1
00:00:00,000 --> 00:00:03,919
As Josh and Jeff mentioned, the average venture
firm is not a good investment.
2
00:00:03,919 --> 00:00:07,759
The real question is show me that you have a
history of being able to find outlier
3
00:00:07,759 --> 00:00:10,320
companies, whether I've heard of those
companies or not.
4
00:00:10,320 --> 00:00:12,959
It's the week of June 23.
5
00:00:12,960 --> 00:00:16,774
Welcome to the Learning Corner, a Precursor
Ventures podcast.
6
00:00:20,054 --> 00:00:22,214
Welcome to The Learning Corner by Precursor.
7
00:00:22,214 --> 00:00:27,335
I'm Mia Foranum, and I'm joined by our GP and
managing partner, Charles Hudson, where we will
8
00:00:27,335 --> 00:00:31,969
be talking through the articles and Goodreads
that caught our teens' attention over the past
9
00:00:32,049 --> 00:00:32,530
week.
10
00:00:32,530 --> 00:00:37,329
Our first piece is episode eight from the
relatively new podcast, Uncapped, hosted by
11
00:00:37,329 --> 00:00:42,210
Jack Altman, where he interviews First Round
Capital's Josh Hovleman, and reflects on how
12
00:00:42,210 --> 00:00:47,354
Venture has evolved from a boutique high craft
discipline into a fragmented ecosystem.
13
00:00:47,354 --> 00:00:49,835
There's a lot to dive into here.
14
00:00:49,914 --> 00:00:54,634
Josh's Blackstone vacation adventure,
harvesting your winners in bubble times, and
15
00:00:54,634 --> 00:00:59,515
continuously creating value as a fund manager
by operating like a company and constantly
16
00:00:59,515 --> 00:01:01,600
seeking learning opportunities.
17
00:01:01,760 --> 00:01:06,640
Josh and Jack spoke a lot about the SOPA
capital that is relevancy Yeah.
18
00:01:06,719 --> 00:01:12,079
As an investor and how it can earn you access
to harder deals and meetings with larger LPs or
19
00:01:12,079 --> 00:01:12,719
investors.
20
00:01:12,719 --> 00:01:17,995
This relevancy is often fueled by firm wide
marketing efforts and broader branding and
21
00:01:17,995 --> 00:01:18,635
medium.
22
00:01:18,635 --> 00:01:24,155
Relevancy is one of those really squishy terms
in venture because the beauty and the curse of
23
00:01:24,155 --> 00:01:28,555
the private markets is that you, as a venture
fund, can selectively choose what to share with
24
00:01:28,555 --> 00:01:30,314
the world and shape your brand.
25
00:01:30,314 --> 00:01:34,859
So how do you think about striking the balance
when it comes to chasing relevancy?
26
00:01:35,020 --> 00:01:38,780
And from an investor's perspective, how much
weight should we actually place on it?
27
00:01:38,780 --> 00:01:40,540
I thought the podcast was super good.
28
00:01:40,540 --> 00:01:42,459
I went back and listened to it a second time.
29
00:01:42,895 --> 00:01:45,935
I think this relevance thing is really
interesting, and sometimes it'll be in meetings
30
00:01:45,935 --> 00:01:48,015
with people like, oh, well, they're just buying
logos.
31
00:01:48,015 --> 00:01:50,814
They invested in this hot company really late
just to have the logo.
32
00:01:50,814 --> 00:01:52,254
But what if logo buying works?
33
00:01:52,254 --> 00:01:54,974
What if being able to say, I'm an investor in
OpenAI?
34
00:01:54,974 --> 00:01:59,409
What if a naive person says, well, who cares if
you bought in some crazy high valuation of your
35
00:01:59,409 --> 00:02:00,049
seed fund?
36
00:02:00,049 --> 00:02:02,049
You can say, I'm an investor in OpenAI.
37
00:02:02,049 --> 00:02:06,450
And I think a lot of founders, I think,
logically, oh, I want to take money from the
38
00:02:06,450 --> 00:02:09,250
people who are already invested in the very
best companies.
39
00:02:09,534 --> 00:02:12,014
Because a, those people have good picking
ability.
40
00:02:12,014 --> 00:02:13,455
They have a good brand halo.
41
00:02:13,455 --> 00:02:15,134
Maybe they can introduce me to that company.
42
00:02:15,134 --> 00:02:17,615
So I think there is some logic in buying logos.
43
00:02:17,615 --> 00:02:21,694
And I think it's also important to remember,
you know, when I started venture twenty five
44
00:02:21,694 --> 00:02:25,490
years ago, there was not as much supply of
capital.
45
00:02:25,490 --> 00:02:30,370
I don't think venture firms had to work as hard
to differentiate themselves and be chosen.
46
00:02:30,370 --> 00:02:34,930
Now, as the podcast mentioned, there's I think
Josh mentioned 10,000 venture firms, 20,000
47
00:02:34,930 --> 00:02:35,569
check writers.
48
00:02:35,569 --> 00:02:38,050
Anything you could do to stand out and be
chosen to be top of mind.
49
00:02:38,264 --> 00:02:42,185
I think one of the fun things for us is via
well over 250 active companies.
50
00:02:42,185 --> 00:02:44,344
50 of whom are fundraising at any point in
time.
51
00:02:44,344 --> 00:02:46,104
I get to see who they wanna meet.
52
00:02:46,104 --> 00:02:49,784
And who they wanna meet is usually not a
function of what firms have the highest IRR
53
00:02:50,280 --> 00:02:51,000
TVPI.
54
00:02:51,000 --> 00:02:55,319
And it's usually like, oh, person produced the
piece of content that I read about my market,
55
00:02:55,319 --> 00:02:56,039
and I like them.
56
00:02:56,039 --> 00:03:00,919
Or this firm shows up in all of these searches
that I do for being an investor in a bunch of
57
00:03:00,919 --> 00:03:02,280
categories that I care about.
58
00:03:02,280 --> 00:03:05,080
And I think with private market, the founder
has to choose you.
59
00:03:05,080 --> 00:03:08,555
So anything you can do to increase the odds
that you'll be chosen.
60
00:03:08,555 --> 00:03:12,395
And as Josh mentioned in the podcast, volume is
another way to be adjusted.
61
00:03:12,395 --> 00:03:16,314
If you are everywhere, if you're in all of the
right rooms, if you're seeing all the most
62
00:03:16,314 --> 00:03:17,835
interesting companies, you'll bubble up.
63
00:03:17,835 --> 00:03:22,239
And it's not surprising to me that oftentimes,
the firms that founders are most interested in
64
00:03:22,239 --> 00:03:26,400
meeting are generally the firms that have the
highest brand perception, whether they're
65
00:03:26,400 --> 00:03:28,479
aggressively self marketing or not.
66
00:03:28,479 --> 00:03:28,639
Yeah.
67
00:03:28,639 --> 00:03:32,514
And I think there's also a set of firms, as
Josh mentioned, like Altos and others, that
68
00:03:32,514 --> 00:03:35,794
have fantastic performance and are less focused
on that.
69
00:03:35,794 --> 00:03:39,555
But I do think for some of the big firms, one
way to create relevance in a lot of content,
70
00:03:39,555 --> 00:03:43,314
have a ton of partners out there, be down the
street, have a ton of people meeting with
71
00:03:43,314 --> 00:03:45,155
founders, and sort of feel under present.
72
00:03:45,240 --> 00:03:50,120
There's so many directions I wanna go after But
one thing back to the logo chasing, and it just
73
00:03:50,120 --> 00:03:55,480
came up because I had a conversation with an LP
friend of mine, and she mentioned how it's so
74
00:03:55,480 --> 00:04:00,574
common for first time buns to put so much
effort into portfolio construction and start,
75
00:04:00,574 --> 00:04:04,495
like, cherry picking specific logos that almost
fit outside their thesis that just showcase
76
00:04:04,495 --> 00:04:06,335
they can get into competitive deal.
77
00:04:06,335 --> 00:04:08,415
But the LP mentioned that's not your thesis.
78
00:04:08,415 --> 00:04:10,175
And I think even Josh and Jack spent that Yeah.
79
00:04:10,175 --> 00:04:14,270
It's fascinating that funds that wanna raise, I
don't their sixth, seventh, eighth fund.
80
00:04:14,270 --> 00:04:19,149
If they completely shifted the side of the
fund, they're raising on a track record from a
81
00:04:19,149 --> 00:04:21,230
model that they no longer operate out of.
82
00:04:21,230 --> 00:04:24,430
I thought that was a really subtle but
important point, which is that there are funds
83
00:04:24,430 --> 00:04:28,675
that are raising multibillion dollar new funds
to do entirely different activities, but
84
00:04:28,675 --> 00:04:30,915
leveraging prime brokers from an earlier era.
85
00:04:30,915 --> 00:04:34,915
I also just like Josh talking about his vision
for I didn't necessarily have 50 people.
86
00:04:34,915 --> 00:04:35,154
Yeah.
87
00:04:35,154 --> 00:04:36,435
But just his vision for, hey.
88
00:04:36,435 --> 00:04:38,194
How do you if you're a boutique practitioner?
89
00:04:38,194 --> 00:04:42,089
How do you remain true to what you wanna build
in a world where everybody around you is
90
00:04:42,089 --> 00:04:42,970
raising more capital?
91
00:04:42,970 --> 00:04:43,290
Yeah.
92
00:04:43,290 --> 00:04:48,170
And one thing he actually talked about was the
presence of a non investing partner.
93
00:04:48,170 --> 00:04:52,089
I think they talked about was such a large
reason why they've been able to keep the brand
94
00:04:52,250 --> 00:04:54,675
enduring as it is within first round.
95
00:04:54,675 --> 00:04:56,194
What are your thoughts on that?
96
00:04:56,194 --> 00:04:59,634
The one thing I will think is that I've heard
Josh talk about this at length.
97
00:04:59,634 --> 00:05:03,475
This most firms don't think about their
decision making processes in common.
98
00:05:03,475 --> 00:05:07,389
And if you thought about your decision making
processes in you would spend a lot more time
99
00:05:07,389 --> 00:05:09,790
and care thinking about, well, how do we
actually make decisions?
100
00:05:09,790 --> 00:05:12,750
And I'd argue in venture, decision making is
the product.
101
00:05:12,750 --> 00:05:17,629
Your portfolio is the sum total of the things
that you saw, the things that you chose to
102
00:05:17,629 --> 00:05:18,350
invest in.
103
00:05:18,350 --> 00:05:21,534
And I think what he outlined, I don't think
that will work for me.
104
00:05:21,534 --> 00:05:21,774
Yeah.
105
00:05:21,774 --> 00:05:25,375
Like, it's a little bit more rigor, and we
don't have as many decision makers at the firm.
106
00:05:25,375 --> 00:05:27,935
But I think a lot about, on our end, what is
our product?
107
00:05:27,935 --> 00:05:30,814
And I think I'm happiest with our decision
making processes.
108
00:05:30,814 --> 00:05:32,814
Individuals following their own intuition.
