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David Tisch: Why No Manager Wants to Stay Small & Why Competing with Mega Platforms is a Losing Game — Transcript

by 20VC with Harry Stebbings · 13,783 words · 1,951 segments · language en · Watch on YouTube

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0:00I've never understood trying to compete
0:02head-to-head against who I would deem to
0:04be the best VCs in the world. Every
0:06concentrated manager will say that we
0:09win 90% of the deals we want to win. And
0:11I think that's total BS. I think it's
0:13like 20%. Over the years, me and David
0:15Tish have done many shows. And I've
0:17always questioned his model. Low
0:18ownership, very diverse portfolios. And
0:20you know what? I was wrong. David has
0:22absolutely crushed it. He's one of the
0:24best early stage investors of our time.
0:26This was a phenomenal discussion. I
0:28loved making this happen.
0:29>> I think the lean startup was a total
0:31fake. There's people to me right now and
0:34this happens in hot market conditions
0:36that are playing a short game. I believe
0:38the right to invest in subsequent rounds
0:40is earned. I work for our LPs and my
0:43customers are found. We don't allow
0:45grenades at early stage. You're not
0:47allowed to throw a grenade on someone
0:49else's deal.
0:50>> Ready to go.
1:02David, I'm so excited for this, dude.
1:04It's been 2 and 1/2 years since you
1:06joined me. You very kindly reminded me
1:09of a debate that we had a couple of
1:11years ago, and we're going to get into
1:13that. Um, but thank you so much for
1:15joining me first.
1:17>> Thanks for uh having me back. Nothing's
1:19happened in between the past two and a
1:21half years and now. So we can just sort
1:23of regurgitate all the old
1:24conversations.
1:26>> Has our job completely changed, David?
1:28>> In some ways totally and in other ways
1:31not. I think you know I've been doing
1:34early stage investing for 17 years now.
1:37Uh which makes me old. Um and I think a
1:42lot of the times people try to relate
1:44the current moment to a historical
1:47moment. So, uh, you know, is this like
1:502021
1:51to me? No. It has nothing to do with 21.
1:54It's a totally separate moment. And this
1:57one's funky and interesting and maybe
2:00frothy, maybe insane, whatever it is.
2:03But it's a standalone new market
2:06condition that you have to figure out in
2:08today's world. Because in 21 there were
2:11a bunch of other factors, macro, micro,
2:13that were creating that environment. And
2:15if you go back to, you know, 18 and uh
2:1815 and 2010, each one of these moments
2:21are just different. And so I could argue
2:24our job has totally changed and equally
2:26explain that our job is just to do
2:29whatever the current market conditions
2:33present. Uh and the actual job is like
2:37see, meet, get to know great founders,
2:41make a decision. Should we invest or
2:44not? and beg them to take your money.
2:46And that's the the funnel that we
2:49operate in.
2:50>> In 2021, I think we can acknowledge it
2:52was just incredibly bubble-like. It was
2:55a good time to sell. It was a bad time
2:57to buy. There was no fundamental
2:58technology innovation. There was
3:00short-term behavioral change with co in
3:03different respects, communications,
3:05buying. Everyone says, "Well, now
3:07starting to feel like 2021."
3:09Are you in that camp of the craziness is
3:12real or are you in the camp of no, we
3:15are so early and there is so much room
3:17to run?
3:18>> I don't think it's as simple as that. I
3:20think in each one of these moments there
3:22are good companies and bad companies.
3:25And so as a
3:27VC generally and especially as an early
3:30stage VC, I think the macro is less
3:32impactful than the micro. Is the company
3:36that I am fortunate enough to be an
3:38investor in the good one? Is it the
3:41great one? Is it the the most important
3:43one? That transcends the macro. And the
3:48macro to me is like a portfolio
3:50analysis. It's a industry analysis, but
3:53it doesn't come down to a specific
3:55company analysis. So, do I think there
3:57are, you know, not perfect companies
4:01raising a lot of money at big
4:03valuations? Yeah. But I don't know that
4:05that's ever not the case. And I think
4:07you've seen it historically in our
4:09industry. There are incredibly public
4:12blowups of some of these companies that
4:14happen in uh catastrophically messy ways
4:17that sometimes create TV shows or movies
4:20or documentaries. Um and then there's
4:24companies that die quietly in the night.
4:26Um, but I think underlying all of these
4:29moments of frothiness are probably a
4:33handful to a lot of great companies that
4:36are building uh highquality businesses
4:38and they're doing it in,
4:41you know, a long-term oriented way. Are
4:44they raising money quicker? Are they
4:46raising money less dilutively? Are they
4:49uh, you know, doing it at big
4:51valuations? Absolutely. But I don't
4:52think that that is a like industry-wide
4:56harmful uh set of conditions. It's just
5:00is this company a great company? Can
5:02this founder can these founders navigate
5:06incredibly complex uh changing
5:09environments almost in real time today?
5:12um to create an enormous amount of value
5:15that I think you are to your point in
5:18the early innings of a deployment of a
5:20horizontal new technology that will have
5:23tremendous impacts. But like all other
5:25technologies, what you see is this
5:27initial wave of impact, initial set of
5:30reactions, some version of plateauing,
5:33more innovation, plateau, innovation,
5:36plateau. The difference this time is
5:39those like cycles are like two to three
5:42months. It's the new model release. It's
5:44the new revenue growth of a vertical AI
5:48business. It's a huge M&A deal. All
5:50these moments create these mini cycles
5:54that feel like they have sort of waves
5:58across the industry.
5:59>> We've seen seed rounds be 10 to 20
6:02million very consistently. Well, also 50
6:06or 100 or a billion
6:08>> for sure. But I'm saying kind of if if
6:10we don't take the real outliers like 10
6:12to 20, it's really been quite normalized
6:14as a round size for good seed companies
6:17with, you know, pedigreed founders. I
6:20get that our job is just to find them
6:22and and you know, beg them to take our
6:24money, but does the business not really
6:27change in that respect? Suddenly, how do
6:29you think about sizing? you know,
6:31bluntly that there's there's nothing
6:33there and you're having to write a large
6:35proportion of your fund as an entry
6:37check. How do you think about that with
6:39the massive explosion of brown size?
6:42>> You can either come on a podcast and
6:44complain about it or you can do the
6:47thing, make a decision, yes or no. If
6:50you're going to play the game that's
6:52that's in the market of deals, you don't
6:55get to change the competitive dynamics
7:01of a free market. So if great founders
7:04or potentially great founders are going
7:06to raise 10 to 20 because someone else
7:08is going to do the deal at that price,
7:11you get to say yes or no. So I think if
7:13you think that is an important company
7:15and one that you want to be part of, you
7:18have to say yes. And there's two
7:22conditions that
7:24allow for those starting points to not
7:27materially change the economics in
7:29venture if the outcome sizes are bigger.
7:32So if you know you you think about 10
7:36years ago the idea of building a $10
7:38billion company was far-fetched. today
7:41that is sort of like you have to sit and
7:43look at an early stage company and try
7:45to squint and get there as a sort of
7:48normal outcome um versus a billion. So I
7:51think there's a change factor there and
7:53then you see anomalies well past that in
7:56terms of valuation or even acquisition
7:59um or or our future IPOs and then the
8:02second one is the lack of dilution. Um,
8:04so as an early stage investor to me in
8:08the companies that tend to hockey stick
8:10very quickly the series B CD are
8:14dramatically less dilutive to the
8:16founders and the early cap table than in
8:19in the past. They are raising these
8:21later stage rounds at 3 to 8% dilution
8:26instead of 12 to 20%. And if you take
8:29that across multiple rounds, your early
8:32stage investment just gets diluted less
8:35and that is an economic factor. Now we
8:40box group, we invest in a a wider set of
8:43companies which you've criticized before
8:45many times for not an ownership focus.
8:48If our entire portfolio is filled with
8:51$20 million seeds at, you know, 200
8:54million pre, do I think that the the
8:58business is fundamentally changed? Yes.
9:00And so you have to find in this market
9:03of, you know, a a in this market of
9:06varied entry points for early stage
9:08investing. I think you have to have a
9:10portfolio balance, but not on an
9:13individual deal basis. Totally get that
9:15in terms of portfolio balance kind of on
9:17a blending entry price and making it a
9:19little bit more palatable. You said
9:20there about my criticizing your
9:23portfolio.
9:23>> I mean, uh, speaking about it, I didn't
9:25use the word criticize on purpose.
9:26>> No, I do. I trust me, I I I think one of
9:28the most important things to look for in
9:30in anyone actually, personal or
9:32professional, is like someone who's
9:33willing to like admit that they were
9:35wrong. Um, I have no problem admitting
9:38that I was wrong. And what I was wrong
9:40on very specifically, I think, is like
9:42not seeing outcome size expansion in the
9:45way that we have done. And that's very
9:47rigid minded of me, which is my fault,
9:50but it's enabled incredible returns from
9:54companies with smaller checks and not
9:56having ownership, so to speak. Um,
10:01what how would you characterize what I
10:03got wrong? Did I do a good job of it
10:05there? Like you can own me for it. I
10:08want like a soundtrack as you're doing
10:10that. So, if we could add post-p
10:12production music in.
10:13>> Oh, yeah. It'll go a little It'll go a
10:16little wider on the on the
10:18>> It's kind of like lose, you know, lose
10:19yourself the first kind of 30 seconds
10:21beat.
