Ignite VC: The Capital Markets Hack Founders Are Missing with Jonathan David Nelson | Ep279

Jonathan Nelson: Like, we're all product people, we're all engineers, designers, you know, operations people. Inside of startups, it's no longer sexy to have like a former investment banker as part of your fund. So VCs have forgotten, like, how to do financial engineering. We've largely forgotten how to do exits. Everybody's like, you got some of that liquidity, man? Like, I would love. Can you, can you buy a secondary from me, man? I heard that's the thing. You can buy my stock from me. And so, like, Silicon Valley is kind of stuck. We're all just kind of trapped in this liquidity thing. It's taken 14, 15, 15 years now for a company to IPO. So my best performing companies in my venture portfolio, my investors have to wait 15 years for that. Like, that's a lot of crabby investors for a long time.

Brian: Hey, everyone. Welcome back to the Ignite podcast. Today we're thrilled to have Jonathan Nelson on the mic. He spent the first part of his career as an ER and ICU nurse before stumbling into Silicon Valley. That is an odd path, building hackers and founders, which grew from a bar meetup for programmers into one of the largest founder communities on earth, spanning dozens of countries. Over 15 years. In and around Venture, he's advised SEC and on, um, the Jobs act in crowdfunding roles, worked with the White House and immigration as economic growth, and contributed to studies on building tech ecosystems across Latam. Today he runs HF Capital, which he describes as an AI native investment bank focused on IPOs, secondaries and M and A. He's one of the more contrarian voices in the market right now. He thinks the US public markets are broken. Interesting for everyone short of a Decacorn, this will be a great conversation. He's evangelizing the London and European exchanges as a real alternative to Series B. And he's been publicly torching the wave of sketchy anthropic secondary vehicles flooding people's inboxes. He's blunt, he's funny, and he'll disagree with me on air, which is exactly why he's here. What's going on, Jonathan?

Jonathan Nelson: No, I won't be here, Brian. Love it.

Brian: Yeah, I'd love, love to start with your origin story. Uh, what's your background?

Jonathan Nelson: I am a strange kid. Grew up in Latin America. Parents were missionaries, so I was the only white kid at the end of six hours of dirt road in a tiny little village at the ascent of Honduras called Minas d'. Oro. Honduras. I was programming managing Dad's mailing list of 100 people that supported kind of what they were doing. When I was like 7 years old, way back in the early 80s, came to the States and was saying I was going to be a missionary. Dad said, yeah, get a trade first. I was like, great, computer science. Love me some computers. Dad was like, you know, I don't want you playing video games the rest of your life, son. You should be a nurse. Like your mom was a nurse. It was very helpful. When you're in the jungle, it's like, okay, I was fresh off the boat. So I studied being a nurse, did that for a while. Dropped out of seminary, grew a ponytail, worked as an ER trauma nurse for a number of years. I threw my back out and eventually injured out. Went back to school for software engineering. And I heard that you could sell ones and zeros. And I know how to copy and paste. So I was like, I can build an app, sell it for a dollar, copy and paste 5 million times. I'll make $5 million.

Brian: So easy. Where do I sign up? Could I invest?

Jonathan Nelson: How does this work?

Brian: Yeah, I want to invest in that. Yeah.

Jonathan Nelson: Uh, hell. So I moved to the Valley, and I was working a couple miles away from Google's HQ while I was finishing up a software engineering degree online and drove my wife crazy. She kicked me out of the house one night a month to go, uh, to this Hackers and Founders meetup that she helped me organize. And things went viral from there. So, yeah, weird backstory.

Brian: That's so random. And then at some point, you. You. You started Hackers and Founders. What was the impetus to do that?

Jonathan Nelson: Driving my wife crazy, talking about startups all the time. So I'd be like, oh, my gosh, programming language this and nerdy things that. And she was like, honey, I love you, but you got to get out of the house one night a month, for the love of God. You got. Let me help you build your business network, honey. So we started this meetup called Hackers and founders in 2008, and after the economy collapsed, a bunch of people started showing up at the meetup. Like, 2009, we were having a couple hundred people show up at the meetup like, it was my bar night, dude. And we started having it twice a month and then once a week in sf, San Jose, Mountain View, East Bay, just kind of all around. And people started peppering me with. They'd come up to me and say, hey, I'm here for two weeks on my visa and I need to raise $5 million. Uh, where is the money tree in Silicon Valley? I'M like, money tree. They're like, yeah, you go, you shake the money tree. You get a bunch of money in two weeks and then you go home. I'm like, yeah, dude, that's not going to happen. It's gonna take you nine months. And it's hard. It's a brutal brute force kind of thing.

Brian: Fundraising is a chore. Like every, every fund I've had, I'm on fund three. I'm closing it out, probably by time. This episode airs like this month in June. Yeah, well, no, I mean, like it's two years of grind. Every single fund, every single, every single time. And I have good track record. It's just. And the same with founders, it's just the grind. I mean, just to close a round, six to nine months, right?

Jonathan Nelson: It's a, uh, brute force algorithm. It's just you gotta knock on doors, you gotta get the meeting, you gotta do the pitch, you gotta get turn and you know, every 10 or 15 pitches, one might actually convert. So if I need 50 limited partners in my fund, better find 500 limited

Brian: partners to pitch, basically.

Jonathan Nelson: Exactly.