109
00:05:32,814 --> 00:05:37,040
And we write small enough checks to early stage
companies that there isn't a lot of metadata to
110
00:05:37,040 --> 00:05:37,680
analyze.
111
00:05:37,680 --> 00:05:41,520
But I think it was Jack who said, if most VCs
looked at the way that their own firms are run
112
00:05:41,520 --> 00:05:44,480
and you have portfolio companies that were run
that way, you'd be horrified.
113
00:05:44,480 --> 00:05:49,324
Because being an adventure fund for most funds
is lengthy discussions and discourse and
114
00:05:49,324 --> 00:05:52,764
butting heads, which is all really wonderful
insights you can draw, but then it's not
115
00:05:52,764 --> 00:05:53,245
recorded.
116
00:05:53,245 --> 00:05:56,285
I said devil's thinking on that because I think
people would be interested to know within
117
00:05:56,285 --> 00:06:01,729
precursor, how do we think about postmortems or
reflections on inflection point for our
118
00:06:01,729 --> 00:06:02,209
companies?
119
00:06:02,209 --> 00:06:05,410
He said, basically, memory is a crappy way to
try to keep track of things.
120
00:06:05,410 --> 00:06:06,289
And I agree with you.
121
00:06:06,289 --> 00:06:09,810
The one thing I realized probably a few years
ago was people would ask me, what did you think
122
00:06:09,810 --> 00:06:11,009
of that company we invested?
123
00:06:11,009 --> 00:06:15,785
Inevitably, I had some rosy, overly optimistic
view of how perfect the company was when we
124
00:06:15,785 --> 00:06:16,264
invested.
125
00:06:16,264 --> 00:06:20,024
And I was like, well, the only way I can think
of to solve this hindsight bias is to actually
126
00:06:20,024 --> 00:06:21,305
capture your thoughts in the moment.
127
00:06:21,305 --> 00:06:24,665
So now we have a whole process of, like, how do
we capture at the time of wire?
128
00:06:24,665 --> 00:06:26,024
What do we think is gonna happen?
129
00:06:26,024 --> 00:06:31,000
We do more as a documentation documentation of
what we think about the founders, and I find
130
00:06:31,000 --> 00:06:33,639
that you capture that in real time as the only
way to be honest.
131
00:06:33,639 --> 00:06:33,959
Yeah.
132
00:06:33,959 --> 00:06:36,199
And then periodically, you wanna update your
thinking.
133
00:06:36,199 --> 00:06:37,800
So six months, I go, alright.
134
00:06:37,800 --> 00:06:39,480
I've been working with this company for six
months.
135
00:06:39,480 --> 00:06:43,064
They've had a time to take the money we gave
them and turn it into some insights.
136
00:06:43,064 --> 00:06:44,185
How effective has this company been?
137
00:06:44,185 --> 00:06:46,904
And we ask the same or a very similar set of
questions again.
138
00:06:46,904 --> 00:06:50,824
Ever means it's been revealing to see, were
there things that I saw and or was worried
139
00:06:50,824 --> 00:06:52,904
about before we invested that have already
shown up?
140
00:06:52,904 --> 00:06:55,865
And conversely, were there things that was
worried about that appeared not to be a
141
00:06:55,865 --> 00:06:56,104
problem?
142
00:06:56,104 --> 00:06:56,345
Yeah.
143
00:06:56,399 --> 00:07:00,720
It one of the things that I find is really
great about our process, the ability to be
144
00:07:00,720 --> 00:07:02,560
honest about where we think our companies are.
145
00:07:02,560 --> 00:07:02,720
Yeah.
146
00:07:02,720 --> 00:07:06,319
Where I think a lot of fun don't wanna put in
writing where they think the right positions
147
00:07:06,319 --> 00:07:06,720
are.
148
00:07:06,720 --> 00:07:09,759
And I think it's a fear of where it could go or
what if they're wrong.
149
00:07:09,759 --> 00:07:14,345
And I think back to Jack and Josh's whole
point, of if we could capture a lot of that
150
00:07:14,345 --> 00:07:16,504
information and learn from it, that's the most
important part.
151
00:07:16,504 --> 00:07:19,704
So it does help you crystallize memories in a
more formalized way.
152
00:07:19,785 --> 00:07:21,944
It also helps other people learn from other
people.
153
00:07:21,944 --> 00:07:22,264
They can
154
00:07:22,264 --> 00:07:23,625
think, well, what did you think would happen?
155
00:07:23,625 --> 00:07:24,104
Oh, wow.
156
00:07:24,104 --> 00:07:27,305
You know, we have the insurance this summer
looking at a bunch of decisions we've made, and
157
00:07:27,305 --> 00:07:28,529
they weren't part of those.
158
00:07:28,529 --> 00:07:31,649
So they can look at them as an outsider and
say, well, these are the things you're worried
159
00:07:31,649 --> 00:07:31,889
about.
160
00:07:31,889 --> 00:07:33,089
Why did you do this anyway?
161
00:07:33,089 --> 00:07:33,649
And what happened?
162
00:07:33,649 --> 00:07:38,449
One of my favorite comparisons in the entire
episode was when they talked about the hot hand
163
00:07:38,449 --> 00:07:38,930
fallacy.
164
00:07:38,930 --> 00:07:39,169
Yeah.
165
00:07:39,169 --> 00:07:45,324
And talking about how ironically it doesn't
apply to somebody like Steph Curry who has paid
166
00:07:45,324 --> 00:07:49,725
tens of millions of dollars because he had a
high percentage hit rate on the shot that he
167
00:07:49,725 --> 00:07:50,285
takes.
168
00:07:50,285 --> 00:07:52,845
It does very much apply to venture.
169
00:07:52,845 --> 00:07:58,910
Most cases, Josh and Jack talked about how
investors are actually rewarded on the shots
170
00:07:58,910 --> 00:08:02,110
that they take, not the shots that they
actually bake.
171
00:08:02,110 --> 00:08:04,670
How do you think about that and venture and get
comfortable with that?
172
00:08:04,670 --> 00:08:05,710
I'll never forget.
173
00:08:05,710 --> 00:08:10,585
I met somebody, I won't say the firm, who was
at a firm that is associated as a seed investor
174
00:08:10,585 --> 00:08:12,345
with a bunch of really iconic companies.
175
00:08:12,345 --> 00:08:16,025
And we were doing one of these dinners where
you introduce yourself, and the person said,
176
00:08:16,025 --> 00:08:19,709
we're investors at these three iconic companies
and hundreds you've never of.
177
00:08:19,709 --> 00:08:20,670
That's pretty much true.
178
00:08:20,670 --> 00:08:25,470
And their whole brand is built on being
associated with three really iconic companies.
179
00:08:25,550 --> 00:08:30,589
And nobody penalizes, criticizes, or cares
about those 99% of the investment.
180
00:08:30,589 --> 00:08:33,345
And I find LPs and founders are often the same
way.
181
00:08:33,345 --> 00:08:35,105
They're like, what's the best company you're
in?
182
00:08:35,105 --> 00:08:39,504
Going back to this relevance thing, making a
bunch of investment and being in market creates
183
00:08:39,504 --> 00:08:40,065
relevance.
184
00:08:40,065 --> 00:08:41,825
And every now and then, I'll read some article.
185
00:08:41,825 --> 00:08:45,549
They're like, I can't believe Andreessen or
Sequoia invested in this stupid company.
186
00:08:45,549 --> 00:08:46,269
It's so dumb.
187
00:08:46,269 --> 00:08:47,709
And I'm like, does it doesn't matter.
188
00:08:47,709 --> 00:08:48,909
Also, you're talking about it.
189
00:08:48,909 --> 00:08:49,629
You're talking about it.
190
00:08:49,629 --> 00:08:50,509
You're talking about it.
191
00:08:50,509 --> 00:08:51,070
You care.
192
00:08:51,070 --> 00:08:53,309
And if it doesn't work, it doesn't matter.
193
00:08:53,309 --> 00:08:54,509
I think it's quite interesting.
194
00:08:54,509 --> 00:08:58,685
Doesn't appear to be much of a long term
penalty for being associated WeWork.
195
00:08:58,685 --> 00:09:00,205
It didn't work out with a lot of money.
196
00:09:00,205 --> 00:09:01,004
Kind of interesting.
197
00:09:01,004 --> 00:09:03,565
It's not like investing in WeWork was some
stain.
198
00:09:03,565 --> 00:09:04,685
It means you got to see the deal.
199
00:09:04,685 --> 00:09:09,565
You got to see the deal and you were part of
one of the more iconic companies of that time.
200
00:09:09,980 --> 00:09:14,220
Wouldn't make being a WeWork investor my whole
personality, but there are people who make
201
00:09:14,220 --> 00:09:18,940
single investments, their whole personality and
brand, and they they lean on that heavily.
202
00:09:18,940 --> 00:09:23,500
And my conclusion is there really is no
substitute adventure for being associated with
203
00:09:23,500 --> 00:09:24,540
a winning company.
204
00:09:24,540 --> 00:09:27,204
It almost doesn't really matter when you've
gotten them all.
205
00:09:27,204 --> 00:09:30,964
Like, now, I think if you can think I'm an
investor in OpenAI, sure people could say,
206
00:09:30,964 --> 00:09:31,764
well, when did you buy in?
207
00:09:31,764 --> 00:09:32,725
Was it through SPV?
208
00:09:32,725 --> 00:09:34,245
It almost doesn't really matter.
209
00:09:34,245 --> 00:09:34,804
I don't know.
210
00:09:34,804 --> 00:09:36,324
I think about this a lot.
211
00:09:36,324 --> 00:09:41,100
The best LPs I meet tend to focus on what are
you doing to get access to the truly spectral
212
00:09:41,100 --> 00:09:44,139
companies that matter, and do you have access
to those?
213
00:09:44,220 --> 00:09:48,139
And the LP that I meet that are less
sophisticated and wanna talk more about, like,
214
00:09:48,139 --> 00:09:49,660
the average outcome data.
215
00:09:49,660 --> 00:09:51,355
Like, what's the average graduation rate?
216
00:09:51,355 --> 00:09:55,834
What's the well, this isn't as Josh and Jack
mentioned, the average venture firm is not a
217
00:09:55,834 --> 00:09:56,475
good investment.
218
00:09:56,475 --> 00:10:00,315
The real question is show me that you have a
history of being able to find outlier
219
00:10:00,315 --> 00:10:02,235
companies, whether I've heard of those
companies.
220
00:10:02,235 --> 00:10:02,315
Or
221
00:10:02,634 --> 00:10:02,875
Yeah.
222
00:10:02,875 --> 00:10:06,009
I guess double clicking on that, how hard is
that do?
223
00:10:06,009 --> 00:10:10,169
Because I can imagine there's the fundamental
difference maybe of what LPs deemed to be high
224
00:10:10,169 --> 00:10:14,730
quality pre seed deal than what you think they
are, especially when you're early on in the
225
00:10:14,730 --> 00:10:16,649
fund and always see our logos.