10:22>> It's like a little background music.
10:24>> Yeah.
10:25>> Harry getting deep. Uh,
10:29>> no. I I think I think that I've always
10:32believed that adventures is a pure power
10:35law dynamic industry. You have to be in
10:38the outliers. And the idea that me or
10:42you, to pick on both of us, are going to
10:45be able to find and buy 10 to 20% of a
10:51true outlier in the seed round and beat
10:55the rest of the market, which I truly
10:58think, you know, a lot of, not all, are
11:01great at their jobs. You're going to
11:03fight them head-to-head and convince the
11:05founder to pick you. and that's the
11:07company that matters. I think it's a lot
11:09of steps that you have to believe to get
11:11that business right. And so
11:16I've never understood trying to compete
11:19head-to-head against who I would deem to
11:21be the best VCs uh in the world. And I
11:24think these are brands and these are
11:26people that have spent decades building
11:30um you know what their organization
11:33stands for and attracting the best set
11:36of founders to want them uh in their
11:38deal. And I think those multi-stage
11:39firms that have uh been around for a
11:42long time are really really good at seed
11:44investing and so in a way that they
11:47weren't before. Huh. Like I feel like
11:49they're more they're more concentrated
11:51focused on it. um and they're more
11:53accessible and they're more efficient
11:55and the market's more efficient. I think
11:56founders know how to reach them and know
11:59how to run a process very differently
12:02than in the past. So I think postcoid
12:04there's a tremendous efficiency in the
12:06fundraising market. um competitive deals
12:10that used to be three to five term
12:13sheets in an early stage round can these
12:15days be 10 to 15 or it's purposely only
12:19three to five but those three to five
12:20are really competing uh against each
12:23other and I think that is again
12:27something you can complain about or just
12:29accept the market conditions and so for
12:31us the belief has always been we have to
12:34be able to invest in the people that we
12:36meet that we think are the fast and we
12:38can't let our business get in the way of
12:40it. And so to me, the thing that you got
12:43wrong is is two pieces. One is the math.
12:47Our business math on our side as a
12:50venture manager that has LPs that needs
12:53to return our capital to LPs at a
12:56outlier uh way. I think you
13:01didn't do the math right. And I think a
13:03lot of people don't appreciate that our
13:05business makes sense and that's okay. We
13:07like what we do. We think
13:09>> and I specifically didn't do the math
13:10right because I didn't see the outcome
13:12size expanding. Is that is that it?
13:14You've got the numbers.
13:14>> Well, the second part is yeah, I maybe
13:17that's it. Or maybe the lack of dilution
13:19part that I made uh before is is what
13:22you get at the beginning actually stays
13:24pretty consistent. Whereas I think in
13:25the past you would probably put like a
13:27negative 80% on that number.
13:30>> Well, Jason Lmin who I do a lot of shows
13:32with every week. we do the weekly show
13:34and he's like 100% 60% you'll be
13:37diluted. Is that not true in your
13:40>> I don't think the best companies
13:43>> now like not every company goes up and
13:46to the right and never sort of runs into
13:48bumps. I think the macro when you get
13:50big can cause some bumps in valuation.
13:52You're seeing it right now in some of
13:54the biggest labs going out and trying to
13:56raise rounds and sort of re uh
13:59re-evaluating the the price that they're
14:01raising at. Um, if you go back in
14:04history, like Uber, Facebook, um,
14:08Airbnb,
14:10uh, Ramp, which I think is one of the
14:12best modern companies ever, uh, they've
14:15all had a bump, a down round, and so I
14:17don't think it's always just up and to
14:19the right. But I think in this specific
14:21sort of three-year window, there is a
14:24lot of continued momentum in terms of
14:26valuations. Um but the second piece
14:28which I think is related to the first
14:30piece that I I think concentrated funds
14:34dismiss is there is an adverse selection
14:38in the concentrated model of what gets
14:41in versus what you want to get in.
14:44Meaning every concentrated manager will
14:47say that we win 90% of the deals we want
14:50to win. And I think that's total BS. I
14:53think it's like 20%. And so in a given
14:56fund cycle, if you're funding 30
14:58companies that you have this immense
15:00conviction in concentration of 30 names
15:04with 10%, you need obviously you need
15:07because it's vital need 10% of the
15:11company in order to make the deal work.
15:14I think you actually offer that deal to
15:17upwards of 120, maybe 150 companies to
15:22get your 30. And I don't think people
15:25admit that. So I do believe that the
15:28best companies, the ones you're most
15:29excited about, don't always make it into
15:31the portfolio. And so just because you
15:34have 30 that you own 10% of, it doesn't
15:36mean those are the 30 that you would
15:39have liked to be in that portfolio. I
15:41think in our model what we're able to do
15:43is get into more of the companies that
15:46we're excited about than other people.
15:48>> I get that. You know what worries me
15:50there so much and I'm asking here, but
15:52it worries me is I completely agree with
15:54you in terms of that supposed win rate.
15:57And what happens now though is they just
15:59say, "David, okay, [ __ ] it. I lost to
16:01Sequoia and Box Group.
16:04Let's do another round. I I'll do it at
16:06800. I know David just did the first
16:09tunch at 400, but I'll do it at 800
16:11today. And for the founder, it's like,
16:13well, good deal. Like, nothing's changed
16:15in the company. I get more money at
16:16double the price.
16:19I think it distorts companies. And
16:21really,
16:21>> what are you worried about?
16:23>> I'm worried about founders losing focus
16:25and becoming distracted with way too
16:27much money way too quickly.
16:29>> That is like a babysitting problem.
16:31Sometimes that's going to happen for
16:33sure. But to attribute that fear to
16:36every founder, some founders are going
16:38to tremendously benefit from having more
16:41runway, higher valuation, more momentum,
16:45more buzz in order to recruit people, in
16:48order to show that there are believers
16:50that think this can be huge so that they
16:52can justify to customers to get early
16:56partners. If you are a great founder and
16:58it doesn't mean all of them are going to
17:00do it properly, you have to take all the
17:02conditions that you've chosen to take
17:04on. So if you took on two tranches, if
17:06you took on high valuations, if you took
17:07on a lot of money, you're going to have
17:09to use those variables and execute your
17:12company building in a different way than
17:14if you're super capital constrained. I
17:16think the lean startup was a total fake.
17:19It was a like stupid
17:22like brainwash that happened for 10
17:24years with like professors and books and
17:29tweets and blog posts that was just like
17:32totally awful. Um, and I think it sent
17:35people like the wrong message.
17:36>> Why why was it totally awful? just
17:38>> because name a company that actually ran
17:40the lean startup playbook that worked
17:43>> one every company if you're going to be
17:46actually successful needs a lot of money
17:49especially today
17:50>> but like 37 signals is is one that's not
17:53>> yeah some bootstrap companies but if you
17:55if you want to get on the venture
17:58flywheel lean is not the answer like
18:00inevitably you're going to be fat you're
18:03not going to be lean you have to be it
18:06doesn't mean undisiplined Right. What
18:08what the the difference between the word
18:11like lean and the word wellfunded is not
18:15lack of discipline. It it it's just not
18:18automatically attributable. Does that
18:20mean that every company that raises a
18:21ton of money is going to be well
18:23disciplined? No. There's going to be
18:24again back to where we started bad
18:26companies.
18:27>> Will you do trunched rounds if a founder
18:29said so
18:30>> I don't like them? it. But like again,
18:33there's the like emotional reaction and
18:36the business decision and those are very
18:38decoupled.
18:39>> But but you will do the second or third
18:41round.
18:42>> Don't put this on air. I don't want
18:43founders to know that we'll just rip
18:45checks into tron rounds. But yeah.
18:47>> Well, no. Like I I I would
18:49>> I don't want to. I would like to invest
18:51at this at the lower price.
18:52>> I'm too arro. I'm [ __ ] [ __ ] off. This is
18:55a partnership.
18:56>> I get it. But that's your problem. Get a
18:58shrink.
18:59>> I don't need a [ __ ] shrink. this is a
19:01partnership and you're saying you're
19:02inherently less valuable than them.
19:04Well, fine. Just don't take me then.
19:06>> Okay, that's their choice and and guess
19:09what? They're not going to take you and
19:10you can go back and you can choose that
19:13company is not going to be that's a yes
19:15no decision. That's it. And so as
19:17>> but you're happy then to just to take
19:20that.
19:20>> I didn't say happy that's now an
19:22emotional attribute.
19:25>> I will I will be sad and take it. That's
19:28a that's like a different thing. you
19:30will succumb. Yeah. You you will just
19:33admit that this is sad and
19:36>> fall in line. I think it's our
19:38responsibility to earn the right to do
19:42what we want to do versus what a founder
19:45is offering us. And so again, beg you
19:49can beg to have a entrepreneur
19:54do what you're asking them to do. So if
19:56if there's two tanches, I would like to
19:59enter in the lower tunch. I need to
20:02convince the founder to allow me to do
20:04that. And if I don't, it's a me problem.
20:08>> I would like the lower tunch, please.
20:10>> Yeah.
20:10>> Cake or cake or cake or death. Cake,
20:13please.
20:14>> And then and then they say no. And then
20:16you're like, pretty please. And then
20:18they say no again. And then you have to
20:20like beg differently.