Brian: I remember fund one or fund two was my first real fund. Fund one was like a rolling fund. Fund two is my first traditional fund. Half I was raising when, you know, the sky was falling in late 22. So half of my commits fell out. And I think I, I counted up the nos on that fund there. They were in the thousands for sure. But like, of the people that knew Team Ignite, the syndicate had invested with me, I probably had 1400 no's. Yeah, 1400, yeah, that's a lot.

Jonathan Nelson: And I mean, it's just, it's so inefficient. And that has just always driven me crazy. And literally after the first four to 5,000 conversations about what, what a pain in the ass it is to raise capital, I'm like, dude, I'm the last person that people should be asking, like, how to raise capital. Like, I save lives and wipe ass and I usually wipe a lot more ass than I do saving lives for a living. And I was like, why are you asking?

Brian: And I'm all out of lives to save.

Jonathan Nelson: Exactly. And I was like, how in the world, like, why, why? How does this work? And the weird thing about growing up in Central America is I grew up in a currency crisis in Costa Rica. Like, the exchange rate went from eight to one to 160 to one in like eight years. And so you just think about money and like, how does it work and what's the exchange rate and how does it you know, and just as a kid growing up in that, you just kind of fundamentally think about money differently. And so I just started saying, you know, what, how does money work in Silicon Valley? Like, was very helpful for me as a trauma nurse to know how blood flowed throughout the human body. If someone gets stabbed and you're leaking, where do I put pressure, you know, here or here? So how does capital flow throughout the ecosystem of Silicon Valley? And I was completely surprised when I found out that my nurse's pension got invested into entrepreneurs through a fund of funds, through a venture fund. And when I learned that the fund of funds took 1% times 10 years, 10%, and the venture fund took 2% times 10 years, 20%. So it was $0.70 on the dollar of my nurse's pension that got deployed. Yeah, yeah. And I'm like, this is inefficient, like, kind of silly. And like, on the way back, like, I sell my company. How does that work? Well, the venture fund takes a 20% profit share and the fund of funds takes a 15%, and then 65 cents on the dollar ends up in the hands of the nurse. I' like, well, this is an inefficient capital delivery mechanism, man. Like, we should engineer a new system and, you know, should do this and that and the other thing. And, you know, the engineer inside of me just started saying, you know, the system is broken. Must fit. The nurse inside of me saying, you know, the ecosystem is sick. Must heal. And that kind of led me on this long, torturous journey. And now I'm starting an investment bank, man, because this process, this process shall not stand, man.

Brian: And I. And I love this, and I want to get to HF Capital, but there's a couple more things I want to talk about because you've done a couple really interesting things. You, you actually advised the sec, as I mentioned in the intro, on the Jobs act on, uh, title three crowdfunding, almost, you know, a little over 10 years ago.

Jonathan Nelson: Yep.

Brian: This was supposed to democratize startup capital. Did it work and. Or did it just produce a lot more noise in the system?

Jonathan Nelson: It worked for a certain category of companies. It works really well for real estate because real estate offers dividends. You know, I.

Brian: There's some distributions coming in every quarter, and. Yeah.

Jonathan Nelson: Uh, and so investors have a way of actually getting some money back. And it's pretty easy to fractionalize that. You know, I get a million bucks in rent on an annual basis, and I have a thousand investors. Everybody gets, you know, a thousand bucks a year. And so that's actually works. Well, the problem is, is that how if they buy stock in a crowdfunding, when do they get to resell that stock at a profit? Well, the two ways that you do that are through an M and A and through an IPO. 90% of the world's tech M&A happens within 60 miles of my front door here in San Jose, California and it's all very clubby. Who, who do I know who knows someone at uh, Google Corporate Development who might actually be interested in buying my engineering team? Because I'm out of money. And so if I'm a small business owner in Minneapolis and I want to build, I don't know, a barber shop, I would, I need to fund money, raise money to actually grow my barbershop. I should be able to crowdfund for my custom. But how are they ever going to be able to sell that stock? They're not. Realistically. So that's like the bug in the system is this like exit piece. And our stock market in the United States is optimized for massive hedge funds and high frequency traders. And so they are not optimized for the SEC's third mandate, which is capital formation. And they pretty much only work for like SpaceX and anthropic and massive multibillion dollar valuation companies. If you IPO in the United States at $100 million, $300 million valuation, like you're kind of screwed.

Brian: Yeah, why is that? Why are you kind of screwed?

Jonathan Nelson: There a couple of reasons. With a small cap IPO in the United States, you run a couple of risks. One is if you get a hedge fund that's an activist, they buy 5 million bucks of your stock or 5% of the company, they can demand a board seat, then they can start arguing for you to do stuff. Hedge funds can short your stock and in the United States you don't actually have to borrow the stock. It's kind of a trust me bro shorts short system. Like I'm going to short the stock and then they can tweet about it because you can talk to your own book. And if a large hedge Fund starts shorting $100 million stock, as an entrepreneur, like I'm screwed. And so you get these massive volatility kind of swings. How do I, If I'm a $500 million, if I'm a billion dollar company in the United states, in the US stock markets, I'm like number 4,000 on the S&P 5,000 on the Russell 5000 index.

Brian: Right? Right. Billion dollar valuation.

Jonathan Nelson: How Do I compete with all the noise and all of the media and all of the earned media that SpaceX is getting or Anthropic is getting? Like, I can open AI, which is kind of the.

Brian: Yeah.

Jonathan Nelson: Or, you know, top 20 tech cerebras

Brian: who just IPO'd recently.