226
00:10:16,649 --> 00:10:19,529
One thing I think about is, for example,
everyone talks about graduation rate.
227
00:10:19,529 --> 00:10:25,034
What if you had 10% graduation rate, but every
company that graduated was a Decacorn?
228
00:10:25,034 --> 00:10:27,514
I would rather have that than 50% graduation.
229
00:10:27,514 --> 00:10:30,394
But a lot of LPs are like, oh, well, 10%
graduation, that's low.
230
00:10:30,394 --> 00:10:32,394
Well, it's not low if you're looking for
outliers.
231
00:10:32,394 --> 00:10:35,355
It's not low if the graduates are exceptional
companies.
232
00:10:35,679 --> 00:10:39,440
And sympathetic to the play of LPs, they're
looking at a bunch of funds and they're gonna
233
00:10:39,440 --> 00:10:41,279
figure out, well, how do I evaluate this
person?
234
00:10:41,279 --> 00:10:45,440
Well, like, in the absence of being able to
underwrite portfolios at the company level, if
235
00:10:45,440 --> 00:10:47,040
I told you, you have two choices.
236
00:10:47,040 --> 00:10:49,759
This fund has 10% of its companies that get the
series a.
237
00:10:49,759 --> 00:10:51,894
This fund has 50% that get series a.
238
00:10:51,894 --> 00:10:55,335
Knowing nothing about the underlying companies,
you might say, give me the person who's 50.
239
00:10:55,335 --> 00:10:56,695
But you wanna know more.
240
00:10:56,695 --> 00:10:57,335
You wanna know more.
241
00:10:57,335 --> 00:11:00,294
But like on the servers, you could be like, oh,
show me the companies that have 50.
242
00:11:00,294 --> 00:11:00,695
Yeah.
243
00:11:00,695 --> 00:11:05,575
Or oh, this person has 20 companies in common
with entries that this person has two.
244
00:11:05,575 --> 00:11:10,259
But what if the two that this person has are
the two that are most important, and the 20
245
00:11:10,259 --> 00:11:12,820
that this person has are the 20 that don't
work?
246
00:11:12,820 --> 00:11:13,220
Right.
247
00:11:13,220 --> 00:11:16,740
You'd go, oh, on average, this person co
invests with the best people.
248
00:11:16,740 --> 00:11:17,059
Yeah.
249
00:11:17,059 --> 00:11:21,404
But a lot of this business comes down to
specifics, and I'm sympathetic to LPs who are
250
00:11:21,404 --> 00:11:23,884
trying to come up with these broad based
heuristics.
251
00:11:23,884 --> 00:11:24,205
Yeah.
252
00:11:24,205 --> 00:11:25,325
They will fail you.
253
00:11:25,325 --> 00:11:26,044
They will fail you.
254
00:11:26,044 --> 00:11:29,644
In the same way that as a VC, if you're like, a
broad based heuristic about what I'm looking
255
00:11:29,644 --> 00:11:32,044
for at founders, it will help you until it
fails you.
256
00:11:32,179 --> 00:11:32,579
Right.
257
00:11:32,579 --> 00:11:37,379
Now, it's a glaring flag if you're in all these
deals with name brand funds and they're all the
258
00:11:37,379 --> 00:11:38,740
ones that didn't do well.
259
00:11:38,740 --> 00:11:42,100
Like, where were you for the deal that they did
and why didn't they loop you in?
260
00:11:42,100 --> 00:11:42,500
Right.
261
00:11:42,500 --> 00:11:45,459
It always makes you ask the question, like, why
am I seeing this?
262
00:11:45,459 --> 00:11:50,254
There's an old Mark Souther post that I send to
people all the time, and it's called why am I
263
00:11:50,254 --> 00:11:50,815
so lucky?
264
00:11:50,815 --> 00:11:53,054
And there are times I'm like, hey.
265
00:11:53,054 --> 00:11:57,294
If one of those big firms invites you into a
deal and you don't have a relationship with
266
00:11:57,294 --> 00:11:58,894
them, it's worth asking.
267
00:11:58,975 --> 00:11:59,774
Why wasn't I chosen?
268
00:11:59,909 --> 00:12:04,629
I love that a portion of our job is supporting
our portfolio companies in any way that they
269
00:12:04,629 --> 00:12:06,870
need, especially to graduate subsequent rounds.
270
00:12:06,870 --> 00:12:09,190
But I do find myself a couple of times I can
think of.
271
00:12:09,190 --> 00:12:12,389
When an investor that I don't have a close
relationship sends me the note and says, this
272
00:12:12,389 --> 00:12:16,825
is a company that we've been getting a lot of
inbound on and they're raising.
273
00:12:16,825 --> 00:12:20,424
And then I'm asking my question, why are you
giving it to me if that's the case?
274
00:12:20,424 --> 00:12:24,985
And like I think about most similar companies
who do get absolutely sworn by inbound requests
275
00:12:24,985 --> 00:12:28,264
from investors, they're actively telling us,
please do not extend infros.
276
00:12:28,629 --> 00:12:31,350
And it's not to say there's a a good or bad
scenario.
277
00:12:31,350 --> 00:12:33,029
It's just something to observe.
278
00:12:33,029 --> 00:12:37,029
Well, as you know, every quarter, we send out
this email to a couple 100 of our closest
279
00:12:37,029 --> 00:12:42,745
friends, and we can see all of the intro
requests quickly coalesce on a very small Yes.
280
00:12:43,064 --> 00:12:46,424
The 300 companies that are probably five, they
get 75%.
281
00:12:46,424 --> 00:12:49,304
And most of them, I would say, the ones that
have the least amount of information attached
282
00:12:49,304 --> 00:12:50,584
to them with description.
283
00:12:50,584 --> 00:12:51,944
It's it's always tell.
284
00:12:51,944 --> 00:12:52,504
Yes.
285
00:12:52,584 --> 00:12:56,424
It is interesting to me just to see, even
within our own portfolio, the gravity of
286
00:12:56,424 --> 00:12:59,379
attention towards the things that people think
are gonna work.
287
00:12:59,379 --> 00:13:02,899
We live in a world where I think in venture,
money comes really late.
288
00:13:02,899 --> 00:13:05,379
So I think people are always looking for a
proxy signal.
289
00:13:05,379 --> 00:13:07,299
Graduation rates are a proxy signal.
290
00:13:07,299 --> 00:13:09,299
Co investors are a proxy signal.
291
00:13:09,379 --> 00:13:12,975
Founder backgrounds are a proxy signal, but
they're all proxy signals.
292
00:13:12,975 --> 00:13:14,575
They're not single in themselves.
293
00:13:14,575 --> 00:13:17,615
One last question here is they did talk about
secondary briefly.
294
00:13:17,615 --> 00:13:22,815
But from the perspective of sometimes investors
aren't as enthusiastic when their founder opts
295
00:13:22,815 --> 00:13:26,174
to take part in secondary, mostly because they
feel like, I haven't got my money.
296
00:13:26,669 --> 00:13:27,309
Why do you?
297
00:13:27,309 --> 00:13:28,750
What is your perspective on that?
298
00:13:28,750 --> 00:13:31,789
I think there were two things about secondaries
I thought about in that part of the episode.
299
00:13:31,789 --> 00:13:35,230
One is, you know, liquidity windows and venture
are irregular.
300
00:13:35,230 --> 00:13:36,990
A lot of years, no money comes out.
301
00:13:36,990 --> 00:13:40,350
Then you get these broad aperture moments where
you can sell everything Yeah.
302
00:13:40,350 --> 00:13:41,205
At the door shut.
303
00:13:41,285 --> 00:13:44,004
Said we don't make money in venture and
equilibrium.
304
00:13:44,004 --> 00:13:45,045
I think about that a lot.
305
00:13:45,045 --> 00:13:49,605
And I think part of the reason companies are
staying private for so long is the development
306
00:13:49,605 --> 00:13:51,605
of a mature secondaries market.
307
00:13:51,605 --> 00:13:56,160
And I think everybody right now has an
incentives to have a healthy, mature secondary
308
00:13:56,160 --> 00:13:56,639
market.
309
00:13:56,639 --> 00:13:58,960
Secondary funds are like, this is great.
310
00:13:59,040 --> 00:14:01,120
Maybe before, kinda get people to sell them.
311
00:14:01,120 --> 00:14:02,080
There's this quality.
312
00:14:02,080 --> 00:14:04,799
I think a lot of VCs before would say, why
would I do a secondary?
313
00:14:04,799 --> 00:14:06,000
This is one of my best companies.
314
00:14:06,000 --> 00:14:07,040
I'm gonna take it public.
315
00:14:07,040 --> 00:14:08,320
And now that doesn't happen as much.
316
00:14:08,325 --> 00:14:12,565
So you can stay private longer because there's
more secondary capital, which means as a
317
00:14:12,565 --> 00:14:15,365
founder, you can get liquidity without going
public.
318
00:14:15,365 --> 00:14:19,125
As an early stage venture fund like precursor,
you can get liquidity either by selling to a
319
00:14:19,125 --> 00:14:20,644
secondary fund or to another buyer.
320
00:14:20,644 --> 00:14:24,649
Because I think all of these forces are
conspiring to push They sort of go public date
321
00:14:24,649 --> 00:14:26,169
out for company much later.
322
00:14:26,169 --> 00:14:30,250
And then, you know, what's chicken and egg is
that you need 3 to $500,000,000 in ARR to go
323
00:14:30,250 --> 00:14:33,769
public if that's really the bar, it seems to be
the bar that just takes more.
324
00:14:33,769 --> 00:14:35,850
But some of the companies that are still
private are well beyond.
325
00:14:36,115 --> 00:14:40,195
And so my belief is that it doesn't matter what
I think about secondaries.
326
00:14:40,195 --> 00:14:40,915
They're gravity.
327
00:14:40,915 --> 00:14:42,995
They are just a part of the ecosystem now.
328
00:14:42,995 --> 00:14:44,595
Founders are going to take them.
329
00:14:44,595 --> 00:14:46,674
Funds are gonna be offered secondaries.
330
00:14:46,674 --> 00:14:49,075
This is a new feature adventure.
331
00:14:49,075 --> 00:14:52,950
And I think one of the most dangerous things
you could do at any business is to be too
332
00:14:52,950 --> 00:14:54,309
nostalgic for the past.
333
00:14:54,309 --> 00:14:57,990
I don't think we're going back to a world where
a company should not go public in seven or ten
334
00:14:57,990 --> 00:14:59,910
years, hold only business.
335
00:14:59,910 --> 00:15:02,950
But that also highlights, and they kinda joke
about this, but it's true.
336
00:15:02,950 --> 00:15:05,190
Sometimes something that goes to eight will go
to 80.
337
00:15:05,190 --> 00:15:09,524
And so I used to tell our LPs, especially in
2020, the conditional probability to get into a
338
00:15:09,524 --> 00:15:13,605
billion dollar valuation once you got to a
$100,000,000 valuation at rate 20 was quite
339
00:15:13,605 --> 00:15:13,925
high.