20:22>> Come on. Please. I'm just a little seed
20:24fund. Come on. you have to use all your
20:26little sale tactics and then you get
20:28rejected. But like is that an enjoyable
20:31market condition that's been emerging
20:34more and more in the past couple years?
20:36No. Do I like if if I am sitting there
20:40and I view it as like not the founder
20:42that trunched us but the other VC, it's
20:45good to know, right? I also have a long
20:49memory
20:50>> scathing
20:51>> but it is right like you have decided
20:53that I will pay another price not the
20:55founder you've created the structure of
20:57this deal such that I am not sitting on
21:00the cap table with you I am pushed to a
21:03a different product than you get to
21:06invest in that means when we have early
21:09stage investments and are going out to
21:11market to help them raise capital if I
21:14get to be a voice in the ear of a
21:16founder
21:17I have opinions, too.
21:19>> Remember, I was on your side, David. I
21:21was I was always on your side. I was on
21:23your side. Come on.
21:25>> But, but I mean it right. Like, there's
21:27people to me right now, and this happens
21:29in in hot market conditions, that are
21:32playing a short game, and there's people
21:33that play a long game. And I think one
21:35of
21:35>> they're playing a short game because
21:36they're cutting people out. They're
21:38pushing them into second tranches. It's
21:39like I just think like
21:42there there's a set of relationships
21:44that you build in this business because
21:46we're all dependent upon each other in
21:47very different ways that eb and flow in
21:50different times in different conditions
21:51in different companies that if you're in
21:54the business of maintaining and building
21:57long-term relationships, you're going to
21:59choose certain behaviors over others in
22:03different moments. And the thing that
22:06we've done at Box Group that I think is
22:08different than a lot of other firms as
22:10they've built is we've stayed very true
22:13to who we are. We do early stage
22:15investing. We try to be there on day
22:17one. We don't take our problems and put
22:20them in front of founders. We try to be
22:22as helpful as we can be and we try to be
22:24founder friendly in every step of the
22:27way. Does that work perfectly every
22:29time? No. But that's the intention. So,
22:32we write we write checks that are not
22:37needing of ownership. We don't sit on
22:39boards. We don't write competitive term
22:41sheets. We are happy to lead a deal. We
22:43are happy to help a founder get in
22:45business with some money. We're happy to
22:47be totally creative in how we invest,
22:49but it's oriented around early stage and
22:52getting in at that dream level.
22:55>> What is the average ownership?
22:57>> I don't know. I have to that's math
22:59question. But like is it like genu is it
23:02like 5% 2%?
23:05>> There are deals we do where we own at
23:07the initial uh check 1% there's deals we
23:11do at 10% and everything in between.
23:14>> But there's no too low.
23:16>> Again that's an emotional thing not a
23:18business thing. I I'm sad if we have to
23:21write a really small check but it comes
23:23down to like yes or no. When does that
23:25happen the most frequently? When we get
23:28to a deal late. When you when you meet a
23:30founder and the deal's in process,
23:33you're now begging for scraps, as you
23:35should. And that's a that's our fault
23:38for getting to something late. And
23:41that's something we can do better as a
23:42firm is meet founders earlier in their
23:45journey. And if we didn't do it, we need
23:47to figure out internally like what could
23:50we have done better to meet a founder
23:52before there was a company.
23:53>> Can I ask you what's your win rate? So
23:56different market conditions it es and
23:58flows probably between um 70 and 90%.
24:02And I think the single factor that
24:05causes us to lose the most is getting to
24:08something too late. Like speed of our
24:11decision-m and accessing the opportunity
24:16are the two factors that we control that
24:19hurt us the most. There's a subset of
24:22companies that just meet us and don't
24:24want us, but that's harder to to course
24:28correct because you almost don't know
24:29why they didn't like you. Uh it it's
24:32like a
24:33I don't know an an EQ emotional outcome
24:36or they didn't think you were valuable
24:38enough or uh maybe they referenced you
24:40and they they got something that said
24:43like not as good as you need them to be.
24:46I think we care a lot about those
24:48situations, but I think that happens
24:50sometimes. The ones that I think we
24:52organizationally
24:54uh can can work on is how do we get to
24:56everything uh before everybody else? And
24:59I think that's the obsession. We're um a
25:01team of 10 investors. There are six uh
25:04partners at the firm. We've all worked
25:06together for a long time. We all like
25:08each other and we all do the work. like
25:11our job every day is to wake up and meet
25:15the next founder that we're excited to
25:17back. I think both of us having
25:19flexibility to not have to be lead like
25:21you know
25:23I think again I admitted my wrongdoing
25:25like I I turn down um great businesses
25:28um over time because of ownership and it
25:31was just terrible decisions and so now
25:33we invest very differently you know we
25:35will absolutely do the one or 2% if we
25:38think it's an unbelievable founder and
25:39it's an amazing opportunity so great
25:43that means I I never lose because I will
25:46just do a smaller back. Um or not never,
25:49but you know what I mean, rarely lose
25:51cuz we
25:53>> But if I had to only lead, that would
25:57come down dramatically. And so my
25:59question to you is,
26:01>> do the pure play lead only seed funds
26:04still have a business in a world?
26:07>> What are the pure play lead only seed
26:09funds left?
26:10I mean, I think you've got your like
26:13uncorks, your floodgates, your uh I
26:17mean, Susa, no. First round,
26:20>> I think they've moved into a different
26:23style of investing and more flexible and
26:26play it a little bit later when
26:28necessary on per on like strategic
26:31purpose.
26:32>> So, what you're saying is that business
26:34doesn't exist anymore.
26:36>> I don't want to be in that business.
26:39And why why is that?
26:40>> Because I don't think you can compete
26:42against the greatest firms in the world
26:45who are running that strategy as part of
26:48what they do
26:49>> with much less price sensitivity and
26:50much bigger checkbooks.
26:52>> Yeah, I don't even think that's a
26:53factor. They're great at what they do. I
26:55like very much pedestal.
26:57>> I I do think it is a factor. We we have
26:59lost to like a GC of the world and with
27:02the respect a junior there and I don't
27:04mean that disparagingly but someone who
27:06is more junior because they offer treble
27:08the price and treble the check. I I
27:11agree with the founder for taking it
27:12like wholly within your right to do it.
27:16But that's why
27:17>> Yeah. But I like it's an offer in the
27:20market, a free market. And I think they
27:22take the majority of the air out of the
27:24room if you're trying to compete for uh
27:27you know, I'm going to lead sit on your
27:29board or not sit on your board, but I
27:31need 10 to 15% of your uh seed company.
27:34I just think there's a greater
27:35efficiency to access the multi-stage
27:37firms and the multi-stage firms are
27:39happy uh to do those deals. I also think
27:41like what you've seen happen is it used
27:45to be a lot of firms would be like,
27:47"Okay, I'm not going to do this. I want
27:48to wait to see this at the A or I'm not
27:50going to do this at the A. I want to
27:52wait to see this at the B." And what's
27:54happened is they don't get to see it.
27:56Like that might have been your only shot
27:59to do the deal because there's an
28:01efficiency in the market and there's
28:03other people that also want to do it at
28:05the B and you might lose there and you
28:07might lose at the C. And so what you're
28:10seeing is if Sequoia wins, it might mean
28:12that um you know Andre or uh Kleiner or
28:18someone else needs to immediately come
28:20into the next round because they know
28:22that that's the best probability they
28:24have of getting a real check into that
28:27company and they do it quickly and they
28:29do it aggressively. And I think that if
28:32you lose head-to-head in a seed in an A
28:35in a B, you can either sort of put your
28:38tail between your legs and call it a day
28:41or you can try to figure out a new entry
28:44point with minimal progress and minimal
28:48uh developments to get your check into
28:52that company if you believe that was an
28:53important one.
28:54>> I think it's an amazing point that there
28:56was a willingness to wait before that's
28:58now gone. I I think that's absolutely
29:01right and very personal. Can I ask you
29:03though? I speak to so many LPs. Um, as
29:06we said, they love to talk. Uh, and
29:08every LP wants one category of venture.
29:10We want the pure play seed investor in
29:14Silicon Valley, small fund under 100
29:16million, pure play seed. And I go, that
29:18is the single worst [ __ ] segment to
29:20be in. Like, that's the one segment you
29:23don't want to be in. And they all kind
29:25of look at me rather horrified. What
29:28advice would you give an LP
29:31when they look at the segments today and
29:32go ah I want pure play seed in San
29:36Francisco as my bucket. I think there
29:38are three different stakeholders in our
29:42industry and they are incentives and and
29:46current conditions are very decoupled
29:49for you know probably the the the most
29:52frustrated each like like we're in a
29:55founder world. I think GPS are
29:58struggling to have a very static and
30:01focused strategy because of we're in a
30:04founder friendly world and I think LPs
30:07are frustrated because they want certain
30:09versions of exposure or uh portfolio
30:13construction that basically aren't
30:15available. I don't think there's an easy
30:17solve for the LP problems and I don't
30:21think there's a clean way to operate as
30:24a GP in a everchanging market that is
30:29very complicated right now. And so I
30:31think founders get the leverage. They
30:34get to raise capital from people they
30:36like at prices that they like. And uh
30:39you as a GP can say yes or no. And on
30:43the LP side, they're going to look at
30:44your portfolio construction, your entry
30:45point, your ownership, and then a lot of
30:49the multi-stage funds have multiple
30:50products that LPs
30:52uh will tell you and me that they don't
30:55like to do. But yet it's going to be the
30:57majority of their allocation into
30:59venture is going to go to the
31:01multi-stage firms that are established
31:03that uh are a way to get scaled capital
31:05into the industry and frankly like
31:08exposure to some of the best companies
31:10in the industry through that. So your
31:14question is around like the LP
31:16conditions. I believe my relationship
31:19with our partners uh is one of truth.