Jonathan Nelson: Yeah. Uh, how the hell do I compete with them? I don't. So how do I convince an investment banking analyst to cover my stock and then they market and sell that analyst report to like institutional investors? It's just not going to happen. So below $5 billion in market cap in the United States, the vast majority of those companies are just orphaned. They get no analyst coverage. Five billion docs is what a medium. Five billion bucks is what? Five billion, excuse me, is what a medium sized hedge fund. So there's all of these risks that are kind of built into the United States stock market system. It's just too big and it's been too successful.

Brian: Fast forward now to HF Capital, the AI native investment bank that you're starting. What was the origin story there?

Jonathan Nelson: So I was thinking we could tokenize stock. If I could build a global digital stock certificate that could trade on blockchain with, you know, could it be legal in 185 different legal jurisdictions around the globe and not get me thrown in jail? Like you can do that, but you have to IPO or do the reporting and compliance to actually be able to let retail investors, you know, the poorest 97% of the country, to actually buy that stock legally per the SEC's rules. So I was going to do that, but yet you need tools to streamline and automate that process. Publicly traded quote unquote venture fund that would have tokens instead of limited partner shares. I got the sec, the police inside of the SEC to verbally sign off. I was like, dude, will you, will you write something so I can show it to like investors? They're like, yeah, we don't do that. And so rich people in Silicon Valley had no idea why I would ever want to do this. Like, why is it needed? We don't need. We don't need it. Like there's tons of exits. People outside of Silicon Valley didn't believe A and blockchain and B that I could ever do this without going to jail. So it struggled. Somebody at the London Stock Exchange. I bumped into Chris Mayo at the London Stock Exchange and they started talking about how their IPO rules are vastly different. And I was like, no. And it's common in the UK. If I'm doing 10, 20, 30 million dollars a year in revenue. Like I can IPO in a London exchange. And all of my concerns are like, well, what about hedge funds? Well, it's illegal to short stock like you guys do in the United States and the uk. You actually have to borrow the stock from someone and sell it. And the people that invest in These small cap IPOs are like long only. I'm like, okay, well how, how do I get analyst coverage? Well, you get a sponsor bank, you get a chaperone and you're guaranteed analyst coverage. I'm like, well, well what about volatility? Like, uh, well, you know. No, you have, uh, like, well, how do I, if I have to trade 10% of my stock, like one of my investors wants out, how do we do that said, well, because you get a sponsor bank, you get a market maker and they will pick up the phone and make some calls for you. And you might not sell it immediately, but you can sell it over the next three to six months without tanking the stock. I was like, how the hell have I never heard about this? Like, how do you screw me? They're like, well, we're the London Stock Exchange, dude. We can't really screw you. So I was insanely curious about this. Very suspicious. And so, being the engineer, I needed to know how the system works. So I've talked to 28 stock exchanges now looking at different listing regimes around the globe. And by God, they have the best, like the best engineered IPO product. They struggle marketing it because you're a 400 year old brand and why would we need to market, you know, the London Stock Exchange? And there's just kind of some legacy stuff there. The listing seems fantastic, but uh, it's, you know, it is what it is.

Brian: So you scout, you scoured the market for all the different stock exchanges and the best, uh, the best one especially for it sounds like small cap, mid cap that you found was London Stock Exchange. Maybe you could talk a little bit about some of the things they do. You talked about the sponsored bank, which is interesting. So you always have this market maker and analyst coverage. You literally have to put up collateral on a short, um, which probably radically reduces the actual the shorting of a stock, right? Because you got to put up some money to do that. What else did you find with the LLC that you liked?

Jonathan Nelson: We will have more shareholder lawsuits in the next six months in the United States than London has had in the last 10 years. Because in the UK, the loser has to pay for the lawsuit, has to pay the legal Costs for the other side, much less litigious. In the United States, the SEC says, hey, if you're going to be public, you have to fill out all of these forms. And the lawyers who are really good at filling out those forms charge you about two grand an hour.

Brian: Like the S1 and the uh, the

Jonathan Nelson: S1 registration statement, K forms, the Q forms, all of that stuff if I need to. Well, if I want to raise more money, I need to file either an S1 or an S3. Each one of these S1 forms, it's like 10001500 hours of legal time. At 2000 bucks an hour, you're looking at like 1 to 3 million bucks. Crazy expensive. And so just maintaining a listing in the United States, you're looking at anywhere between 1 to 3 million dollars to IPO, you're looking at anywhere between 5 to like 60 million bucks. In the UK you get ah, a sponsor bank, you hire a regulator like it's a licensed physician. It's called a nominated advisor. They do most of, the, most of the form filling out for you. They make sure that you're doing things okay. Their lawyers cost about 20% of what our institution, what our public markets lawyers do here, they're accountants. On this lower end of the market they have a bunch of boutique accountants, boutique law firms that do this and they're much cheaper. So all in to IPO, instead of 5 to 60 million bucks, you're talking about 1 to 4. Your annual maintenance costs are probably about 350, $450,000. And it's just, it's a completely different kind of regulatory mindset. And venture capital was kind of a latecomer to the UK and so companies just got less used to raising money on the London Stock Exchange. Like that's how companies in the UK and Europe have grown for 400 years.

Brian: So why don't more companies do this? What's the, what's the friction there where everybody wants to IPO on the NASDAQ or New York Stock Exchange versus the lse?