340
00:15:13,925 --> 00:15:16,965
If you got to a 100, somebody was gonna
probably get you a billion.
341
00:15:16,965 --> 00:15:18,804
So in that world, selling is busy.
342
00:15:18,804 --> 00:15:22,090
You know that there's a high probability
there's another high mark coming.
343
00:15:22,090 --> 00:15:26,250
I think people laughed at OpenAI at this or
maybe scoffed more than laughed.
344
00:15:26,250 --> 00:15:32,090
And thus far, every time you could buy OpenAI,
you get a markup in twelve to eighteen months.
345
00:15:32,090 --> 00:15:37,195
Going off to our next topic, Rohit Madal, an
early stage startup investor and cofounder of
346
00:15:37,195 --> 00:15:41,595
Stilt, wrote a LinkedIn post sharing a common
but really difficult dilemma some founders
347
00:15:41,595 --> 00:15:42,154
face.
348
00:15:42,235 --> 00:15:46,795
What do you do when you're at 1,500,000.0 in
ARR with six months of runway?
349
00:15:46,795 --> 00:15:50,075
Do you raise a down round, or do you seek an
acquisition?
350
00:15:50,075 --> 00:15:54,410
Rohit argues that both processes are demanding
and mutually exclusive.
351
00:15:54,410 --> 00:15:59,210
He encourages founders to honestly assess their
energy and conviction before choosing a path.
352
00:15:59,210 --> 00:16:02,490
If you wanna choose m and a, you'll need at
least two serious fires.
353
00:16:02,490 --> 00:16:05,664
If you wanna raise, you'll need to be
transparent and fully commit.
354
00:16:05,664 --> 00:16:08,944
Either way, going in half in can destroy that
optionality.
355
00:16:08,944 --> 00:16:11,985
So he says that fundraising and m and a are
both full time jobs.
356
00:16:11,985 --> 00:16:15,745
How have you been able to kind of advise
founders when they brought up some of these
357
00:16:15,745 --> 00:16:16,225
issues?
358
00:16:16,225 --> 00:16:18,064
I think most founders think I can do both.
359
00:16:18,339 --> 00:16:19,860
You could, probably not well.
360
00:16:19,860 --> 00:16:20,339
Yeah.
361
00:16:20,339 --> 00:16:25,460
So one thing I ask, and this is very timely
because in q one of this year, I wrote to our
362
00:16:25,460 --> 00:16:29,620
LP and said, I think this is gonna be a big
year of what I call the great realization.
363
00:16:29,620 --> 00:16:33,285
We're gonna have a ton of companies that and
realization is a double entendre.
364
00:16:33,285 --> 00:16:36,565
They will realize their fate, and also we will
realize the position.
365
00:16:36,725 --> 00:16:39,845
There's be a bunch of companies that wake up
and say, I've been doing this for five years.
366
00:16:39,845 --> 00:16:41,684
We've achieved some level of success.
367
00:16:41,684 --> 00:16:44,725
We are clearly not open AI or anthropic or
cursor.
368
00:16:44,725 --> 00:16:45,845
We're not a breakout.
369
00:16:45,845 --> 00:16:46,690
What are we do?
370
00:16:46,690 --> 00:16:49,809
And your options are, like, get profitable and
continue to grind it out.
371
00:16:49,809 --> 00:16:53,970
Sell the company and partner with somebody else
or maybe wind it down and return some capital.
372
00:16:53,970 --> 00:16:57,889
I think for most of those companies, they're
just not interesting enough to the series a
373
00:16:57,889 --> 00:16:59,490
market to really fundraise.
374
00:16:59,490 --> 00:17:03,205
When I find this, you know, one of our LPs last
week was like, why don't we get more of these
375
00:17:03,205 --> 00:17:04,085
companies to sell?
376
00:17:04,085 --> 00:17:05,684
We could try to make somebody sell.
377
00:17:05,684 --> 00:17:07,365
I haven't found that to be effective.
378
00:17:07,365 --> 00:17:12,724
Oftentimes, what I see happen is people try to
do both and then go all in on fundraising and
379
00:17:12,724 --> 00:17:14,804
say, well, if I can't fundraise, then I'll sell
the business.
380
00:17:14,804 --> 00:17:16,964
And then they come in with two months of
runway, and I go, okay.
381
00:17:17,160 --> 00:17:18,599
We can try to sell the company.
382
00:17:18,599 --> 00:17:19,559
Who are we gonna sell it to?
383
00:17:19,559 --> 00:17:22,279
They're like, I was hoping you could tell me
without Okay.
384
00:17:22,279 --> 00:17:23,319
Who do you know?
385
00:17:23,320 --> 00:17:23,880
Right.
386
00:17:23,880 --> 00:17:26,440
And they're like, well, I have a friend at
Google.
387
00:17:26,440 --> 00:17:26,840
I'm like
388
00:17:26,920 --> 00:17:27,320
Don't we
389
00:17:27,320 --> 00:17:27,559
all?
390
00:17:27,559 --> 00:17:28,359
Don't we up.
391
00:17:28,359 --> 00:17:29,160
Literally no.
392
00:17:29,160 --> 00:17:29,559
Yawn.
393
00:17:29,559 --> 00:17:32,284
And oftentimes, they tell them it's very hard
to buy a stranger.
394
00:17:32,284 --> 00:17:33,724
Nobody knows your company.
395
00:17:33,804 --> 00:17:35,004
Nobody knows what you do.
396
00:17:35,004 --> 00:17:40,684
You're asking a lot of a product manager or
court dev person who's got a busy agenda and
397
00:17:40,684 --> 00:17:44,990
their own priorities to stop and make time for
a company where they have no connection, where
398
00:17:44,990 --> 00:17:47,710
it's gonna be a lot of their time and energy
for not a lot of money.
399
00:17:47,710 --> 00:17:51,230
We have a lot of companies where I think in the
end, they're like, jeez, I wish I had either
400
00:17:51,230 --> 00:17:55,150
started building relationships with potential
buyers much earlier in our company's life
401
00:17:55,150 --> 00:17:59,015
cycle, or I wish all the time I wasted wasted
trying to hail Mary fundraise.
402
00:17:59,015 --> 00:18:00,774
Like, this weekend, I talked to somebody.
403
00:18:01,095 --> 00:18:05,575
They have two months of runway, and they've got
half of the round done, and they're like, we
404
00:18:05,575 --> 00:18:06,295
need cash.
405
00:18:06,295 --> 00:18:10,390
And I was like, I don't think anyone's gonna
give you money in your current form.
406
00:18:10,390 --> 00:18:11,590
Too little runway.
407
00:18:11,590 --> 00:18:12,950
It's too hard of financing.
408
00:18:12,950 --> 00:18:17,750
I think you could cut your burn and give
yourself four to six months to operate, and
409
00:18:17,750 --> 00:18:20,789
maybe then we could help you raise money with a
lower burn.
410
00:18:20,789 --> 00:18:23,174
In your current form, the company is fundable.
411
00:18:23,174 --> 00:18:23,414
Yeah.
412
00:18:23,414 --> 00:18:27,174
And every year, I get more comfortable just
telling people, I think your company's
413
00:18:27,174 --> 00:18:28,774
unfundable in its current form.
414
00:18:28,774 --> 00:18:32,375
Here are the things that would have to change
in terms of growth rate spend for this company
415
00:18:32,375 --> 00:18:34,615
to be fundable, but right now, it's unfundable.
416
00:18:34,615 --> 00:18:36,214
And it's not a fun message to deliver.
417
00:18:36,214 --> 00:18:41,690
Is there an advantage of sharing these types of
options and offerings to them earlier on in the
418
00:18:41,690 --> 00:18:42,890
journey when it's not relevant?
419
00:18:42,890 --> 00:18:46,250
Or do you only share what it's feeling like
it's heading that direction?
420
00:18:46,250 --> 00:18:49,690
I think if you bring it up too early, some
founders are like, oh, you don't believe in my
421
00:18:49,690 --> 00:18:49,930
company.
422
00:18:49,930 --> 00:18:50,170
Yeah.
423
00:18:50,170 --> 00:18:50,250
I'm
424
00:18:50,250 --> 00:18:51,794
like, what I said?
425
00:18:51,794 --> 00:18:52,194
Right.
426
00:18:52,194 --> 00:18:56,274
In other cases, you can bring it up, but what I
found is I can tell a founder, hey.
427
00:18:56,274 --> 00:18:57,315
We have eighteen months of cash.
428
00:18:57,315 --> 00:19:01,394
We should make sure we have a relationship with
the companies that could someday be partnership
429
00:19:01,394 --> 00:19:01,875
buyers.
430
00:19:01,875 --> 00:19:02,914
And and they're like, okay.
431
00:19:02,914 --> 00:19:05,289
And it's important, but it's not urgent.
432
00:19:05,289 --> 00:19:09,129
And urgent things crowded out, and then a year
later, they're like, what's your relationship
433
00:19:09,129 --> 00:19:11,129
with OpenAI or Google or whatever?
434
00:19:11,129 --> 00:19:15,210
Like, well, the time to start building that was
a little bit of I mean, kinds of little things.
435
00:19:15,210 --> 00:19:16,409
Getting to know people in the org.
436
00:19:16,484 --> 00:19:20,804
If you're going to a conference where they're
gonna be there, finding this isn't this doesn't
437
00:19:20,804 --> 00:19:21,525
have to be us.
438
00:19:21,525 --> 00:19:25,204
This is getting to know them, building
touchpoint, having them get to know you, you
439
00:19:25,204 --> 00:19:28,325
get to know them so that if there is something
to be done, there's a relationship.
440
00:19:28,325 --> 00:19:28,804
Right.
441
00:19:28,804 --> 00:19:32,349
And they don't have to be along a journey while
the is just being made the entire time.
442
00:19:32,349 --> 00:19:34,109
It's really just establishing a relationship.
443
00:19:34,109 --> 00:19:35,950
It doesn't have to be anything transactional.
444
00:19:35,950 --> 00:19:39,150
What doesn't work or what doesn't feel natural
is when you're rushing to do it.
445
00:19:39,069 --> 00:19:42,109
Then it becomes stale and uncomfortable for
everyone involved.
446
00:19:42,109 --> 00:19:46,349
And for most of these companies, it's just not
worth it for the buyer to spend a lot of time
447
00:19:46,349 --> 00:19:50,505
and energy because it's a small transaction,
and it's a headache.
448
00:19:50,505 --> 00:19:52,505
And so you don't wanna be a headache.
449
00:19:52,505 --> 00:19:52,984
Yeah.
450
00:19:52,984 --> 00:19:54,984
Well, we are all out of time today.
451
00:19:54,984 --> 00:19:58,984
Thank you, Charles, for joining us in hot New
York City this week.
452
00:19:58,984 --> 00:20:00,650
Thank you our listeners for stopping by.
453
00:20:00,650 --> 00:20:03,690
Please like and subscribe, and we'll talk with
you all next week.
454
00:20:03,690 --> 00:20:04,250
Thank you.