31:23Um, we invest out of a $275 million seed
31:27fund right now. It will invest in around
31:31150 companies. So, we are pure play seed
31:35with lack of a focus on ownership and
31:39concentration. There is a large cohort
31:43of LPs that are confused by our math and
31:46don't doesn't think it works and that
31:49don't believe in our model. You do 50
31:51companies a year.
31:52>> A little more probably.
31:54>> David, do you remember them all?
31:57>> Yeah.
31:58I don't know what the other people who
32:00do one to two deals a year do all day.
32:02That also confuses me.
32:04>> Podcast.
32:06>> Uh like it sounds sounds lovely. Um
32:09there are LPs that don't believe in our
32:11math. Our math works. Like I know our
32:14math works. I see our math. And I think
32:16our our partners also believe our math
32:19works. And that's awesome. Uh because
32:21our our model's terrible if the math
32:23doesn't work.
32:23>> From a liquid returns basis, what has
32:25been the single best investment?
32:28>> Um we were fortunate enough to have met
32:30Curser uh sort of before uh they were
32:34working on uh the uh business that
32:38scaled. And um my partner uh Claire got
32:41to know Michael when they were uh
32:43investing on dorm room fund together.
32:46Uh, and we uh were in the earliest round
32:49of cursor. Um, which
32:50>> did that return the [ __ ]
32:52>> Yes.
32:54>> Multiple times.
32:55>> Yeah.
32:56>> I told you this model doesn't work,
32:57David. You didn't listen. You know,
33:00>> I got I got to do better math.
33:03>> Our Excel sheet broke. I tried to update
33:05it one day. And
33:06>> do do you know what's astonishing with
33:08that? And I'm really pleased you chose
33:09that actually as an example, which is
33:11the speed to that enterprise value as
33:13well. Like four years. I thought thought
33:15every LP was moaning that venture is
33:17taking too long. Now we're seeing open
33:19RDER. Was open RE one of yours?
33:21>> It was not.
33:22>> Oh, bugger. It wasn't one of my next
33:24time.
33:24>> Yeah, next time. Um, but like you know
33:27this was whatever two two years to 8
33:30billion. I think the speed of company
33:33creation, growth, explosion uh is
33:36different and I also think underlying
33:38like blessed to have been in in early
33:41part of the cursor uh story and I think
33:44you know what they did and accomplished
33:47is uh truly sensational and uh it's it's
33:52a generational outcome. It's the biggest
33:54venture M&A deal in history. We were
33:57just lucky to have have been there
33:59early. I think underlying like in the
34:01fund that cursor sits in in the early
34:03stage fund that cursor sits in for me
34:05what I love is there's 10 other
34:08companies that are fascinating and
34:10they're just taking a slightly more
34:12reasonable timeline to grow and
34:14compound. Do I think any of them like
34:17will get to the accomplishment of of how
34:20big and great cursor was? I don't know.
34:23And that's not like a binary they did
34:26they did it or didn't. But I think what
34:28uh you have to appreciate in this early
34:31stage investing is that things take
34:32time. We were the earliest investor in a
34:35company called Clay. Clay is a bumpy
34:40four-year road to explosive growth and
34:44now is growing and compounding what
34:48they're doing in an amazing way. But
34:51it's not a clean perfect story. And I
34:54think it takes learning and it takes
34:56iteration and developing their go to
34:59market that got them to where they are
35:00at today. Base 10, we're we're in the
35:03seed round of base 10. You needed
35:06inference to sort of become a space and
35:08base 10 today is a full outlier company
35:11and they're running at full speed and
35:14and sort of hitting that hockey stick uh
35:17fully. Uh but it wasn't this just start
35:21up and to the right. Do you think the
35:23best companies are generally immediately
35:25obvious or do you think actually the
35:28value is generally actually in the messy
35:30middle and the ones you don't expect?
35:32>> I think there are signs early on that a
35:36founder
35:38uh is running the experiment at a
35:40world-class level. Um and that is either
35:43they are
35:45hiring total outlier people to join them
35:48quickly. they are finding customers
35:53that are inaccessible early uh and
35:57you're almost confused as to how they're
36:00getting so far ahead so quickly and it's
36:02a lot of the time some combination of
36:04the product and the go to market
36:06conversations that they're having um or
36:08they picked the right idea but I think
36:10there are always challenges and bumps
36:13and sometimes those are prolonged and
36:17sometimes those are immediate and so
36:18what you're really uh identifying is can
36:22this founding team navigate again like I
36:26think the market is so complicated
36:27today. I I we we spend time and we ask
36:31young people uh we go to college
36:33campuses a lot. We were up uh at at
36:36Harvard and MIT recently uh and talking
36:39to undergrads and I asked like raise
36:42your hand if you have a vision for what
36:44the world is in 10 years which is our
36:48job in which if you go back in time
36:51young people old people there was like I
36:53can see what the world's like in 10
36:54years or or some guess of it no hands
36:58went up and I'm like five years one hand
37:00two years that's when you started to get
37:03some hands
37:04And I think that's what people are
37:06feeling today is uncertainty as to the
37:09timelines of what the future looks like.
37:12And when you're in this moment of AI and
37:15you have people saying we're all about
37:16to die from AI and you have other people
37:19saying we're entering an age of
37:20abundance and free flowing markets uh
37:24that will change the way labor forces
37:26work.
37:27That's a pretty wide gap between the
37:31prediction of the future and then you
37:33have the models rolling out frequently
37:37with major innovations that in some way
37:40are important to a subset of companies.
37:43But in the end, not every company is
37:45going to need the cutting edge bleeding
37:47edge model. And so you're watching this
37:49age of AI deployment, AI adoption, and
37:52it's going to impact people differently
37:54at different speeds. So, it's
37:55complicated. And then you're seeing AI
37:58impact the physical world, science, all
38:01these spaces that felt hard to access
38:04before that are getting opened up
38:06because of this horizontal technology
38:09shift. So, there's just a ton of
38:11uncertainty. I think you feel it in the
38:12public markets. You see it with compute
38:15access, compute pricing, energy, data
38:17centers, the politics around all of it.
38:20This is complicated. And so when you're
38:22asked to predict the future, I don't
38:24know that anybody sits here today and
38:27actually has an answer. And it's cool
38:28that people come on podcasts or tweet or
38:31do whatever they do and say like, I know
38:32where the world's going. And you're
38:33like, no, you don't. So I think what
38:36you're looking for in today's founders
38:39are people that are capable of real time
38:42navigating everchanging conditions that
38:46are insanely fast and insanely
38:49complicated. And so to your question of
38:51like do you fund somebody and know it
38:54immediately?
38:55No. Because I think the world's changing
38:57too quickly today for that to be a
39:00condition. Do you think the founders
39:02that succeed today are different to
39:04those in the past?
39:07Yeah. If I look at the founders that I
39:08meet, they're inherently a lot more
39:10technical. There's a lot fewer uh
39:13salesled founders today than there are
39:16>> You're in a moment of that, right? And
39:18so the question to me is like if you're
39:20an early stage investor, is there two
39:24years out when actually sales matter
39:27again in some way and go to market
39:29becomes a differentiator? And if that's
39:31the answer, you should fund those people
39:33today because their exposure to the
39:35bigger markets is not going to be as
39:38purely relevant for like one to four
39:40years when their company is a bit
39:42further along, their products ready. And
39:44so if that is your bet, it actually
39:47makes sense to start rotating a little
39:50differently today, then sort of you you
39:52can't as an early stage investor solve
39:54an immediate opportunity or need.
39:56Nothing goes fast enough. And so um but
40:00I do I think the founders today are more
40:03technical in you know a non-offensive
40:05way smarter than ever before. I think
40:07there's like less opportunity for
40:10mediocrity to succeed and you can't just
40:14like identify a gap in a business market
40:17and go attack it with like lazy fair
40:21approaches. You have to be so good in
40:25order to win right now. And you know,
40:28you saw I don't know if you saw the
40:29Scott Woo video that went viral where
40:31he's doing counting a you're like I
40:33can't compete with that. I can't compete
40:35with that. Right.
40:37I saw a great one which is cognition is
40:39just a wrapper around Scott Woo.
40:41>> But but you have to if you look at every
40:44company right now that to me is is
40:47becoming an outlier
40:49the founder quality of each of them is
40:53really really impressive. And I think
40:56that that like there was an era where
40:59like everybody was told you should start
41:01a company. Everybody should start a
41:03company. And I don't think we're there
41:05anymore. I think it's it like can
41:08everybody start a business? Sure. And I
41:12think that's okay. And I think the word
41:14company and business are in some way
41:16different. And venture capital for
41:19probably 10 years was funding a lot of
41:23categories that were not capable of
41:25becoming as big as maybe you thought at
41:27the beginning because what they were
41:29aiming for was uh a bit smaller. I think
41:34today the appetite for scale from the
41:38venture product um is uncompromisable
41:41because you need to get uh huge to make
41:44the mouth work and I think the founders
41:47ambitions today are like a huge and b
41:51the opportunity set feels unlimited. I
41:54don't want to like single out a company
41:56but it's a company that we both know and
41:58everyone will know which is testament to
42:00its success but like would you fund like
42:02a Harry's today?