Jonathan Nelson: US has much better marketing, much better financial press. You know, like when was the last IPO in London that you actually heard about? Or Australia or Europe or Canada? I know all you hear about is teslanthropic, teslanthropic US exchanges. And so the US capital markets press doesn't cover them. Founders. We have 20 years worth of venture capitalists in Silicon Valley, probably more like 25 that don't understand capital markets. Like we're all product people, we're all engineers, designers, operations People inside of startups, it's no longer sexy to have like a former investment banker as part of your fund. So VCs have forgotten like how to do financial engineering. We've largely forgotten how to do exits. Like, everybody's like, you got some of that liquidity, man? Like I would love. Can you, can you buy a secondary from me, man? I heard that's the thing. You can buy my stock from me. And so like Silicon Valley is kind of stuck. We're all just kind of trapped in this liquidity thing. It's taken 14, 15 years now for a company to IPO. So my best performing companies in my venture portfolio, my investors have to wait 15 years for that. Like, that's a lot of crabby investors for a long time. And so. But we don't know anything else, you know, and hear this punk guy who, you know, has got a ponytail and goes around saying, you know, trust me, bro, the London Stock Exchange has a better system. And the people in town are like, are you crazy? Are you a communist? Like, are you? Well, and I'm like, I'm a hacker, dude. Like, this is a hack.

Brian: At what point would a startup want to consider IPOing versus raising a, uh, series? I don't know, D, E, F, whatever.

Jonathan Nelson: I'm looking for companies in like the 50 and 50 range. 50 million bucks a year in revenue, 50% year over year growth, like growing 50% year over year, close to profitable. That is not a venture fundable company.

Brian: Right.

Jonathan Nelson: Like Sequoia will not write you a check.

Brian: No. If you just went from 25 to 50 mil, or um, let's call it, um, I guess that would be 35 million of ARR to 50, that'd be roughly 50% growth. And you're roughly EBITDA, you know, cash flow positive. You're just not venture backable anymore at that scale. I mean you might be able to find, uh, a VC firm to, to, to write you a check.

Jonathan Nelson: But yeah, you give me a tech stock that's growing profitably 50% year over year, I will YOLO that bitch every day of the month. Like I'm in, like, are you kidding me? And I get audited financials and I get quarterly reporting and you know, financial transparency. Yeah. Like these should be public stocks. They should not be private companies, but the private equity industry, the venture capital industry and this, everybody in the United States is like, no, no, no, no, don't ipo, It's a nightmare. Don't ipo, it's a nightmare. It's a nightmare. So companies don't. But I think it's a great hack, dude. The benefits to the founder are. It's a lot less. My due diligence essentially is done in my IPO process in London. It's done. I report financially, like everything about me is transparent. So if I want to raise a follow on round, I talk to my sponsor bank, say, hey, dude, I want to acquire this company or I want to open up this other market, blah, blah, blah. Do you think I could actually raise another 50 million bucks? Your sponsor bank will say, let me make some calls. And they'll come back and say, yeah, we can do the deal like two, three days later, a week tops. You close your check. And as a founder, I didn't have to do that fundraising. Like my investment bank, they're an outsourced sales team. So when I heard this, I'm um, like, wait, wait, wait. I can raise follow on rounds in days. Like if I want to acquire company, I can just issue more stock and the. I can just acquire another company in stock. I can start rolling up other companies. I'm like, why isn't everybody doing this? How do you screw me? I, I think it's just, it's a marketing thing. Yeah, People just don't understand it. They're terrified of it. Boards are terrified of it. You know, VCs who are on the boards are like, I don't want to screw up like the best company in my portfolio. Like, no, let's just, let's try to find a private equity fund we can sell you to.

Brian: That's interesting. So why would a company not do this? So like kind of take the steel man the other side. So hey, I'm a, I'm a, I'm a founder. Maybe I'm growing faster than the 50%. Right. So, um, I'm more venture backable. That would be one reason. We kind of covered that. But are there any other reasons why you wouldn't consider, Consider this.

Jonathan Nelson: As a founder, I no longer control my stock price. So as a founder, when I want to sell my stock, I go out and fundraise. And if I no longer say this is my valuation and I don't sell, if they want to sell at a much lower price, like I have that choice. As a publicly traded company, you don't get that liberty. And so something happens to the stock market, a war happens in the Middle east, my share price drops. AI starts to happen. I'm a SaaS company. People think, oh my gosh, I'm going to get killed. You know, My share price drops. Like there are things out of your control that affect your share price, and that sucks. The other side of that is I never have, like, unhappy investors, because if my investors are unhappy, they sell my stock. If they believe in me, they own my stock. So it's a different flip. It's a different switch that you have to flip. You can't talk as much about the internals of your company. Like, it's more regulated. You got to be careful. Like, you can't do insider trading. You should probably hire an investor relations and PR firm. Like that should become, uh, you know, you no longer just talk to VCs and talk to, you know, build your company. You're still talking to public investors, but you're generally talking to them through the press. So that's kind of a different flip. If I'm nerdy, that's hard, right? And honestly, like, I did work with a company, took them to ipo Ze. After a lot of work, the board just decided to launch their own SPAC in the United States. And a SPAC is like a, uh, clean company that doesn't have any operations.

Brian: Explain what, uh, a SPAC means. Like, what's that? It sounds like an acronym for people who don't know what that is.