00:00:00,000 --> 00:00:03,919
As Josh and Jeff mentioned, the average venture
firm is not a good investment.
2
00:00:03,919 --> 00:00:07,759
The real question is show me that you have a
history of being able to find outlier
3
00:00:07,759 --> 00:00:10,320
companies, whether I've heard of those
companies or not.
4
00:00:10,320 --> 00:00:12,959
It's the week of June 23.
5
00:00:12,960 --> 00:00:16,774
Welcome to the Learning Corner, a Precursor
Ventures podcast.
6
00:00:20,054 --> 00:00:22,214
Welcome to The Learning Corner by Precursor.
7
00:00:22,214 --> 00:00:27,335
I'm Mia Foranum, and I'm joined by our GP and
managing partner, Charles Hudson, where we will
8
00:00:27,335 --> 00:00:31,969
be talking through the articles and Goodreads
that caught our teens' attention over the past
9
00:00:32,049 --> 00:00:32,530
week.
10
00:00:32,530 --> 00:00:37,329
Our first piece is episode eight from the
relatively new podcast, Uncapped, hosted by
11
00:00:37,329 --> 00:00:42,210
Jack Altman, where he interviews First Round
Capital's Josh Hovleman, and reflects on how
12
00:00:42,210 --> 00:00:47,354
Venture has evolved from a boutique high craft
discipline into a fragmented ecosystem.
13
00:00:47,354 --> 00:00:49,835
There's a lot to dive into here.
14
00:00:49,914 --> 00:00:54,634
Josh's Blackstone vacation adventure,
harvesting your winners in bubble times, and
15
00:00:54,634 --> 00:00:59,515
continuously creating value as a fund manager
by operating like a company and constantly
16
00:00:59,515 --> 00:01:01,600
seeking learning opportunities.
17
00:01:01,760 --> 00:01:06,640
Josh and Jack spoke a lot about the SOPA
capital that is relevancy Yeah.
18
00:01:06,719 --> 00:01:12,079
As an investor and how it can earn you access
to harder deals and meetings with larger LPs or
19
00:01:12,079 --> 00:01:12,719
investors.
20
00:01:12,719 --> 00:01:17,995
This relevancy is often fueled by firm wide
marketing efforts and broader branding and
21
00:01:17,995 --> 00:01:18,635
medium.
22
00:01:18,635 --> 00:01:24,155
Relevancy is one of those really squishy terms
in venture because the beauty and the curse of
23
00:01:24,155 --> 00:01:28,555
the private markets is that you, as a venture
fund, can selectively choose what to share with
24
00:01:28,555 --> 00:01:30,314
the world and shape your brand.
25
00:01:30,314 --> 00:01:34,859
So how do you think about striking the balance
when it comes to chasing relevancy?
26
00:01:35,020 --> 00:01:38,780
And from an investor's perspective, how much
weight should we actually place on it?
27
00:01:38,780 --> 00:01:40,540
I thought the podcast was super good.
28
00:01:40,540 --> 00:01:42,459
I went back and listened to it a second time.
29
00:01:42,895 --> 00:01:45,935
I think this relevance thing is really
interesting, and sometimes it'll be in meetings
30
00:01:45,935 --> 00:01:48,015
with people like, oh, well, they're just buying
logos.
31
00:01:48,015 --> 00:01:50,814
They invested in this hot company really late
just to have the logo.
32
00:01:50,814 --> 00:01:52,254
But what if logo buying works?
33
00:01:52,254 --> 00:01:54,974
What if being able to say, I'm an investor in
OpenAI?
34
00:01:54,974 --> 00:01:59,409
What if a naive person says, well, who cares if
you bought in some crazy high valuation of your
35
00:01:59,409 --> 00:02:00,049
seed fund?
36
00:02:00,049 --> 00:02:02,049
You can say, I'm an investor in OpenAI.
37
00:02:02,049 --> 00:02:06,450
And I think a lot of founders, I think,
logically, oh, I want to take money from the
38
00:02:06,450 --> 00:02:09,250
people who are already invested in the very
best companies.
39
00:02:09,534 --> 00:02:12,014
Because a, those people have good picking
ability.
40
00:02:12,014 --> 00:02:13,455
They have a good brand halo.
41
00:02:13,455 --> 00:02:15,134
Maybe they can introduce me to that company.
42
00:02:15,134 --> 00:02:17,615
So I think there is some logic in buying logos.
43
00:02:17,615 --> 00:02:21,694
And I think it's also important to remember,
you know, when I started venture twenty five
44
00:02:21,694 --> 00:02:25,490
years ago, there was not as much supply of
capital.
45
00:02:25,490 --> 00:02:30,370
I don't think venture firms had to work as hard
to differentiate themselves and be chosen.
46
00:02:30,370 --> 00:02:34,930
Now, as the podcast mentioned, there's I think
Josh mentioned 10,000 venture firms, 20,000
47
00:02:34,930 --> 00:02:35,569
check writers.
48
00:02:35,569 --> 00:02:38,050
Anything you could do to stand out and be
chosen to be top of mind.
49
00:02:38,264 --> 00:02:42,185
I think one of the fun things for us is via
well over 250 active companies.
50
00:02:42,185 --> 00:02:44,344
50 of whom are fundraising at any point in
time.
51
00:02:44,344 --> 00:02:46,104
I get to see who they wanna meet.
52
00:02:46,104 --> 00:02:49,784
And who they wanna meet is usually not a
function of what firms have the highest IRR
53
00:02:50,280 --> 00:02:51,000
TVPI.
54
00:02:51,000 --> 00:02:55,319
And it's usually like, oh, person produced the
piece of content that I read about my market,
55
00:02:55,319 --> 00:02:56,039
and I like them.
56
00:02:56,039 --> 00:03:00,919
Or this firm shows up in all of these searches
that I do for being an investor in a bunch of
57
00:03:00,919 --> 00:03:02,280
categories that I care about.
58
00:03:02,280 --> 00:03:05,080
And I think with private market, the founder
has to choose you.
59
00:03:05,080 --> 00:03:08,555
So anything you can do to increase the odds
that you'll be chosen.
60
00:03:08,555 --> 00:03:12,395
And as Josh mentioned in the podcast, volume is
another way to be adjusted.
61
00:03:12,395 --> 00:03:16,314
If you are everywhere, if you're in all of the
right rooms, if you're seeing all the most
62
00:03:16,314 --> 00:03:17,835
interesting companies, you'll bubble up.
63
00:03:17,835 --> 00:03:22,239
And it's not surprising to me that oftentimes,
the firms that founders are most interested in
64
00:03:22,239 --> 00:03:26,400
meeting are generally the firms that have the
highest brand perception, whether they're
65
00:03:26,400 --> 00:03:28,479
aggressively self marketing or not.
66
00:03:28,479 --> 00:03:28,639
Yeah.
67
00:03:28,639 --> 00:03:32,514
And I think there's also a set of firms, as
Josh mentioned, like Altos and others, that
68
00:03:32,514 --> 00:03:35,794
have fantastic performance and are less focused
on that.
69
00:03:35,794 --> 00:03:39,555
But I do think for some of the big firms, one
way to create relevance in a lot of content,
70
00:03:39,555 --> 00:03:43,314
have a ton of partners out there, be down the
street, have a ton of people meeting with
71
00:03:43,314 --> 00:03:45,155
founders, and sort of feel under present.
72
00:03:45,240 --> 00:03:50,120
There's so many directions I wanna go after But
one thing back to the logo chasing, and it just
73
00:03:50,120 --> 00:03:55,480
came up because I had a conversation with an LP
friend of mine, and she mentioned how it's so
74
00:03:55,480 --> 00:04:00,574
common for first time buns to put so much
effort into portfolio construction and start,
75
00:04:00,574 --> 00:04:04,495
like, cherry picking specific logos that almost
fit outside their thesis that just showcase
76
00:04:04,495 --> 00:04:06,335
they can get into competitive deal.
77
00:04:06,335 --> 00:04:08,415
But the LP mentioned that's not your thesis.
78
00:04:08,415 --> 00:04:10,175
And I think even Josh and Jack spent that Yeah.
79
00:04:10,175 --> 00:04:14,270
It's fascinating that funds that wanna raise, I
don't their sixth, seventh, eighth fund.
80
00:04:14,270 --> 00:04:19,149
If they completely shifted the side of the
fund, they're raising on a track record from a
81
00:04:19,149 --> 00:04:21,230
model that they no longer operate out of.
82
00:04:21,230 --> 00:04:24,430
I thought that was a really subtle but
important point, which is that there are funds
83
00:04:24,430 --> 00:04:28,675
that are raising multibillion dollar new funds
to do entirely different activities, but
84
00:04:28,675 --> 00:04:30,915
leveraging prime brokers from an earlier era.
85
00:04:30,915 --> 00:04:34,915
I also just like Josh talking about his vision
for I didn't necessarily have 50 people.
86
00:04:34,915 --> 00:04:35,154
Yeah.
87
00:04:35,154 --> 00:04:36,435
But just his vision for, hey.
88
00:04:36,435 --> 00:04:38,194
How do you if you're a boutique practitioner?
89
00:04:38,194 --> 00:04:42,089
How do you remain true to what you wanna build
in a world where everybody around you is
90
00:04:42,089 --> 00:04:42,970
raising more capital?
91
00:04:42,970 --> 00:04:43,290
Yeah.
92
00:04:43,290 --> 00:04:48,170
And one thing he actually talked about was the
presence of a non investing partner.
93
00:04:48,170 --> 00:04:52,089
I think they talked about was such a large
reason why they've been able to keep the brand
94
00:04:52,250 --> 00:04:54,675
enduring as it is within first round.
95
00:04:54,675 --> 00:04:56,194
What are your thoughts on that?
96
00:04:56,194 --> 00:04:59,634
The one thing I will think is that I've heard
Josh talk about this at length.
97
00:04:59,634 --> 00:05:03,475
This most firms don't think about their
decision making processes in common.
98
00:05:03,475 --> 00:05:07,389
And if you thought about your decision making
processes in you would spend a lot more time
99
00:05:07,389 --> 00:05:09,790
and care thinking about, well, how do we
actually make decisions?
100
00:05:09,790 --> 00:05:12,750
And I'd argue in venture, decision making is
the product.
101
00:05:12,750 --> 00:05:17,629
Your portfolio is the sum total of the things
that you saw, the things that you chose to
102
00:05:17,629 --> 00:05:18,350
invest in.
103
00:05:18,350 --> 00:05:21,534
And I think what he outlined, I don't think
that will work for me.
104
00:05:21,534 --> 00:05:21,774
Yeah.
105
00:05:21,774 --> 00:05:25,375
Like, it's a little bit more rigor, and we
don't have as many decision makers at the firm.
106
00:05:25,375 --> 00:05:27,935
But I think a lot about, on our end, what is
our product?
107
00:05:27,935 --> 00:05:30,814
And I think I'm happiest with our decision
making processes.
108
00:05:30,814 --> 00:05:32,814
Individuals following their own intuition.