42:04>> I think Jeff and Andy from Harry's are
42:08like worldclass founders that if you put
42:11inside of any company uh they would
42:15build something of importance and of
42:18meaning. We at Box Group have stopped
42:21funding brands.
42:23Not because I actually think they're
42:25small. I don't think you can fund brands
42:28at Seed because brands to me are built
42:31off of your initial data set of like
42:35does the brand resonate? Does the
42:37product resonate? Do people buy it? Do
42:39you have like customer LTV or CAC to LTV
42:43ratios that make sense? And you don't
42:45get any of that data at seed. I think
42:47one of like the more interesting
42:49investor products out there is like
42:52doing brand investing at series A. I
42:54don't think it fits in your traditional
42:56venture firms today, but I think there's
42:58a subset of investors that fund brands.
43:00If you look at the beverage industry is
43:02a great example. If you look at some of
43:03the QSRs, um if you look at, you know,
43:07uh personal care, there are scaling
43:10brands that are fascinating businesses.
43:12I just don't think where we sit today
43:15we're equipped to invest pre
43:18momentum.
43:20One thing that I see you said it's very
43:21much a founders market earlier. They can
43:23choose the price they want with the
43:25people they want.
43:26>> Um
43:27>> to me it's like a real halves and have
43:29nots which is like there are three
43:30categories where if you're in that
43:32category hell 50
43:34>> three categories of halves and have nots
43:36that's you only named two. No, three
43:38categories of interesting company that
43:41investors just go nuts for and obviously
43:43it's more than three but a small number
43:45and if you're not in that even if you
43:47are in AI4X
43:50investors like nah not interesting not
43:52in compute not in inference n not in
43:54data centers not in chips whatever and
43:57you're instantly dismissed do you see
44:00that too but I again come back to
44:03founder quality and founder ambition and
44:05execution so we were In the earliest
44:08round of a company called Rogo, they
44:10were building AI for finance. Um, Gabe
44:14uh finally told the story. Uh, but after
44:17the seed round, I helped them go out to
44:19try to raise an A. Uh, I put my name
44:22behind this company fully and I'm like,
44:25Rogo is going after something huge and
44:28Gabe is sensational. And I sent it out
44:31to make up a number. He said 40. We can
44:34say 40. 40. series A lead investors. He
44:39got fully passed on by 39 of them.
44:42>> Did Keith do that round?
44:43>> Keith did that round. So 39 nos. This is
44:47now a consensus company. It is now been
44:51funded by uh Keith led the A Seoia.
44:55Seoia did it. Kleiner did it. Do you
44:58doubt yourself in you do or you just
45:01think God the mimicry of this market's
45:03ridiculous?
45:04>> Both.
45:06Well, I just get sad. I'm like, I'm I've
45:08like done this a long time. I'm like
45:11telling you to spend time here and some
45:13of the passes were quick of like we
45:14don't think this is interesting or like
45:16we don't know that this could get big or
45:18they don't have enough traction,
45:20whatever they were. But I just think
45:22there are companies in this moment of
45:24your your point of like kingmaking
45:28halves have have nots that are misread
45:32at different stages and then become one
45:36of the other categories. And so that to
45:38me means as as it should be early stage
45:42is not a perfect market and there's not
45:46perfect information. There are going to
45:48be companies that are not in the
45:51zeitgeist, off the radar, that compound
45:54value, compound momentum, and build
45:57something that's very important before
46:00uh or or outside of the immediacy of of
46:05those funding conditions. And I think
46:07rogo to me was like totally
46:08misinterpreted by a series of investors
46:11at a specific point in time, kept
46:13building, kept getting better and then I
46:16think in the right way uh rewarded for
46:20um you know the the execution of what
46:22they've done.
46:22>> And you do follow on checks into just
46:25the next round, next two rounds.
46:26>> No. So we we operate today two funds. Uh
46:29they're both $275 million. Uh so it's a
46:32core seed fund. Uh and then we do a
46:35follow-on fund. Um we write sort of 20
46:39to 30 uh lean-in checks uh into
46:43companies almost all from our portfolio.
46:46>> And the lean-in checks are 5 million
46:47bucks or
46:48>> 5 to 30.
46:49>> And that's across the A and the B the
46:51next couple of rounds.
46:53>> Yeah.
46:54>> What's the most you've ever invested in
46:56a company across the two?
46:58>> Probably $40 million.
47:01>> Which company was that? I mean, we've
47:03we've written substantial checks into
47:05ramp, into clay, into base 10, into
47:08rogo, into tandem, um into
47:12>> Which did you not? And on reflection,
47:16what did you not see?
47:18>> Oh, we don't uh which did we not write a
47:20big check into?
47:21>> Yeah. Like you did a first check. Well,
47:23sometimes you can't sometimes you can't
47:25get more than your PR rata in companies
47:28and that's a fight for allocation in
47:31future rounds and that might be the
47:33founder choosing not to take a bigger
47:36check from you. Um, so that's one
47:38condition and then the other condition
47:40is like we mis we misread
47:44uh the company and didn't lean in hard
47:46enough when we uh could have. And I
47:48think we're not a perfect we don't make
47:51perfect decisions. I wish we did. Uh so
47:53I look back and there are so many
47:55opportunities of great companies that we
47:57were fortunate enough to be early in
47:59that we uh were too slow to react to. Um
48:02and uh
48:04>> is there one that you think of first
48:05there? And what do you
48:06>> I think of a lot but I uh I think we're
48:09like incredibly fortunate to be in
48:11business with that founder at the
48:13earliest stage. And um I think our job
48:17is to like continue to help them in the
48:19ways that they ask us to help them. and
48:22uh make our customers who are the
48:24founders happy.
48:25>> David is pratt right? We saw this
48:30>> now. Like do I think do I think a bunch
48:32of the VCs that are the early stage VCs
48:34that are out there saying like we don't
48:36need pro rata. We're going to like give
48:38it up. Like it's all marketing garbage.
48:42It's just nonsense. Like I can write a
48:45blog post too. I just don't believe that
48:46that it's that black and white. I
48:49believe the right to invest in
48:51subsequent rounds is earned. So whether
48:54you have it in the documents or not,
48:56it's earned. There are multiple factors
48:59that go into it. So having it in the
49:01documents to me is more helpful for the
49:05founder than for you as a firm. If you
49:08as a firm are asked by the founder to
49:10step back for whatever reason, that is
49:13up to you to say yes or no, knowing that
49:16if you say no, you are getting into a
49:19fight that you are likely going to lose
49:21in some form. you're either going to
49:23lose it financially and that you're not
49:25going to get your prada because of
49:26whatever mechanism can be used to remove
49:29your praa or more importantly you're
49:32going to lose it because of reputation.
49:33You are going to piss off the founder
49:35and they are not going to like you
49:37anymore. So if you say no to a founder
49:41and you want to take reputational risk
49:44that's on you. So why is it important to
49:47have it in the documents? Because I
49:48think that funds that follow you into
49:52rounds in the A and the B, they are
49:54happy to squash you in any way they can.
49:58And the more that you have it in the
50:00documents, the more leverage a founder
50:02has to negotiate the terms of their next
50:05round. So if a firm comes in and says,
50:08"We want 22%." And you look at your cap
50:11table and you're like, "I have 6% of my
50:14cap table that needs Pratta." you're
50:16able to actually create more leverage
50:19with your follow- on investor to say
50:21like I that math doesn't work for me. I
50:23would like to redo this and then you can
50:26use that in in help of your negotiation.
50:31>> Do you see large firms be more ownership
50:33hungry or more willing to accept less
50:37ownership?
50:37>> Halves and have nots.
50:40So, I think there are firms sometimes
50:42that need 20% in a deal and then you're
50:44like, "But last week you did a deal at
50:455%." And I see it because I'm in that
50:48deal, too. Uh, and so I always think
50:50that's funny when the word need comes up
50:52in venture. And you're like, "I I know
50:54what need means." And it does not mean
50:56need. Uh, it means I'd like I hope for,
51:00but it doesn't mean actually a binary uh
51:03need. Um I think within the big firms
51:07there are very different style actors. I
51:11think there are uh people who are on the
51:14way up or competitive inside of their
51:16firm that behave one way and there are
51:19people that are very confident in their
51:20position at a firm and their standing
51:23and their success that behave a
51:25different way. And you know, you can say
51:27junior or senior, whatever terminology
51:29you want to use uh for that, but I think
51:31that um you know, relationships matter.
51:35There are times when we send a deal to a
51:37multi-stage firm and they write the term
51:39sheet and then try to squash us. And I'm
51:42like, that's weird. Like those tend to
51:45be again this orientation towards
51:47short-term decision-m versus long-term
51:49and not appreciating the the consistency
51:53of a relationship. And I think in my
51:56again, I've been doing this a long time.
51:58There are people that you build great
51:59relationships with that tend not to have
52:02overly sharp elbows with you. And then
52:04sometimes you catch a elbow out of
52:06nowhere. You're like, "Oh, I didn't see
52:07that one coming."