Jonathan Nelson: It's a total acronym. So it's a special purpose acquisition company. The only purpose of this company is to one ipo. It's just, it's a paper. It's an on paper company. It's a shell company. You convince an investment bank to let you take it public. They convince investors to put money in it. And then my job as the owner of the SPAC is I go around and I look for another company to acquire. It's a special purpose acquisition company. So when I see a company that I want to acquire, I acquire them with stock. The SPAC investors can either sell the stock, sell their own stock in the spac, or they can roll it over into the new company. There are some quirks with how we do SPACs in the United States that it's very easy to SPAC at a $300 million valuation. All of the investors in the original SPAC Ghost. And now I'm trading at a 2.5 million dollar valuation. And that's what happened with the company that I worked with because the board decided to launch their own SPAC because it was sexier. It's 23, 24. Everybody's doing this. We know how to manage the risks, blah, blah, blah. I'm like, dude, it's a bad idea. It's a bad idea. It's a bad idea. You should just IPO and London instead of, uh, no one's ever done this before. Like, okay, and now I'm like, told you so. Love ya. And so basically they put a bunch

Brian: of money into the spac, but they couldn't take that money in stock fast enough to acquire the company, the target company, and it lost all its value.

Jonathan Nelson: The SPAC had 60 million bucks in it. Investors had put money into the SPAC, they get warrants. So if the SPAC acquisition goes well, they can buy more stock at a discount. If it doesn't go well, if they don't like the acquisition, they can just sell. And so there's all of these incentives for people to actually buy into the shell and to withdraw, uh, their money after the acquisition is complete. So that happens all the time. So the spac, this is why I

Brian: hear in the news all these SPACs like collapsing in value so fast.

Jonathan Nelson: So what happens is the SPAC does the acquisition. The other company becomes public through this reverse merger process. It's financial engineering. All of a sudden all the investors are like, bail, everybody sell. And the share price ends up just tanking. It's pretty normal for a SPAC to drop 85, 90% of its value in the first year.

Brian: Wow. And is, uh, that because they don't have the same lockup restrictions as regular

Jonathan Nelson: IPOs, or it's that it's kind of a way around SEC rules because the company that IPO'd is, doesn't have any operations. So their filings are very cheap. When they acquire another company now the company has to build all of that. They haven't done this before. They have to build this internal muscle. They have to figure out how to do it. They're probably not good at public reporting yet. And the investors had an incentive, a uh, big financial incentive to have the acquisition and then sell their stock. And so it's, SPACs are stacked against the company that gets acquired.

Brian: And it's, let's say I'm m a startup and I, I have 50 million of revenue. So basically I can go out, probably can't raise 50 million on, I don't know, call 250. Right. Because I'm only growing 50% a year. Maybe I can, I can raise, I don't know, 10 on 50 million revenue. Growing 50%. What do you think that valuation would be in venture? It's probably 150, probably 3x of revenue, something like that. So I can go raise maybe 15 on 150. Sell 10% of the company, maybe 30 on 150. What would be kind of the terms on the London Stock Exchange IPO process that you think you could get? Are they better?

Jonathan Nelson: Typically, if you are raising privately at that stage, I am probably selling what's called liquidation preferences. That investor is probably getting a lot of insurance.

Brian: Yeah. It kind of messes up people like me earlier on the cap table right now because now they have 2x liqpref. Maybe you can explain what that is for people listening and haven't heard that before.

Jonathan Nelson: So again, it's another bit of financial engineering. A, uh, liquidation preference is when a company gets liquidated or exit, I am preferred. I get a preference. And how much money do I get back before anybody else gets that money back? So if I have a 2x liquidation preference, I invest 10 million bucks into this company. When this company iPodOS, the first $20 million in liquidity comes back to me because I have a liquid, liquid.

Brian: I have a 2x liquid pref. Yeah.

Jonathan Nelson: And so I get 2x my money back. And everybody else who's lower did a 1x liquidation preference because we're founder friendly and we want to be in the.

Brian: And we were earlier stage and you know, the company was growing 5x back then when we invested and.

Jonathan Nelson: Exactly. And so the early investors end up getting screwed. The founders end up getting screwed.

Brian: Right. Let's say the IPO for. I don't know, let's say it's A or IP or they exit, they get acquired by PE firm for a hundred million.

Jonathan Nelson: Uh-huh.

Brian: So the first 20 million of proceeds is going back to that late stage 2x lick pref investor. Now there's 80 million left over for all everybody else.

Jonathan Nelson: Yep.

Brian: But the. It depends if it's participating or non participating. Maybe explain that as well.

Jonathan Nelson: So participating preferred is I get 2x and Zen, I get 10% of the rest. Like I bought 10% of the company. The first 2x I come and then the participation is I participate the same as everybody else does.

Brian: Now I still get 10% of the

Jonathan Nelson: 80 million, so I get another 8 million.

Brian: Wow.

Jonathan Nelson: So I get $28 million, uh, for my $10 million investment on, uh, my $10 million investment. It's a great investment.

Brian: Right. That's a little 3x. And if you just invested two, three, four years ago, your LPs are pretty happy.

Jonathan Nelson: Absolutely. And so from like an asset manager perspective, it's brilliant. It's not founder friendly. Founders are almost always very optimistic about their companies. And, uh, if they're up against the wall though. They got to do what they got to do to keep the company going. And so they will take bad terms. If I IPO that company, everything. My whole cap table converts to preferred stock, converts to common stock. So I sell common stock. That 2s liquidation preference. VC or PE firm probably bought a board seat as well. And they're going to start putting the thumb screws to me to do whatever is best.

Brian: No, they'd rather see the acquisition. But if you ipo, my understanding is all the liqu pref gets like crammed down to common. So you bought 10% of the company. You wrote a $10 million check out 100 million. You're just going to get 10% of that IPO, whatever that is, versus like an acquisition.