109
00:05:32,814 --> 00:05:37,040
And we write small enough checks to early stage
companies that there isn't a lot of metadata to
110
00:05:37,040 --> 00:05:37,680
analyze.
111
00:05:37,680 --> 00:05:41,520
But I think it was Jack who said, if most VCs
looked at the way that their own firms are run
112
00:05:41,520 --> 00:05:44,480
and you have portfolio companies that were run
that way, you'd be horrified.
113
00:05:44,480 --> 00:05:49,324
Because being an adventure fund for most funds
is lengthy discussions and discourse and
114
00:05:49,324 --> 00:05:52,764
butting heads, which is all really wonderful
insights you can draw, but then it's not
115
00:05:52,764 --> 00:05:53,245
recorded.
116
00:05:53,245 --> 00:05:56,285
I said devil's thinking on that because I think
people would be interested to know within
117
00:05:56,285 --> 00:06:01,729
precursor, how do we think about postmortems or
reflections on inflection point for our
118
00:06:01,729 --> 00:06:02,209
companies?
119
00:06:02,209 --> 00:06:05,410
He said, basically, memory is a crappy way to
try to keep track of things.
120
00:06:05,410 --> 00:06:06,289
And I agree with you.
121
00:06:06,289 --> 00:06:09,810
The one thing I realized probably a few years
ago was people would ask me, what did you think
122
00:06:09,810 --> 00:06:11,009
of that company we invested?
123
00:06:11,009 --> 00:06:15,785
Inevitably, I had some rosy, overly optimistic
view of how perfect the company was when we
124
00:06:15,785 --> 00:06:16,264
invested.
125
00:06:16,264 --> 00:06:20,024
And I was like, well, the only way I can think
of to solve this hindsight bias is to actually
126
00:06:20,024 --> 00:06:21,305
capture your thoughts in the moment.
127
00:06:21,305 --> 00:06:24,665
So now we have a whole process of, like, how do
we capture at the time of wire?
128
00:06:24,665 --> 00:06:26,024
What do we think is gonna happen?
129
00:06:26,024 --> 00:06:31,000
We do more as a documentation documentation of
what we think about the founders, and I find
130
00:06:31,000 --> 00:06:33,639
that you capture that in real time as the only
way to be honest.
131
00:06:33,639 --> 00:06:33,959
Yeah.
132
00:06:33,959 --> 00:06:36,199
And then periodically, you wanna update your
thinking.
133
00:06:36,199 --> 00:06:37,800
So six months, I go, alright.
134
00:06:37,800 --> 00:06:39,480
I've been working with this company for six
months.
135
00:06:39,480 --> 00:06:43,064
They've had a time to take the money we gave
them and turn it into some insights.
136
00:06:43,064 --> 00:06:44,185
How effective has this company been?
137
00:06:44,185 --> 00:06:46,904
And we ask the same or a very similar set of
questions again.
138
00:06:46,904 --> 00:06:50,824
Ever means it's been revealing to see, were
there things that I saw and or was worried
139
00:06:50,824 --> 00:06:52,904
about before we invested that have already
shown up?
140
00:06:52,904 --> 00:06:55,865
And conversely, were there things that was
worried about that appeared not to be a
141
00:06:55,865 --> 00:06:56,104
problem?
142
00:06:56,104 --> 00:06:56,345
Yeah.
143
00:06:56,399 --> 00:07:00,720
It one of the things that I find is really
great about our process, the ability to be
144
00:07:00,720 --> 00:07:02,560
honest about where we think our companies are.
145
00:07:02,560 --> 00:07:02,720
Yeah.
146
00:07:02,720 --> 00:07:06,319
Where I think a lot of fun don't wanna put in
writing where they think the right positions
147
00:07:06,319 --> 00:07:06,720
are.
148
00:07:06,720 --> 00:07:09,759
And I think it's a fear of where it could go or
what if they're wrong.
149
00:07:09,759 --> 00:07:14,345
And I think back to Jack and Josh's whole
point, of if we could capture a lot of that
150
00:07:14,345 --> 00:07:16,504
information and learn from it, that's the most
important part.
151
00:07:16,504 --> 00:07:19,704
So it does help you crystallize memories in a
more formalized way.
152
00:07:19,785 --> 00:07:21,944
It also helps other people learn from other
people.
153
00:07:21,944 --> 00:07:22,264
They can
154
00:07:22,264 --> 00:07:23,625
think, well, what did you think would happen?
155
00:07:23,625 --> 00:07:24,104
Oh, wow.
156
00:07:24,104 --> 00:07:27,305
You know, we have the insurance this summer
looking at a bunch of decisions we've made, and
157
00:07:27,305 --> 00:07:28,529
they weren't part of those.
158
00:07:28,529 --> 00:07:31,649
So they can look at them as an outsider and
say, well, these are the things you're worried
159
00:07:31,649 --> 00:07:31,889
about.
160
00:07:31,889 --> 00:07:33,089
Why did you do this anyway?
161
00:07:33,089 --> 00:07:33,649
And what happened?
162
00:07:33,649 --> 00:07:38,449
One of my favorite comparisons in the entire
episode was when they talked about the hot hand
163
00:07:38,449 --> 00:07:38,930
fallacy.
164
00:07:38,930 --> 00:07:39,169
Yeah.
165
00:07:39,169 --> 00:07:45,324
And talking about how ironically it doesn't
apply to somebody like Steph Curry who has paid
166
00:07:45,324 --> 00:07:49,725
tens of millions of dollars because he had a
high percentage hit rate on the shot that he
167
00:07:49,725 --> 00:07:50,285
takes.
168
00:07:50,285 --> 00:07:52,845
It does very much apply to venture.
169
00:07:52,845 --> 00:07:58,910
Most cases, Josh and Jack talked about how
investors are actually rewarded on the shots
170
00:07:58,910 --> 00:08:02,110
that they take, not the shots that they
actually bake.
171
00:08:02,110 --> 00:08:04,670
How do you think about that and venture and get
comfortable with that?
172
00:08:04,670 --> 00:08:05,710
I'll never forget.
173
00:08:05,710 --> 00:08:10,585
I met somebody, I won't say the firm, who was
at a firm that is associated as a seed investor
174
00:08:10,585 --> 00:08:12,345
with a bunch of really iconic companies.
175
00:08:12,345 --> 00:08:16,025
And we were doing one of these dinners where
you introduce yourself, and the person said,
176
00:08:16,025 --> 00:08:19,709
we're investors at these three iconic companies
and hundreds you've never of.
177
00:08:19,709 --> 00:08:20,670
That's pretty much true.
178
00:08:20,670 --> 00:08:25,470
And their whole brand is built on being
associated with three really iconic companies.
179
00:08:25,550 --> 00:08:30,589
And nobody penalizes, criticizes, or cares
about those 99% of the investment.
180
00:08:30,589 --> 00:08:33,345
And I find LPs and founders are often the same
way.
181
00:08:33,345 --> 00:08:35,105
They're like, what's the best company you're
in?
182
00:08:35,105 --> 00:08:39,504
Going back to this relevance thing, making a
bunch of investment and being in market creates
183
00:08:39,504 --> 00:08:40,065
relevance.
184
00:08:40,065 --> 00:08:41,825
And every now and then, I'll read some article.
185
00:08:41,825 --> 00:08:45,549
They're like, I can't believe Andreessen or
Sequoia invested in this stupid company.
186
00:08:45,549 --> 00:08:46,269
It's so dumb.
187
00:08:46,269 --> 00:08:47,709
And I'm like, does it doesn't matter.
188
00:08:47,709 --> 00:08:48,909
Also, you're talking about it.
189
00:08:48,909 --> 00:08:49,629
You're talking about it.
190
00:08:49,629 --> 00:08:50,509
You're talking about it.
191
00:08:50,509 --> 00:08:51,070
You care.
192
00:08:51,070 --> 00:08:53,309
And if it doesn't work, it doesn't matter.
193
00:08:53,309 --> 00:08:54,509
I think it's quite interesting.
194
00:08:54,509 --> 00:08:58,685
Doesn't appear to be much of a long term
penalty for being associated WeWork.
195
00:08:58,685 --> 00:09:00,205
It didn't work out with a lot of money.
196
00:09:00,205 --> 00:09:01,004
Kind of interesting.
197
00:09:01,004 --> 00:09:03,565
It's not like investing in WeWork was some
stain.
198
00:09:03,565 --> 00:09:04,685
It means you got to see the deal.
199
00:09:04,685 --> 00:09:09,565
You got to see the deal and you were part of
one of the more iconic companies of that time.
200
00:09:09,980 --> 00:09:14,220
Wouldn't make being a WeWork investor my whole
personality, but there are people who make
201
00:09:14,220 --> 00:09:18,940
single investments, their whole personality and
brand, and they they lean on that heavily.
202
00:09:18,940 --> 00:09:23,500
And my conclusion is there really is no
substitute adventure for being associated with
203
00:09:23,500 --> 00:09:24,540
a winning company.
204
00:09:24,540 --> 00:09:27,204
It almost doesn't really matter when you've
gotten them all.
205
00:09:27,204 --> 00:09:30,964
Like, now, I think if you can think I'm an
investor in OpenAI, sure people could say,
206
00:09:30,964 --> 00:09:31,764
well, when did you buy in?
207
00:09:31,764 --> 00:09:32,725
Was it through SPV?
208
00:09:32,725 --> 00:09:34,245
It almost doesn't really matter.
209
00:09:34,245 --> 00:09:34,804
I don't know.
210
00:09:34,804 --> 00:09:36,324
I think about this a lot.
211
00:09:36,324 --> 00:09:41,100
The best LPs I meet tend to focus on what are
you doing to get access to the truly spectral
212
00:09:41,100 --> 00:09:44,139
companies that matter, and do you have access
to those?
213
00:09:44,220 --> 00:09:48,139
And the LP that I meet that are less
sophisticated and wanna talk more about, like,
214
00:09:48,139 --> 00:09:49,660
the average outcome data.
215
00:09:49,660 --> 00:09:51,355
Like, what's the average graduation rate?
216
00:09:51,355 --> 00:09:55,834
What's the well, this isn't as Josh and Jack
mentioned, the average venture firm is not a
217
00:09:55,834 --> 00:09:56,475
good investment.
218
00:09:56,475 --> 00:10:00,315
The real question is show me that you have a
history of being able to find outlier
219
00:10:00,315 --> 00:10:02,235
companies, whether I've heard of those
companies.
220
00:10:02,235 --> 00:10:02,315
Or
221
00:10:02,634 --> 00:10:02,875
Yeah.
222
00:10:02,875 --> 00:10:06,009
I guess double clicking on that, how hard is
that do?
223
00:10:06,009 --> 00:10:10,169
Because I can imagine there's the fundamental
difference maybe of what LPs deemed to be high
224
00:10:10,169 --> 00:10:14,730
quality pre seed deal than what you think they
are, especially when you're early on in the
225
00:10:14,730 --> 00:10:16,649
fund and always see our logos.