52:08>> Who when they send you a deal, do you
52:10pay most attention to?
52:12>> Great founders.
52:14That's who I pay the most attention to.
52:15When founders inside of our portfolio,
52:18and I don't think it's the best ones
52:20only. I think it's the founders who we
52:22believe have highquality taste bars and
52:24high quality networks. When those people
52:26send you some someone they know, someone
52:28they like, that's when you pay the most
52:30attention.
52:31>> When you look at one part of our
52:32business that's investing, another part
52:35is also bluntly making money for our LPs
52:38and selling and we have very liquid
52:40secondary markets today. How do you
52:42think about that and taking cash off the
52:45table when there is so much demand for
52:47some of these names? I work for our LPs
52:51and my customers are founders and that I
52:55think is a totally again dislocated
52:59uh two sets of relationships. My job is
53:02as you said to give the people who
53:04believe in us and invest money in us as
53:07much money as I possibly can and one way
53:10to do that is to try to get out of
53:13positions at different times and there's
53:16a risk to it. uh and there's a financial
53:19risk to it and a relationship a a sort
53:22of reputational risk to it and I think
53:24that's a really important thing to
53:26balance. So on like in general we don't
53:29sell early we believe we are investing
53:33at the seed stage to join the founder
53:36for their journey and that could be 15
53:38years it could be 20 years it could be
53:40four years. Uh but selling early to me
53:44risks two things. One is like if a
53:46founder doesn't want you to sell early
53:48you're risking reputational risk in
53:50relationship with that founder. In this
53:52market a lot of founders are taking
53:54secondary. So you could argue like if
53:56you're doing it, I can do it. I don't
53:58think that's necessarily uh the right
54:01framework. I really don't. Um and I can
54:04talk about why, but I don't use that
54:06framework um to think about it. Uh and
54:09then the second one, I think the best
54:11companies compound the most at the end,
54:13right? Going from like a $2 billion to
54:16$4 billion to an 8 billion company is
54:18easier than going from zero to a
54:20billion. And if you believe that you are
54:23in a company that's great, I don't see
54:26why you would get out early. I think
54:28you're leaving the most money on the
54:29table by getting out of something early.
54:32And I really don't want to do that. I
54:35want to see it through. And if I still
54:39believe in a company or one of my
54:42partners believes in a company, I don't
54:45think derisking it is the right answer.
54:48We're in the business of risk and we
54:50should uh stay investors in the
54:54companies that are going to keep
54:55compounding because every turn you have
54:58at the end is a is a big win for your
55:02LPs and for your firm and for the
55:05founders.
55:06>> Why do you not think that if a founder's
55:08taking money off the table, investors
55:10should maybe do the same? Because I
55:12think founders have a different set of
55:14economic conditions that are are not
55:19related to what investors have. Let's
55:22say a founder has debt. Let's say a
55:24founder is living in a place that
55:27creates stress and overhead cognitively
55:31for their life. And in reality, having
55:34some money to improve some things
55:37outside of work allows them to be better
55:40at their company.
55:42or knowing that I have 10, 20, $30
55:45million in my pocket, I am now willing
55:48to see this through, I'm willing to to
55:52have bigger risk appetite to like go for
55:55it because I feel some safety net. I
56:00don't think that that is the same risk
56:02analysis that a VC uses to be like, I
56:04need to take, you know, 20% of my
56:06position off here to like make my fund
56:09math look good or tell my partners I,
56:12you know, took some money out of this
56:13thing. I just think they're totally
56:15different. Or giving early employees
56:18like a tender offer and allowing them to
56:20have some early liquidity. I think it
56:22could help with retention. Um, I think
56:24it could keep a lot of those employees
56:27happy and engaged and um, you know,
56:30excited to to work at a company knowing
56:32that they offer tenders every couple
56:34years. Um, we have a bunch of companies
56:36in our portfolio that are regularly
56:38doing tenders to the employee base and I
56:40think that that's an incredibly uh,
56:43valuable culture to set and uh, a
56:46retention tactic. And so I just don't
56:48believe that they're always related.
56:51What did you believe about venture that
56:53you now no longer believe? David,
56:55>> I just took a while to see. Right. Every
56:57firm thinks you're in the top decile,
57:01>> right?
57:01>> I never heard any firm be like, "No,
57:04we're bottom bottom quartile."
57:06>> Right. So, I'm I'm like waiting to meet
57:08all the bottom three cortile firms in
57:10the in the venture industry. when you
57:12hear all the LPs explain that and you
57:14look at the the data and it says, you
57:17know, all the returns in venture are
57:18aggregated to the top five 10% of firms.
57:21Uh I just I don't I haven't met the the
57:25others yet.
57:25>> Do you think we'll have more or less VCs
57:28in 5 years time?
57:30>> There's less noise in the venture market
57:33than ever before and there's more
57:35competition. What do you mean?
57:37>> You asked before there's less new firms.
57:39>> Really? It feels like there's more
57:41spinouts than ever before.
57:43>> I think they're less like I think on it
57:46I think if you actually look at the
57:47data, you know, it takes a long time for
57:50firms to go away even if they're still
57:52alive. They become irrelevant. They're
57:54not investing a lot. They might not have
57:55raised a new fund. Nobody's sort of
57:59taking them off the map. So, the names
58:01remain, but the activity goes away. Um,
58:05you know, you had asked before about
58:06like sub$und00 million in San Francisco
58:09concentrated seed funds. I think I like
58:12didn't answer that fully. I don't think
58:15very many people get into venture
58:19and want to stay consistent in doing
58:22what they do. Meaning the starter VC is
58:26a seed fund, right? you get like if
58:28you're new, if you're sort of unproven,
58:30you'll get a 2040 $80 million fund,
58:34whatever it is to start. But your goal
58:36is to raise a way bigger fund one day.
58:39And when you raise a bigger fund, when
58:41you scale your business, when you have
58:43partners and scale aum, your investment
58:46style, your stage, your concentration,
58:49your check size is all going to
58:51fundamentally change. So when I meet new
58:54investors, I always ask like what's fund
58:56four look like? Because fund four is
58:59actually your vision. It's the same as
59:02when you meet a founder and you ask like
59:03what's the big vision? So I want to know
59:05not what fund one is doing today. I want
59:07to know where you're going with this
59:09because to me the advice that you give
59:11that person should be in line with how
59:14do you get to your actual ambition, not
59:17how do you execute your starter fund.
59:20And I think what you see in the new
59:22firms today is a big ambition. They want
59:26to start with something small and get
59:28bigger and do something different really
59:30quickly. And I think what's I I love
59:34about what we do here is this is who we
59:36are. This is who we've always been. We
59:39are an early stage firm. We write checks
59:42at the very early stage and we don't
59:44have any ambition to do anything else.
59:46>> No. But the but but like to be clear
59:48like you did just raise what 550 across
59:51two funds. I mean I get you
59:54>> yeah the scale the the
59:57>> sure but the same exact investment style
1:00:00and I think we see founders today come
1:00:03to us and say you're doing the same like
1:00:04you're you're exactly where you were 10
1:00:06years ago when I started my last
1:00:08company. Maybe the check size is
1:00:09different but we are not we as a firm
1:00:12our DNA our craft is oriented towards
1:00:15being there at the very beginning at the
1:00:17dream stage and that to me is like what
1:00:20I wake up and get excited about and I
1:00:23think that uh when you look at new
1:00:27venture firms they're their ambition is
1:00:29to be a multi-stage firm for the most
1:00:30part and that's a very competitive part
1:00:33of the market. it is. I don't actually
1:00:35think they know what their dream is. And
1:00:37I know and what I mean by that is like,
1:00:39you know, one thing I would say to young
1:00:41people, I sound really old, is like be
1:00:42careful what you wish for because you
1:00:43might just get it. And I think the truth
1:00:46is if you know the people at the
1:00:47multi-stage firms, a lot of them are not
1:00:49happy the ones who are running it and
1:00:51wish they were the smaller firms.
1:00:53>> Yeah. But I think I think I think there
1:00:54are different form factors of the
1:00:56multi-stage firm. I think you see
1:00:57benchmark scaled today, USV scaled today
1:01:01and the DNA inside of those firms and
1:01:03the relationships inside of those firms
1:01:05are very different than some of your
1:01:07other scaled firms. I think what
1:01:09Conviction has done is amazing and
1:01:11scaled. I think what Rivbit's done is
1:01:13amazing and skilled. And then then you
1:01:14go to Thrive like Thrive has created a
1:01:17generational venture firm in a different
1:01:19flavor in a rapid amount of time and
1:01:22challenges at the very top of venture.