Jonathan Nelson: Mhm.

Brian: Now the acquisition cascades down the press stack.

Jonathan Nelson: Hm.

Brian: That's why the VCs, the late stage VCs will steer a company towards an acquisition. They'd rather see their buddy out at the PE firm by the company. Because now they're gonna. They're gonna stand to 3x instead of 2x.

Jonathan Nelson: And chances are the guy, the buddy at the PE company was probably a limited partner in my fund. I mean, that's just the game. You can't make the players, you gotta. Don't hate the players. Hate the game. Yep.

Brian: Don't hate the players. Hate the game. Exactly.

Jonathan Nelson: But.

Brian: And here comes Jonathan with, with an idea. Right. To the founders. And so the founders bought in. This is. This sounds great. I'm gonna get more money as a founder. Right. All my employees and myself and my, my co founders.

Jonathan Nelson: Um.

Brian: And now I gotta go sell this to the board. And that, that's. Therein lies the friction right there.

Jonathan Nelson: Yes. And board members are like, why have I never heard about this? Same reaction I had. How do you screw me? Like, what's the downside? No, like, SPACs were creative. That was a hack. And that went really, really wrong. And you know, there are risks. You know, what if I can't sell my stock? What if it's a down market? What if my industry isn't sexy anymore? You still have the same risks of that in the private market, but you understand how to, you know what you're getting into.

Brian: There's bit of like a jumping off the cliff with the ipo, right?

Jonathan Nelson: Yeah.

Brian: Because now I'm m putting it out.

Jonathan Nelson: Fundamentally changing how your company runs.

Brian: Right? Yeah. And then there's a cost. Right. What does it cost to do another, another raise privately at that late stage. Let's, let's call it the $50 million revenue company growing 50% a year. And I'm going to go raise another, another 10 to 20 million versus IPO. Is there a cost savings there?

Jonathan Nelson: Privately depends on how much you value your time. If it's in a private market and if you're taking a flat round or a down round, you're probably looking for those investors for 12 to 18 months and your company's growth is going to stall. You know, blah, blah, blah. That's. It's the time value. I then find an investor. I do diligence. I am chasing. I'm selling my stock instead of selling my product. That is what it is. If I ipo, I do diligence for once and for all, and then I maintain it. And it's. I as an engineer, inside of me, I think of capital markets, stock markets is a capital API. As long as I comply with these rules, these are my API keys. I can plug into the capital market who have been created to get capital to the companies that need it, when they need it. And generally how.

Brian: This is my swagger doc for the.

Jonathan Nelson: Yeah, and so, you know, engineers kind of understand the API, API in the capital markets. But I'm probably the only person that talks about it that way. And so, you know, it's been a hard sell, frankly. I probably pitched three 400 VCs, founders boards. I had a handful kind of bite and the boards stopped them all. So next step is I'm probably going to raise a single, uh, purpose growth fund where I invest in the company. I take a board seat on the condition that I walk the company through the IPO process.

Brian: Oh, that's interesting. Now you're on the board and you can kind of have a little bit more sway.

Jonathan Nelson: And I have skin in the game, right? And the founder sees it not as Jonathan saying, trust me, bro, you should totally IPO here. It'll be awesome. Um, oh, and by the way, you'll have to pay me for the privilege. Two, I'm buying your stock, I'm putting my capital at risk, and we will do this together. I'm on your board, so I can't really run away after the IPO like I got to. So that's the direction that I'm heading. But this entire process, like, dude, there's probably only 10 or 15,000 people in the entire world that really understand IPOs. And, and it's all driven by email and Excel. And there's so much that can be streamlined and smoothed out with like an AI, a prospectus, you have access to all the prospectuses of every public company for the last 40 years. You can train an AI on that. You can generate it and have a lawyer just supervise it, double check it. Human in the middle. All my compliance like that should be AI. Gotta have a human in the middle to be sure you're not hallucinating. You should be able to have an AI map the universe of public investors and IPOs, because that's public. So we should be able to know who to talk to for what kind of company and when. There's all sorts of things that can be automated. And I'm like, why isn't anybody else doing this? Out of those 10 or 15,000 people, I'm probably one of like a handful of product guys. So that's why I'm building my 8i native investment bank.

Brian: Fascinating. So why not build, I mean, I'm sure you thought about this.

Jonathan Nelson: Uh-huh.

Brian: Why not build the tools and just sell them to the investment bank versus become the investment bank yourself? Sure.

Jonathan Nelson: You know, it's SaaS. I can sell you a SaaS product and that's great. I get monthly recurring revenue or I can sell you a SaaS product and I can use it myself and I can charge a commission. SaaS plus.

Brian: And I think your model is interesting because I think what's happening, and I see it in the early stage because we invest pre seed and seed. Right. We do some late stage secondary stuff which we can get into, but for the most part it's pre seed and seed. Right. And I see more startups being created than ever, getting more traction than ever. But there's also this. There's higher highs like the anthropics and OpenAI's and et cetera. But I think there's also this like fatter tail of outcomes.

Jonathan Nelson: Yes.

Brian: That are going to need more options, Right?

Jonathan Nelson: Absolutely. And it's getting. There are fewer and fewer companies IPOing. It's taking a lot longer. I, having been at hackers and founders for years, in 2008, 2009, I was probably the tip of the spear and I was like, y' all need to be ready. There's going to be an order of magnitude more founders created now that I have stripe and now that I have access to open source and now that

Brian: I have AWS and cloud. Yep.