226
00:10:16,649 --> 00:10:19,529
One thing I think about is, for example,
everyone talks about graduation rate.
227
00:10:19,529 --> 00:10:25,034
What if you had 10% graduation rate, but every
company that graduated was a Decacorn?
228
00:10:25,034 --> 00:10:27,514
I would rather have that than 50% graduation.
229
00:10:27,514 --> 00:10:30,394
But a lot of LPs are like, oh, well, 10%
graduation, that's low.
230
00:10:30,394 --> 00:10:32,394
Well, it's not low if you're looking for
outliers.
231
00:10:32,394 --> 00:10:35,355
It's not low if the graduates are exceptional
companies.
232
00:10:35,679 --> 00:10:39,440
And sympathetic to the play of LPs, they're
looking at a bunch of funds and they're gonna
233
00:10:39,440 --> 00:10:41,279
figure out, well, how do I evaluate this
person?
234
00:10:41,279 --> 00:10:45,440
Well, like, in the absence of being able to
underwrite portfolios at the company level, if
235
00:10:45,440 --> 00:10:47,040
I told you, you have two choices.
236
00:10:47,040 --> 00:10:49,759
This fund has 10% of its companies that get the
series a.
237
00:10:49,759 --> 00:10:51,894
This fund has 50% that get series a.
238
00:10:51,894 --> 00:10:55,335
Knowing nothing about the underlying companies,
you might say, give me the person who's 50.
239
00:10:55,335 --> 00:10:56,695
But you wanna know more.
240
00:10:56,695 --> 00:10:57,335
You wanna know more.
241
00:10:57,335 --> 00:11:00,294
But like on the servers, you could be like, oh,
show me the companies that have 50.
242
00:11:00,294 --> 00:11:00,695
Yeah.
243
00:11:00,695 --> 00:11:05,575
Or oh, this person has 20 companies in common
with entries that this person has two.
244
00:11:05,575 --> 00:11:10,259
But what if the two that this person has are
the two that are most important, and the 20
245
00:11:10,259 --> 00:11:12,820
that this person has are the 20 that don't
work?
246
00:11:12,820 --> 00:11:13,220
Right.
247
00:11:13,220 --> 00:11:16,740
You'd go, oh, on average, this person co
invests with the best people.
248
00:11:16,740 --> 00:11:17,059
Yeah.
249
00:11:17,059 --> 00:11:21,404
But a lot of this business comes down to
specifics, and I'm sympathetic to LPs who are
250
00:11:21,404 --> 00:11:23,884
trying to come up with these broad based
heuristics.
251
00:11:23,884 --> 00:11:24,205
Yeah.
252
00:11:24,205 --> 00:11:25,325
They will fail you.
253
00:11:25,325 --> 00:11:26,044
They will fail you.
254
00:11:26,044 --> 00:11:29,644
In the same way that as a VC, if you're like, a
broad based heuristic about what I'm looking
255
00:11:29,644 --> 00:11:32,044
for at founders, it will help you until it
fails you.
256
00:11:32,179 --> 00:11:32,579
Right.
257
00:11:32,579 --> 00:11:37,379
Now, it's a glaring flag if you're in all these
deals with name brand funds and they're all the
258
00:11:37,379 --> 00:11:38,740
ones that didn't do well.
259
00:11:38,740 --> 00:11:42,100
Like, where were you for the deal that they did
and why didn't they loop you in?
260
00:11:42,100 --> 00:11:42,500
Right.
261
00:11:42,500 --> 00:11:45,459
It always makes you ask the question, like, why
am I seeing this?
262
00:11:45,459 --> 00:11:50,254
There's an old Mark Souther post that I send to
people all the time, and it's called why am I
263
00:11:50,254 --> 00:11:50,815
so lucky?
264
00:11:50,815 --> 00:11:53,054
And there are times I'm like, hey.
265
00:11:53,054 --> 00:11:57,294
If one of those big firms invites you into a
deal and you don't have a relationship with
266
00:11:57,294 --> 00:11:58,894
them, it's worth asking.
267
00:11:58,975 --> 00:11:59,774
Why wasn't I chosen?
268
00:11:59,909 --> 00:12:04,629
I love that a portion of our job is supporting
our portfolio companies in any way that they
269
00:12:04,629 --> 00:12:06,870
need, especially to graduate subsequent rounds.
270
00:12:06,870 --> 00:12:09,190
But I do find myself a couple of times I can
think of.
271
00:12:09,190 --> 00:12:12,389
When an investor that I don't have a close
relationship sends me the note and says, this
272
00:12:12,389 --> 00:12:16,825
is a company that we've been getting a lot of
inbound on and they're raising.
273
00:12:16,825 --> 00:12:20,424
And then I'm asking my question, why are you
giving it to me if that's the case?
274
00:12:20,424 --> 00:12:24,985
And like I think about most similar companies
who do get absolutely sworn by inbound requests
275
00:12:24,985 --> 00:12:28,264
from investors, they're actively telling us,
please do not extend infros.
276
00:12:28,629 --> 00:12:31,350
And it's not to say there's a a good or bad
scenario.
277
00:12:31,350 --> 00:12:33,029
It's just something to observe.
278
00:12:33,029 --> 00:12:37,029
Well, as you know, every quarter, we send out
this email to a couple 100 of our closest
279
00:12:37,029 --> 00:12:42,745
friends, and we can see all of the intro
requests quickly coalesce on a very small Yes.
280
00:12:43,064 --> 00:12:46,424
The 300 companies that are probably five, they
get 75%.
281
00:12:46,424 --> 00:12:49,304
And most of them, I would say, the ones that
have the least amount of information attached
282
00:12:49,304 --> 00:12:50,584
to them with description.
283
00:12:50,584 --> 00:12:51,944
It's it's always tell.
284
00:12:51,944 --> 00:12:52,504
Yes.
285
00:12:52,584 --> 00:12:56,424
It is interesting to me just to see, even
within our own portfolio, the gravity of
286
00:12:56,424 --> 00:12:59,379
attention towards the things that people think
are gonna work.
287
00:12:59,379 --> 00:13:02,899
We live in a world where I think in venture,
money comes really late.
288
00:13:02,899 --> 00:13:05,379
So I think people are always looking for a
proxy signal.
289
00:13:05,379 --> 00:13:07,299
Graduation rates are a proxy signal.
290
00:13:07,299 --> 00:13:09,299
Co investors are a proxy signal.
291
00:13:09,379 --> 00:13:12,975
Founder backgrounds are a proxy signal, but
they're all proxy signals.
292
00:13:12,975 --> 00:13:14,575
They're not single in themselves.
293
00:13:14,575 --> 00:13:17,615
One last question here is they did talk about
secondary briefly.
294
00:13:17,615 --> 00:13:22,815
But from the perspective of sometimes investors
aren't as enthusiastic when their founder opts
295
00:13:22,815 --> 00:13:26,174
to take part in secondary, mostly because they
feel like, I haven't got my money.
296
00:13:26,669 --> 00:13:27,309
Why do you?
297
00:13:27,309 --> 00:13:28,750
What is your perspective on that?
298
00:13:28,750 --> 00:13:31,789
I think there were two things about secondaries
I thought about in that part of the episode.
299
00:13:31,789 --> 00:13:35,230
One is, you know, liquidity windows and venture
are irregular.
300
00:13:35,230 --> 00:13:36,990
A lot of years, no money comes out.
301
00:13:36,990 --> 00:13:40,350
Then you get these broad aperture moments where
you can sell everything Yeah.
302
00:13:40,350 --> 00:13:41,205
At the door shut.
303
00:13:41,285 --> 00:13:44,004
Said we don't make money in venture and
equilibrium.
304
00:13:44,004 --> 00:13:45,045
I think about that a lot.
305
00:13:45,045 --> 00:13:49,605
And I think part of the reason companies are
staying private for so long is the development
306
00:13:49,605 --> 00:13:51,605
of a mature secondaries market.
307
00:13:51,605 --> 00:13:56,160
And I think everybody right now has an
incentives to have a healthy, mature secondary
308
00:13:56,160 --> 00:13:56,639
market.
309
00:13:56,639 --> 00:13:58,960
Secondary funds are like, this is great.
310
00:13:59,040 --> 00:14:01,120
Maybe before, kinda get people to sell them.
311
00:14:01,120 --> 00:14:02,080
There's this quality.
312
00:14:02,080 --> 00:14:04,799
I think a lot of VCs before would say, why
would I do a secondary?
313
00:14:04,799 --> 00:14:06,000
This is one of my best companies.
314
00:14:06,000 --> 00:14:07,040
I'm gonna take it public.
315
00:14:07,040 --> 00:14:08,320
And now that doesn't happen as much.
316
00:14:08,325 --> 00:14:12,565
So you can stay private longer because there's
more secondary capital, which means as a
317
00:14:12,565 --> 00:14:15,365
founder, you can get liquidity without going
public.
318
00:14:15,365 --> 00:14:19,125
As an early stage venture fund like precursor,
you can get liquidity either by selling to a
319
00:14:19,125 --> 00:14:20,644
secondary fund or to another buyer.
320
00:14:20,644 --> 00:14:24,649
Because I think all of these forces are
conspiring to push They sort of go public date
321
00:14:24,649 --> 00:14:26,169
out for company much later.
322
00:14:26,169 --> 00:14:30,250
And then, you know, what's chicken and egg is
that you need 3 to $500,000,000 in ARR to go
323
00:14:30,250 --> 00:14:33,769
public if that's really the bar, it seems to be
the bar that just takes more.
324
00:14:33,769 --> 00:14:35,850
But some of the companies that are still
private are well beyond.
325
00:14:36,115 --> 00:14:40,195
And so my belief is that it doesn't matter what
I think about secondaries.
326
00:14:40,195 --> 00:14:40,915
They're gravity.
327
00:14:40,915 --> 00:14:42,995
They are just a part of the ecosystem now.
328
00:14:42,995 --> 00:14:44,595
Founders are going to take them.
329
00:14:44,595 --> 00:14:46,674
Funds are gonna be offered secondaries.
330
00:14:46,674 --> 00:14:49,075
This is a new feature adventure.
331
00:14:49,075 --> 00:14:52,950
And I think one of the most dangerous things
you could do at any business is to be too
332
00:14:52,950 --> 00:14:54,309
nostalgic for the past.
333
00:14:54,309 --> 00:14:57,990
I don't think we're going back to a world where
a company should not go public in seven or ten
334
00:14:57,990 --> 00:14:59,910
years, hold only business.
335
00:14:59,910 --> 00:15:02,950
But that also highlights, and they kinda joke
about this, but it's true.
336
00:15:02,950 --> 00:15:05,190
Sometimes something that goes to eight will go
to 80.
337
00:15:05,190 --> 00:15:09,524
And so I used to tell our LPs, especially in
2020, the conditional probability to get into a
338
00:15:09,524 --> 00:15:13,605
billion dollar valuation once you got to a
$100,000,000 valuation at rate 20 was quite
339
00:15:13,605 --> 00:15:13,925
high.