1:01:24And I think the way that they've built
1:01:26that firm is so different than again
1:01:30your traditional multi-stage firms. And
1:01:32so I don't think it's as simple as
1:01:34categorizing every firm is the same. I
1:01:38think you have to look at each firm
1:01:39individually and the execution of how
1:01:41they've done it. I think like what
1:01:43Daniel and and not had done for the
1:01:46moment that that was incredible and what
1:01:48a lot has done is incredible. And so I
1:01:51think if you all those firms I just
1:01:53mentioned are new right in in the grand
1:01:56scheme of things. I guess benchmark and
1:01:57USB are not the but the other ones are
1:01:59new and the speed at which they've
1:02:02gotten to where they've gotten is
1:02:03incredible and the the quality of what
1:02:05they've built is incredible and that was
1:02:09ambitious and I think when you look at
1:02:11the new firms today I think the the ones
1:02:14that are great are going to execute
1:02:16great and have real ambition and make a
1:02:18real space for themselves in this
1:02:21industry and the rest of them are going
1:02:23to go away. When you think about
1:02:26finding, picking and winning, if I were
1:02:30to ask you to review yourself, one
1:02:33through three, one being best, two being
1:02:36mediocre, three being worst, how would
1:02:38you review yourself?
1:02:40>> I just think we're mid constantly.
1:02:43That's what the kids say. Um, our
1:02:45obsession at our firm is to to see
1:02:49things. We all wake up every day and try
1:02:52to see. I think we see somewhere between
1:02:5650 and 75% of what we want to see. Hard
1:03:00to know, but we can always be better
1:03:03there. There's like always something out
1:03:05there that we didn't see that we want to
1:03:08see. And getting in front of people,
1:03:11finding a way not just to get in front
1:03:13of them, but for them to take you
1:03:15seriously. Um, that's like what we wake
1:03:18up and obsess over. winning
1:03:21when you don't win it hurts like that
1:03:23that is like a that's like a um what
1:03:26could we have done better it is the area
1:03:29in venture I think you can tactically
1:03:31work to improve you can try different
1:03:34things you can like figure out what you
1:03:37can do better uh and I think we spent a
1:03:40lot of time on that
1:03:41>> what has that led to you spent a lot of
1:03:43time on that and what have you changed
1:03:44as a result
1:03:45>> everything I mean you you have to know
1:03:49what tactics to bring to the fight. And
1:03:53that's like reading a room and guessing
1:03:56which playbook of
1:03:58really relationship building that you
1:04:01want to use. What does a founder want
1:04:03from you? What are they looking for? And
1:04:05how do you convince them that you are
1:04:07the answer to what they're looking for?
1:04:10And it really is so founder dependent.
1:04:14Each like there are certain founders
1:04:15that don't want to talk a lot. There are
1:04:17certain founders that want transactional
1:04:20help. There are certain founders that
1:04:22want a friend that wanted a like set of
1:04:25experience that want somebody who is
1:04:27around all the time to balance things
1:04:28like it's a services industry. And so
1:04:31the win condition to me is selling your
1:04:34service to the point where a founder
1:04:36wants it. And that's complicated
1:04:38especially in this market. The picking
1:04:41is the art of this business and it's so
1:04:44hard. You can look at our firm from afar
1:04:46and assume we say yes more than other
1:04:49firms. I don't. We don't. We are
1:04:53hyperfocused on saying yes when we
1:04:56should. But that's a really really hard
1:04:59thing to do at the early stage in real
1:05:02time. And I I like want to tell you I
1:05:08know how to get better at that or we can
1:05:11get better at that. And yet like there
1:05:15there comes a point when you're in your
1:05:17career and you've seen enough reps that
1:05:19your taste is your taste and you're
1:05:22going to say yes. You're like
1:05:23butterflies show up. You're going to say
1:05:25yes.
1:05:26They don't. You're going to say no. You
1:05:28can convince. Like we think about how to
1:05:31make the right decision a lot and don't
1:05:35know the tactics to get better at it.
1:05:37>> David, how many companies do you meet a
1:05:39week as a firm?
1:05:40>> A lot. 50 to 100.
1:05:43>> So people are meeting 20 companies a
1:05:45week.
1:05:45>> Yeah. At least.
1:05:47>> Okay. And then every Monday you come for
1:05:50an IC and you talk about the five best
1:05:52like
1:05:53>> Tuesdays and Thursdays.
1:05:55>> Tuesdays.
1:05:57>> Twice a week. Okay.
1:05:58>> We use Mondays for work. We are agile
1:06:01with our decision-m. I think group think
1:06:04is terrible. We don't vote. Somebody
1:06:07here has to want to do a deal if we're
1:06:08going to do it. Somebody needs to be
1:06:10like this is something that I am excited
1:06:13about and I think we should do. And so I
1:06:16think decisions start with a human on
1:06:20our side being excited about something.
1:06:22And whether that happens inside or
1:06:25outside our meeting is not important.
1:06:28And so if we get to our meeting and one
1:06:32of my partners is like, I did a deal
1:06:34yesterday. Great. And equally so like
1:06:38I'm leaning into this. I want to talk
1:06:40through it. Great. We internally don't
1:06:43allow negativity in making early stage
1:06:46decisions.
1:06:47>> What do you mean by that?
1:06:48>> If you aren't the person that has spent
1:06:52time with the founders, you aren't
1:06:54allowed to be negative about it.
1:06:56>> Right? But what if you know something
1:06:59about the market that you feel
1:07:01>> I don't think anybody knows anything
1:07:02about markets at the early stage.
1:07:04Markets evolve. um if you know something
1:07:06about the founders, but we've probably
1:07:08diligenced that before we're taking
1:07:10meetings and leaning into something like
1:07:12if there are like ethical issues, if
1:07:15there's reputational issues with a
1:07:17founder, I think that is an important
1:07:19thing to share. We don't allow grenades
1:07:21at early stage. You're not allowed to
1:07:24throw a grenade on someone else's deal.
1:07:25Our job is to get to yes, it's I if you
1:07:29name a company at early stage, I can
1:07:31tell you why it's going to fail. any
1:07:33company. Here are the five risk
1:07:35conditions and here's why it's going to
1:07:37fail. It's the easiest thing to do. If
1:07:39you've done this for like a year, you
1:07:41can guess why a company's going to fail.
1:07:44Your memos at every firm writes are very
1:07:48obvious why it's not going to work.
1:07:50That's not the job. And by the way, on a
1:07:52probability basis, it's not going to
1:07:53work because 70 90 whatever the number
1:07:56is percent of early stage companies
1:07:58don't work. So you explaining why
1:08:01something isn't going to work is
1:08:04incredibly obvious and incredibly
1:08:06irrelevant. What the magic of our
1:08:09business is is squinting and seeing why
1:08:11something is going to work by believing
1:08:15in the thing that you see that the
1:08:17founder sees that you are aligned with
1:08:19the founder and seeing is going to work
1:08:22and saying yes. Our job is to say yes to
1:08:27the right things, not to be fearful of
1:08:30saying yes to the ones that don't work.
1:08:32>> Totally get that and understand that. I
1:08:34always love that Google will just build
1:08:36it or the, you know, open AI or
1:08:39>> whatever it is. But but like
1:08:42you can't hire, you don't know how to
1:08:44hire, you're not going to get like it's
1:08:45not big enough. All these things,
1:08:46they're just not factors for the win.
1:08:49Why is it going to work?
1:08:50>> You said that 17 to 90% don't work.
1:08:53Keith Ro said before that's dramatically
1:08:55overestimated and in fact if you invest
1:08:57in great people actually your loss rate
1:09:01in other words it actually really not
1:09:03working being a zero or close to a zero
1:09:06is much lower than people think. I think
1:09:08at series A that's true. I think at seed
1:09:10it's it's some real scale of of numbers.
1:09:15>> You do?
1:09:16>> But I think I think you go one
1:09:19stage ahead and that number is
1:09:21dramatically lower.
1:09:24>> I also think Keith is a generationally
1:09:26talented investor and if his loss rate
1:09:28is I don't know a tenth of everybody
1:09:30else's, that wouldn't surprise me.
1:09:33>> Yeah. No, I I totally get you. Um
1:09:35listen, David, I want to do a quick
1:09:36fire. So, I say a short statement, you
1:09:38give me your immediate thoughts.
1:09:40>> I'm longwinded.
1:09:42>> 60 seconds per one.
1:09:43>> Let's go.
1:09:44>> I'm going to set a timer.
1:09:46>> You can choose one seed fund,
1:09:50one series A, and one growth fund to be
1:09:53an LP in.
1:09:55>> Which one?
1:09:57>> I think Y Combinator has invented the
1:10:00only product in our industry. And I
1:10:02think for all the people that say
1:10:05anything, you know, critical about them,
1:10:08it's probably just rooted in some
1:10:09version of jealousy. I think what
1:10:11they've built is a world-class brand, a
1:10:14worldclass attractor of great talent and
1:10:17I think run the best business model uh
1:10:20in our whole industry. Uh so seed fund
1:10:23like YC series A
1:10:25>> I think there are five to seven equally
1:10:30impressive like multi-stage firms that
1:10:34just
1:10:35continue to find themselves in the best
1:10:38companies. You can choose Benchmark, you
1:10:40can choose Seoia. I think the machine
1:10:42Andre's built, I think what Thrive has
1:10:44done, you know, what what Lee Fixel does
1:10:46at edition is uh fascinating and off the
1:10:50radar in an interesting way and
1:10:52sometimes is a great series A investor.