Jonathan Nelson: AI, there's going to be another order of magnitude or two more startups. They're going to be smaller by definition and ventures kind of scaling, but it's probably four or five years behind. Investment banking is 15 years behind the ball on this. Like nobody that I've come across. Well, there's actually a YC company that's focusing on AI and M and A bank. They have like an M, an engineer and an M. M and A. I saw that investment banker kind of working side by side. Fantastic. But like there's Silicon Valley doesn't understand this. This is like a New York thing. This is like a London thing.

Brian: Yeah. So you've also uh, through practical vc, worked on secondary side. So these are LPGP interests and, and funds. Tell us more about that.

Jonathan Nelson: So after the last IPO that I worked on, 2002, 22, 23, um, I got a little burnt, needed to take a break. Um, friend of mine, Dave McClure said hey, I'm building a secondaries fund. Could you help me buy some secondaries in Latin America? You're from there, you've invested down there for years. I'm like, yeah, sure, what do you want? He's like, I want one investment. Like, okay, when? Six months. He ended up liking the discounts and the quality of this, the quality of the companies that he was buying into that. I think it ended up being like 15% of his fund. And I, number two, just because he is a value growth buyer. So he looks for the best value in the company with the strongest financials. And in Latin America these companies, like there's two funds that raise, that do growth investing down there and if they pass, you're kind of screwed. And so these companies just sell and sell and sell and they have to be profitable. And so this company's doing two, $300 million a year in revenue, growing 80% year over year with a 10% profit margin. Dude. And where are they going to IPO? Mexico? No, United States. Not for another five years. So we were one of the only, there's a couple more now, but we were the only buyers of secondaries in the region. And it's a great business, great fund. I mean tiny, tiny LP in one of his funds and I'm like thrilled. It's going to do great. And so, but I wanted to kind of throw out my own shingle into the I banking thing. And so that's kind of what I'm doing. But secondary's market is now as large as the primary market, the secondaries. Do people in your audience understand what a secondary is?

Brian: Is that you can explain it for people who might be listening. Um, don't understand what that is.

Jonathan Nelson: Yeah, so it's a New York financial engineering term. So the primary investment is when the company itself sells stock to investors and the money that the investors invest go into the company company, that's the primary investment. Any kind of secondary sale is when investors sell that stock between themselves. Investors sell to each other. And so you're buying second hand stock, so it's a secondary sale. And so right now there is a very quickly growing market for buying and selling secondaries, I. E. Everybody wants to buy a little bit of anthropic. Oh my gosh. Oh my gosh. Oh my God. Do you have any anthropic? Do you have any.

Brian: Oh man. I get emailed every day.

Jonathan Nelson: Exactly.

Brian: Yep.

Jonathan Nelson: I get like five people a week asking me if I have access to anthropic because I'm in Silicon Valley. And I'm like, yeah, uh, you don't want that because it's going to be scammy by the time it's offered to you.

Brian: Yeah, uh, I just saw one today. It was uh, 1.3 trillion. So that's like literally almost 50% over the latest valuation.

Jonathan Nelson: And was it through a multi layer spv? Yep, they all are. And so what happened, how that works is I can actually buy like 50 million bucks of anthropic stock from one of the entrepreneurs. Well, I can't buy the stock. I can write a contract to buy the stock in the future at a price that's a forward contract.

Brian: That's different.

Jonathan Nelson: But uh, it's a forward contract. I put that contract into a special purpose vehicle, an spv, which is just a shell company that holds a contract. And then I can sell pieces of that SPV to other investors who are like, ooh, I'm going to create my own SPV out of this. And so I'm going to buy chunks of this SPV and then I'm going to create my own SPV and I'm going to go and find other investors. So it's like this group of Russian nested dolls where you have an SPV that owns a part of an SPV that owns a part of an SPV that owns a part of an SPV that owns, you know, a uh, forward contract on stock options. And if you actually look at where those SPVs are incorporated, you know, you might catch one in Panama, you might catch one in the Cayman Islands. A lot of these tend to be sketchy.

Brian: Yeah, you gotta, you gotta be careful. And we've done a lot of these at Team Ignite and we're always make sure there's, there's a custody of like

Jonathan Nelson: uh, shares and the due Diligence because

Brian: you can end up in these. Yeah. Uh, forward contracts or like. Yeah, it's like multiple shells through all kinds of Caribbean islands.

Jonathan Nelson: Yeah.

Brian: So yeah, you gotta be careful there.

Jonathan Nelson: Yep, absolutely. But it's. The secondaries market is as big as the primary market in venture capital right now.

Brian: That's crazy. But a lot of times the companies themselves have Rofer. Right.

Jonathan Nelson: So one of the couple of challenges. One is according to SEC rules I can't have. It's either 2,000 or 5,000 shareholders before I actually have to report like a publicly traded company before I have to fill out that awful uh, S1 registration statement. So as a private company, I need to control who's owning my shares. And if I have a bunch of people selling little pieces, parts of my company all over the place, like that's a regulatory danger for me. And if there's scammers selling this stuff or shady or various grades of, you know, various shades of gray, I'm taking the reputational hit on the value of my stock. I'm no longer controlling the value of the stock. There's a market kind of, you know, I, I'm raising money at a 900 million dollar 900 billion valuation. That is anthropic. Someone offers you to sell the stock at a $1.4 trillion valuation. 1.3 on one hand. That's nice because then I can actually go back to my primary investors and say, oh look, on the secondary market my stock is 1.3. You're getting it from easily 900 billion. But the company wants to control it. So they have these rights of first refusal written into their incorporation. Whereas they get to buy the stock first before anybody else actually gets to buy it before you sell it to anybody else. So you usually need to have the board to buy in to selling the secondary. If it's actually secondary shares.