340
00:15:13,925 --> 00:15:16,965
If you got to a 100, somebody was gonna
probably get you a billion.
341
00:15:16,965 --> 00:15:18,804
So in that world, selling is busy.
342
00:15:18,804 --> 00:15:22,090
You know that there's a high probability
there's another high mark coming.
343
00:15:22,090 --> 00:15:26,250
I think people laughed at OpenAI at this or
maybe scoffed more than laughed.
344
00:15:26,250 --> 00:15:32,090
And thus far, every time you could buy OpenAI,
you get a markup in twelve to eighteen months.
345
00:15:32,090 --> 00:15:37,195
Going off to our next topic, Rohit Madal, an
early stage startup investor and cofounder of
346
00:15:37,195 --> 00:15:41,595
Stilt, wrote a LinkedIn post sharing a common
but really difficult dilemma some founders
347
00:15:41,595 --> 00:15:42,154
face.
348
00:15:42,235 --> 00:15:46,795
What do you do when you're at 1,500,000.0 in
ARR with six months of runway?
349
00:15:46,795 --> 00:15:50,075
Do you raise a down round, or do you seek an
acquisition?
350
00:15:50,075 --> 00:15:54,410
Rohit argues that both processes are demanding
and mutually exclusive.
351
00:15:54,410 --> 00:15:59,210
He encourages founders to honestly assess their
energy and conviction before choosing a path.
352
00:15:59,210 --> 00:16:02,490
If you wanna choose m and a, you'll need at
least two serious fires.
353
00:16:02,490 --> 00:16:05,664
If you wanna raise, you'll need to be
transparent and fully commit.
354
00:16:05,664 --> 00:16:08,944
Either way, going in half in can destroy that
optionality.
355
00:16:08,944 --> 00:16:11,985
So he says that fundraising and m and a are
both full time jobs.
356
00:16:11,985 --> 00:16:15,745
How have you been able to kind of advise
founders when they brought up some of these
357
00:16:15,745 --> 00:16:16,225
issues?
358
00:16:16,225 --> 00:16:18,064
I think most founders think I can do both.
359
00:16:18,339 --> 00:16:19,860
You could, probably not well.
360
00:16:19,860 --> 00:16:20,339
Yeah.
361
00:16:20,339 --> 00:16:25,460
So one thing I ask, and this is very timely
because in q one of this year, I wrote to our
362
00:16:25,460 --> 00:16:29,620
LP and said, I think this is gonna be a big
year of what I call the great realization.
363
00:16:29,620 --> 00:16:33,285
We're gonna have a ton of companies that and
realization is a double entendre.
364
00:16:33,285 --> 00:16:36,565
They will realize their fate, and also we will
realize the position.
365
00:16:36,725 --> 00:16:39,845
There's be a bunch of companies that wake up
and say, I've been doing this for five years.
366
00:16:39,845 --> 00:16:41,684
We've achieved some level of success.
367
00:16:41,684 --> 00:16:44,725
We are clearly not open AI or anthropic or
cursor.
368
00:16:44,725 --> 00:16:45,845
We're not a breakout.
369
00:16:45,845 --> 00:16:46,690
What are we do?
370
00:16:46,690 --> 00:16:49,809
And your options are, like, get profitable and
continue to grind it out.
371
00:16:49,809 --> 00:16:53,970
Sell the company and partner with somebody else
or maybe wind it down and return some capital.
372
00:16:53,970 --> 00:16:57,889
I think for most of those companies, they're
just not interesting enough to the series a
373
00:16:57,889 --> 00:16:59,490
market to really fundraise.
374
00:16:59,490 --> 00:17:03,205
When I find this, you know, one of our LPs last
week was like, why don't we get more of these
375
00:17:03,205 --> 00:17:04,085
companies to sell?
376
00:17:04,085 --> 00:17:05,684
We could try to make somebody sell.
377
00:17:05,684 --> 00:17:07,365
I haven't found that to be effective.
378
00:17:07,365 --> 00:17:12,724
Oftentimes, what I see happen is people try to
do both and then go all in on fundraising and
379
00:17:12,724 --> 00:17:14,804
say, well, if I can't fundraise, then I'll sell
the business.
380
00:17:14,804 --> 00:17:16,964
And then they come in with two months of
runway, and I go, okay.
381
00:17:17,160 --> 00:17:18,599
We can try to sell the company.
382
00:17:18,599 --> 00:17:19,559
Who are we gonna sell it to?
383
00:17:19,559 --> 00:17:22,279
They're like, I was hoping you could tell me
without Okay.
384
00:17:22,279 --> 00:17:23,319
Who do you know?
385
00:17:23,320 --> 00:17:23,880
Right.
386
00:17:23,880 --> 00:17:26,440
And they're like, well, I have a friend at
Google.
387
00:17:26,440 --> 00:17:26,840
I'm like
388
00:17:26,920 --> 00:17:27,320
Don't we
389
00:17:27,320 --> 00:17:27,559
all?
390
00:17:27,559 --> 00:17:28,359
Don't we up.
391
00:17:28,359 --> 00:17:29,160
Literally no.
392
00:17:29,160 --> 00:17:29,559
Yawn.
393
00:17:29,559 --> 00:17:32,284
And oftentimes, they tell them it's very hard
to buy a stranger.
394
00:17:32,284 --> 00:17:33,724
Nobody knows your company.
395
00:17:33,804 --> 00:17:35,004
Nobody knows what you do.
396
00:17:35,004 --> 00:17:40,684
You're asking a lot of a product manager or
court dev person who's got a busy agenda and
397
00:17:40,684 --> 00:17:44,990
their own priorities to stop and make time for
a company where they have no connection, where
398
00:17:44,990 --> 00:17:47,710
it's gonna be a lot of their time and energy
for not a lot of money.
399
00:17:47,710 --> 00:17:51,230
We have a lot of companies where I think in the
end, they're like, jeez, I wish I had either
400
00:17:51,230 --> 00:17:55,150
started building relationships with potential
buyers much earlier in our company's life
401
00:17:55,150 --> 00:17:59,015
cycle, or I wish all the time I wasted wasted
trying to hail Mary fundraise.
402
00:17:59,015 --> 00:18:00,774
Like, this weekend, I talked to somebody.
403
00:18:01,095 --> 00:18:05,575
They have two months of runway, and they've got
half of the round done, and they're like, we
404
00:18:05,575 --> 00:18:06,295
need cash.
405
00:18:06,295 --> 00:18:10,390
And I was like, I don't think anyone's gonna
give you money in your current form.
406
00:18:10,390 --> 00:18:11,590
Too little runway.
407
00:18:11,590 --> 00:18:12,950
It's too hard of financing.
408
00:18:12,950 --> 00:18:17,750
I think you could cut your burn and give
yourself four to six months to operate, and
409
00:18:17,750 --> 00:18:20,789
maybe then we could help you raise money with a
lower burn.
410
00:18:20,789 --> 00:18:23,174
In your current form, the company is fundable.
411
00:18:23,174 --> 00:18:23,414
Yeah.
412
00:18:23,414 --> 00:18:27,174
And every year, I get more comfortable just
telling people, I think your company's
413
00:18:27,174 --> 00:18:28,774
unfundable in its current form.
414
00:18:28,774 --> 00:18:32,375
Here are the things that would have to change
in terms of growth rate spend for this company
415
00:18:32,375 --> 00:18:34,615
to be fundable, but right now, it's unfundable.
416
00:18:34,615 --> 00:18:36,214
And it's not a fun message to deliver.
417
00:18:36,214 --> 00:18:41,690
Is there an advantage of sharing these types of
options and offerings to them earlier on in the
418
00:18:41,690 --> 00:18:42,890
journey when it's not relevant?
419
00:18:42,890 --> 00:18:46,250
Or do you only share what it's feeling like
it's heading that direction?
420
00:18:46,250 --> 00:18:49,690
I think if you bring it up too early, some
founders are like, oh, you don't believe in my
421
00:18:49,690 --> 00:18:49,930
company.
422
00:18:49,930 --> 00:18:50,170
Yeah.
423
00:18:50,170 --> 00:18:50,250
I'm
424
00:18:50,250 --> 00:18:51,794
like, what I said?
425
00:18:51,794 --> 00:18:52,194
Right.
426
00:18:52,194 --> 00:18:56,274
In other cases, you can bring it up, but what I
found is I can tell a founder, hey.
427
00:18:56,274 --> 00:18:57,315
We have eighteen months of cash.
428
00:18:57,315 --> 00:19:01,394
We should make sure we have a relationship with
the companies that could someday be partnership
429
00:19:01,394 --> 00:19:01,875
buyers.
430
00:19:01,875 --> 00:19:02,914
And and they're like, okay.
431
00:19:02,914 --> 00:19:05,289
And it's important, but it's not urgent.
432
00:19:05,289 --> 00:19:09,129
And urgent things crowded out, and then a year
later, they're like, what's your relationship
433
00:19:09,129 --> 00:19:11,129
with OpenAI or Google or whatever?
434
00:19:11,129 --> 00:19:15,210
Like, well, the time to start building that was
a little bit of I mean, kinds of little things.
435
00:19:15,210 --> 00:19:16,409
Getting to know people in the org.
436
00:19:16,484 --> 00:19:20,804
If you're going to a conference where they're
gonna be there, finding this isn't this doesn't
437
00:19:20,804 --> 00:19:21,525
have to be us.
438
00:19:21,525 --> 00:19:25,204
This is getting to know them, building
touchpoint, having them get to know you, you
439
00:19:25,204 --> 00:19:28,325
get to know them so that if there is something
to be done, there's a relationship.
440
00:19:28,325 --> 00:19:28,804
Right.
441
00:19:28,804 --> 00:19:32,349
And they don't have to be along a journey while
the is just being made the entire time.
442
00:19:32,349 --> 00:19:34,109
It's really just establishing a relationship.
443
00:19:34,109 --> 00:19:35,950
It doesn't have to be anything transactional.
444
00:19:35,950 --> 00:19:39,150
What doesn't work or what doesn't feel natural
is when you're rushing to do it.
445
00:19:39,069 --> 00:19:42,109
Then it becomes stale and uncomfortable for
everyone involved.
446
00:19:42,109 --> 00:19:46,349
And for most of these companies, it's just not
worth it for the buyer to spend a lot of time
447
00:19:46,349 --> 00:19:50,505
and energy because it's a small transaction,
and it's a headache.
448
00:19:50,505 --> 00:19:52,505
And so you don't wanna be a headache.
449
00:19:52,505 --> 00:19:52,984
Yeah.
450
00:19:52,984 --> 00:19:54,984
Well, we are all out of time today.
451
00:19:54,984 --> 00:19:58,984
Thank you, Charles, for joining us in hot New
York City this week.
452
00:19:58,984 --> 00:20:00,650
Thank you our listeners for stopping by.
453
00:20:00,650 --> 00:20:03,690
Please like and subscribe, and we'll talk with
you all next week.
454
00:20:03,690 --> 00:20:04,250
Thank you.
