuation as something that I can grow into overtime? In my experience, I tend to find that founders can be overly dilutive and sensitive to dilution generally speaking.

Rebecca Thorton:  And what does that mean exactly? 

Tony Lewis: Most important is having a great outcome and if you're performing well and your company's doing well, I find that investors are willing to rally around the founders and the common stockholders to increase pools and take care of those executives as the life cycle of the company gets more mature over time. And so I think that that's most important is to just go about realizing your vision and make sure you have the adequate capital to realize the milestones you're trying to prove before that next round of financing.

Rebecca Thorton: I think that's great advice for our founders that are listening. So, Mike, let's move to you. What's the end state here? How do you see this all coming together, and what's the benefit for the ecosystem?

Michael Elanjian: Yeah, I think what Aumni’s done a wonderful job of, and why we're excited about the acquisition is really providing more transparency and more portfolio analytics and performance reporting solutions to venture capital firms and general partners that invest in companies. I think the other piece that we really wanna do is to extend that to the fund market and so there's plenty of limited partners that are investing in new managers and emerging managers and so providing more transparency to the fund space as well and really aligning the interests across the capital stack between companies reporting up to GPs reporting up to LPs. So I think that remains a really big focus. But the overall end game for us is not just to provide portfolio analytics and reporting solutions and market insights and trends, but how do we pair that directly into a platform that we've been building called Capital Connect, which is really focused on helping companies better raise capital in the earlier markets from investors and helping emerging managers and ECs get better access to some of the institutional LPs to raise their next fund. And again, the more that we can provide market insights and trends to help investors do research, the more that we can help companies and funds, raising capital, get a better sense of what's happening in market standard, the more that we can make that process easier coupled with software and workflow tools along the way. Over time, where I think we see this going is leveraging that data to really provide liquidity solutions to the market to make sure that we have a healthy, vibrant market structure where there's issuance, data analytics, portfolio monitoring, and trading in the private markets. No different than what you see in the healthy public markets.

Rebecca Thorton: It sounds really exciting and I can understand why Aumni was just a valuable complement to what is being built with Capital Connect. I think that's a great place to wrap up. I know I've learned a lot. I wanna thank our colleagues, Tony and Mike, for their time and insights today and to thank our listeners. We hope you'll join us for next week's episode of What's the Deal? Mike, Tony, thanks again.

Michael Elanjian: Thanks for having us.

Tony Lewis: Thank you very much.

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