Brian: Right.

Jonathan Nelson: You generally need board approval for that.

Brian: Ah, that's what a lot of people don't realize is if you are going to buy the shares on the secondary market and actually transfer the shares.

Jonathan Nelson: Yes.

Brian: The company needs to approve and most likely a hot company like Anthropic will not approve. They'll say no, we're going to buy those shares.

Jonathan Nelson: Correct.

Brian: Yeah. Let's talk about the future. Like what do you, what are you excited about over the next, you know, five or 10 years, as you kind of look at this, these categories, developing this IPO market, hopefully, uh, taking off your.

Jonathan Nelson: Mhm.

Brian: AI driven investment bank. Taking off. What are you, what are you excited about?

Jonathan Nelson: I mean, I'M excited about the tools that I'm building internally. I have been agenetically engineering as opposed to vibe coding. I have been vibe coding ton of internal tools which have been like truly giving me like superpowers. Like I had a massive network before because I ran hackers and founders. Like the tools that I'm actually building with AI and putting that in AI and connected to other different APIs. I feel like I have like Jarvis for fundraising right now and I'm going to have Jarvis for IPOs and I'm going to have like Jarvis M and A as well. I will probably have Jarvis for secondaries. And so that has been mind blowing as to how much I've been able to build and a short amount of time and how much leverage I think that's going to give me in the future.

Brian: Do you think everything in the future is like an L1, L2 blockchain tokenized stock market? Do you feel like we get there

Jonathan Nelson: at some point in blockchain, every asset that can be tokenized will be tokenized eventually. Eventually. In the United States you have regulatory capture and you have a hundred trillion dollar banking sector that has a lot of vested interest in controlling that whole process.

Brian: Right.

Jonathan Nelson: The future of uh, blockchain I have said for years, is building new capital markets, infrastructure, payments infrastructure, stock settlement, real estate transactions, loans, bonds, all of that is going to be on chain at some point in time and it's probably going to be emerging markets that are starting to leapfrog the United States in some of these technologies.

Brian: Yeah.

Jonathan Nelson: So like Venezuela, Argentina, you know, the economies are terrible. They Venezuela, half of the, half of the, half of the country's economy runs on like crypto.

Brian: Right. On stablecoins and Right.

Jonathan Nelson: It's, it's not a micropayment, it's just how you pay for things. East Africa, almost all of Kenya's economy is built on a currency that's based on cell phone minutes.

Brian: Wow.

Jonathan Nelson: So you can, it's called M Pesa. Uh, and Vodafone accidentally created it because you could transfer minutes to each other and you could sell the minutes and people just started using minutes to pay for things and it's now like East Africa. M Pesa is like the euro for large stocks of East Africa. I can sell Vodafone cell phone minutes and pay for things like on feature phones. Like that in my mind is leapfrogging what's happening in the United States. I'm much more excited about what's happening in emerging markets than I am in the Us. You know, I love me some Stanford friends, but helping a bunch of rich white guys get richer, you know, yeah, sure, that's nice. You know, I grew up in Latin America. Helping Latin Americans have access to the same capital markets tools as the gringos have in the United States or East Africa. Like the impact of that. Yeah, uh, is explicit.

Brian: Why hasn't like, like a uh, uh, Mark Zuckerberg level founder just said, nope, if you want to buy into my company, it's like, here's the, here's the token. Why isn't anybody enforce that? Or has any well known unicorn founders done that yet? Or Decacorn founders said, nope, we're completely blockchain if you want to buy our company. Uh, here it is, here's the token. It's freely tradable. You can buy in anytime, you can sell anytime. Why has anybody done that in?

Jonathan Nelson: The ICO craze was probably 2017, so we're only nine years out. There is a crypto company and I'm spacing on the name. They're actually going to be IPOing it like uh, they're doing like 3, 400 million dollars a year in value in valuation. Their, basically their equity has been the tokens that they issue, but it's different than their stock. And so you know, they haven't really needed to sell stock because they sold tokens along with their equity at the same time. They will be public probably in the next 24 months. They're an Asian company. A lot of crypto companies have issued, you know, Binance, issued the Binance coin. All of these crypto companies haven't needed, they've sold a product which has been their blockchain tokens as opposed to selling their stock. And so they haven't really needed to sell their stock. But yes, bonds need to be on the blockchain. Um, there's so many more efficiencies. If you can get the blockchain to actually operate fast enough to actually all of these assets are essentially going to be on chain at some point. It'll take another 10 years.

Brian: It's amazing. I learned so much about the IPO process. Where can the founders and VCs, uh, and anybody interested get in touch with you?

Jonathan Nelson: Yeah, no, absolutely. Email me JF Capital. And I'm pretty active on LinkedIn.

Brian: So.

Jonathan Nelson: Jonathan Nelson at LinkedIn. Um, happy to talk, happy to chat and if you give me a chance to geek out about capital markets, I'm in.

Brian: Yeah, well, it was a lot of fun. I learned a ton. Thanks so much for coming on.

Jonathan Nelson: Really appreciate it, Brian. Thank you.