1:10:55So I think uh you know I think what
1:10:57Ribbit has built over the years if you
1:10:58look at what they've done is incredible
1:11:00and so I don't think uh like and then
1:11:03you have founders fund which operates in
1:11:05their own world and is incredible and I
1:11:07think you know we we said Keith Keith at
1:11:09Kosla has done generational level
1:11:12investing. So I I actually don't think
1:11:13it's series A. It's easy to isolate
1:11:16because you're looking at this
1:11:17combination if you put your LP hat on of
1:11:20like fund size accessing early stage
1:11:23versus growth these blended products. Uh
1:11:26and I don't think it's a black and white
1:11:28answer. Like I think the two funds that
1:11:31were just very narrow focused for series
1:11:35A over uh historical period were USV and
1:11:39Benchmark. And I think they've changed
1:11:42their fund size today. Um but not really
1:11:45the partnership dynamic.
1:11:46>> Yeah, absurd punting there. Uh growth
1:11:49>> I weaved in and out of your forced
1:11:51question.
1:11:52>> Growth fund. You got one growth fund
1:11:55>> again like I think there like I think
1:11:57spark growth comes to mind as a amazing
1:12:01slightly off the radar just just unique
1:12:04outlier uh decision-making. I think what
1:12:07Meritech did for a while. I think what
1:12:09Menllo's done, these are new like names
1:12:12in my uh weaving of your answer that I
1:12:15wanted to get in. I think what Cotto is
1:12:16doing or Dragon Ear is doing right now.
1:12:18I think
1:12:19>> you're [ __ ] You're [ __ ]
1:12:21Switzerland.
1:12:22>> I am Switzerland. But um
1:12:26and I'm probably forgetting like a hand.
1:12:28But I mean it. I think there's a tier
1:12:30green oaks, right? I could easily just
1:12:32say green oaks is the answer to your
1:12:34question. No, because I I'm asking you.
1:12:36I want money dollar for dollar. Where am
1:12:39I going to make the most money?
1:12:40>> I think it changes in every mark. Like,
1:12:43no,
1:12:43>> but I can give you mine. Y I agree with
1:12:44you for ownership. No one gets the
1:12:46ownership they get for
1:12:47>> but I think YC is the only
1:12:48differentiated product in venture.
1:12:49>> And then I think Benchmark for series A
1:12:52and then I think SEOA for series B and
1:12:55beyond. That's mine.
1:12:57>> So you're discounting Sequoa's early
1:12:59stage investing. I'm not I'm giving them
1:13:02credit. I'm I'm suggesting I would draw
1:13:04the BMY seeds than Sequoia seeds. Yes.
1:13:06>> So I think I think the real answer to
1:13:08your question is you're in a period of
1:13:11consolidation in venture and the best
1:13:13firms are going to continue to compound
1:13:15in every which way because they're going
1:13:16to access the best founders. They're
1:13:18going to access the best scaled LP
1:13:20capital and it's going to turn into the
1:13:21best set of returns and there's going to
1:13:23be a halves and have nots in venture.
1:13:25And uh I think there's probably you know
1:13:2820 to 30 names that are competitive and
1:13:33probably 10 that are uh outliers amongst
1:13:37that 20 to 30.
1:13:39>> What was the single most memorable
1:13:40founder meeting in the last 12 months?
1:13:44first found a meeting
1:13:45>> like in our firm. Uh my partner Greg,
1:13:48you know, got to spend time with Noah
1:13:50from Instinct um early and I think for
1:13:54him that was the like mindblowing
1:13:57initial meeting and conversation and we
1:13:59were lucky enough to be part of uh that
1:14:02early round.
1:14:03>> Woo! Baby, well done. I think for me the
1:14:07things we've done in the past 12 months
1:14:09are not mature enough yet to talk about
1:14:14because they're coming and
1:14:16>> but just like which which founder did
1:14:18you find most mind-blowing where you I
1:14:20left like wow
1:14:21>> I have to be as excited
1:14:25every time I say yes so I actually I
1:14:28don't operate like that I operate like
1:14:32this and if something rises above this,
1:14:36you lean in. And if something doesn't,
1:14:38you lean out. And so I view my job as a
1:14:42continuum of like steadiness in order to
1:14:45make the right decisions. And so it's
1:14:48not I I think what to this point
1:14:51satisfies me the most to answer your
1:14:54question is like the relationship that
1:14:56comes out of it. Do you click with a
1:14:58early st like we funded this 22-year-old
1:15:01who's building a game that's going to
1:15:03release in like two months like a single
1:15:07game level difficulty one trillion right
1:15:09to win a game business but like he has
1:15:14been thinking about this game for a long
1:15:16long time and we're going to see if it
1:15:19like hits and if it hits it's going to
1:15:21be awesome but like low probability of
1:15:25market All these factors are negative,
1:15:27but he's awesome. And then I met this
1:15:30woman who's building this really cool
1:15:32piece of hardware that goes in like your
1:15:35home. It's a point solution that's like
1:15:38huge market. Everybody has a need for
1:15:40this. But like again, level difficulty
1:15:42impossible. And then you meet like
1:15:44veteran founders who are building a
1:15:46foundational model for uh you know a
1:15:49physical world application and you're
1:15:51like well that's crazy and you guys seem
1:15:53like totally the right people to do
1:15:54this. And then you have someone in
1:15:55science who's doing something. Um, so I
1:15:59really do believe you have to be excited
1:16:02about everybody in some form equally.
1:16:04Who do I like hanging out with? I like I
1:16:07like I'm a consumer mindset. I find the
1:16:11consumer founders the most interesting
1:16:13because they're nuts because they're
1:16:15they're going after the biggest con most
1:16:18confusing end user. And I think uh you
1:16:22know that that's like I learned from
1:16:25them. Uh we're an early investor in a
1:16:28company called Triumph. I think spending
1:16:30time with Jake uh is like an amazing uh
1:16:34I love talking to him. I love hearing
1:16:36about what they're doing. Um I think
1:16:39they'll start making a lot of noise in
1:16:41the coming year. Uh and sort of be one
1:16:43of those halves.
1:16:44>> What are you most excited about in the
1:16:46next 10 years? I think seeing this play
1:16:49out, right? Like where where are we
1:16:52going? Where is the world going?
1:16:56It's like such a curious uncertainty
1:16:59right now. And uh like that's what makes
1:17:03this job a special opportunity is you
1:17:06get to meet the people who are going to
1:17:08answer that question um and get to be
1:17:11part of their journey. I don't know
1:17:13>> what is certain in the next 5 to 10
1:17:15years. What should be like autonomous
1:17:18driving
1:17:19that should be like it irritates me that
1:17:22it's not today. Like it would save
1:17:25lives. It would save it would like the
1:17:28data on autonomous driving would save
1:17:33hundreds of thousands of lives worldwide
1:17:35if we just mandated it. But yet like
1:17:38freedom and all these other factors go
1:17:41into holding that back. But the
1:17:43technology is a solved thing.
1:17:46>> Well, I mean, I'm not being the techn
1:17:49the technology is not like quite a
1:17:51solved thing for ambiguous cities, for
1:17:53challenging weather conditions.
1:17:55>> It's pretty solved. Like from a from
1:17:57like a safety profile perspective, it's
1:18:01pretty solved. It's not perfect, but
1:18:02pretty solved. Like if I told you pretty
1:18:05solved equals decrease of 80% of the
1:18:08deaths that automobiles cause, it's
1:18:11pretty solved. But freedom like I don't
1:18:14like that as a society we don't adopt
1:18:19future things because we hold on to uh
1:18:22the wrong establishments.
1:18:25>> Well, it's because incentive design is
1:18:26is skewed in a lot of frameworks and
1:18:29there are
1:18:30>> existing modernizing society long term
1:18:33is the the the right way to to think. I
1:18:38think like and do you know do you know I
1:18:40I agree with you and I I think it's kind
1:18:41of like the rollup play versus an
1:18:43entirely new company play. I think it's
1:18:45much easier to create an incredible AI
1:18:47first school from nothing than try and
1:18:51incentivize innovation in stale
1:18:54architectures.
1:18:55>> Or we should do both.
1:18:56>> You know, you can try both, but it's
1:18:58much easier just move forward, right?
1:19:00And I think I think like
1:19:03the politics, the social dynamics, the
1:19:06economic dynamics of all of the
1:19:10challenges in the world would be best
1:19:14served with like practical
1:19:16decisionm than charged uh decision-m and
1:19:21that I hope uh is where we find
1:19:25ourselves over time because if you end
1:19:27up in the age of abundance, I think It's
1:19:30important to figure out like how does
1:19:33that benefit everybody and not just a
1:19:35few and I think technology generally is
1:19:39a equalizer and a positive force and I
1:19:42think uh hopefully AI can move in ways
1:19:46that impact health, impact science,
1:19:49impact uh every industry such that it
1:19:52benefits a a global population um in you
1:19:57know great ways. Dude, I I think this
1:19:59was probably the most low friction
1:20:01conversation we've had. There wasn't
1:20:03like a dramatic
1:20:04>> Should we fight at the end?
1:20:05>> Well, I don't know. I feel like we
1:20:07should at least try. Yeah.
1:20:09>> Well, we we fought over you deciding
1:20:12venture.
1:20:12>> It was the most nerdy venture fight when
1:20:14you actually we we fought about
1:20:15ownership versus diversification in
1:20:18portfolios. You're like, "All right,
1:20:20guys, calm down." Um, dude, I I love
1:20:22chatting to you. I I have so much
1:20:24regardless of me being wrong, I have so
1:20:26much respect for the business that
1:20:27you've built.
1:20:28>> Thanks for having me. I uh
1:20:30>> No, dude. Not not at all.

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