SPEAKER_06: I was watching Gary Vaynerchuk, Gary V. And he said every now and then he opens up his email from Brian Chesky at Airbnb and just stares at the fact that he didn't even reply.And he just stares at it.And when I introduced... 21 people to Uber.I remember Mark Suster was in the room and he couldn't get there.And he missed the investment.And to this day, Mark and I are in a couple deals together.He just shakes his head sometimes.Oh, man, how did I miss it?It was a four and a half million dollar round of Uber he missed.
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SPEAKER_05: Welcome back to this week's Liquidity Podcast.With me today, I have David Clark from Vencap.Next, we have Tamash Tungas from Theory Ventures.And of course, J. Cal from The Launch Fund.I'm your moderator, David Weisberg, co-founder of 10X Capital.Today, we have two great topics on the docket.There's a new YC class, and the data is out on the new class, and there's already several breakouts.And we discuss startup valuations for Q1 2024, which are fresh off the press. We'll end with the latest three investments from each of our guests.Let's dive right in.
YC had its demo day last week and the VC community is abuzz.Under Gary Tan's leadership, the winter class showed a significantly smaller batch size and acceptance rate of less than 1% from 27,000 applicants. Several VCs have expressed excitement about the new class, especially around several AI companies, which seem to have dominated the headlines.One company, Leia, an AI assistant for lawyers, has already raised a Series A from Benchmark.Gary Tan and a text blogger, Eric Newcomer, highlighted practical AI as a major theme playing out in the current BATS. Tomas, what are the opportunities today in AI?How do you think about the differences between co-pilots, assistants, and agents acting on behalf of users?
SPEAKER_03: Yeah, so we see two different kinds of opportunities in AI.The first one were co-pilots, and those are the systems that auto-complete sentences.What we've seen with those is 50% to 75% improvements in productivity.Microsoft and ServiceNow both reported that.They work pretty well in the legal context, too.And then the second category we see are agents, which are robots or computer programs acting almost entirely on behalf of users.And they're a full-sale development rep replacements is one security operations analysis is another Klarna cut two thirds of their customer support team with agents.And so for any jobs that are broke or require processing lots of data and customizing the output, they're really good.If the productivity gains are anything close to mechanical robots, we would expect that these AI agents actually replace something like two and a half workers on average.
SPEAKER_05: You saw Gary Tan talk about practical AI.Is it too early for practical AI?Should investors be thinking much bigger than the verticalization of AI?
SPEAKER_03: No, I think that's the right place to start.The main reason is, I mean, we talk about AI.Startups had a negative time to launch.What do we mean by that?Really, the big companies got a big jump on it, Microsoft and Google and others, because they had the vast majority of PhDs.They had all the data.And the key unlock within this LLM wave was just scale. So the response by startups to pursue vertical AI makes a lot of sense.You can't compete with Microsoft and Word or PowerPoint or any of their core markets.You have to compete in areas where they're not paying attention or the data sets are unique.
So it makes a lot of sense that we would see it vertically.Another account example would be like RPA, UiPath, $10 billion company doing robotic process automation. It's fairly straightforward to deploy a basic version of a large language model or AI-enabled robot.And so you can't compete or it's very challenging to compete with a direct assault on some of these big companies.You have to go and pick a workflow.You have to go and pick a data set that those companies don't have.
SPEAKER_05: Jason, you've funded quite a few AI startups.What are you seeing in terms of your early breakouts?
SPEAKER_06: Yeah, just on Gary Tan's comment, I like the comment that practical AI, I guess that's like saying useful AI, or you can use this AI, it's practical to use it.I think that's a bit of a reaction to the last class, which was considered wrappers.And like, oh, is everything going to be done natively in Claude or chat GPT for or? Gemini slash Bard, Microsoft's co pilot.So that that is still an important discussion, I think, to have, which is verticalized AI versus generalized AI.And practical, I think, is a way of saying verticalize.And wrapper is a derogatory way of sort of dismissing what would be transient startups that don't make it now, of course, 80% 90% of startups in the incubator space go to zero, you have to let the founders figure this out.And that's the phase we're still in.It's pretty obvious who's gonna win the hardware stack.
not going to be a startup, right?NVIDIA, Intel, AMD risk.I mean, there's just so many players there.It's so capital intensive.I don't see some startups, you know, breaking in, in all likelihood and taking that market share.It's possible.I just, I would say possible and probable are how I tend to think of the world.And that feels improbable.Then you get to large language models.I think we're already starting to see those come apart.
with Mustafa going to Microsoft, and you know, some of these large language models getting overtaken, and open source models doing really well.So, you know, there's, there's kind of, I think it'd be some problems there with a lot of these becoming commoditized and indistinguishable.I'm sure Thomas, you're seeing this in some of your companies where they just switch. they're on claw, they're on chat GP before they take the same prompts, they move around, which makes me think that some of these language models might actually be not worth what they're worth.And that, you know, meta and Apple and the open source community releasing these things is going to be right where the startups go.Remember, startups are super efficient by necessity, like, you know, they're already behind the curve and trying to catch up here.And they're also resource constrained.So they're going to go for the cheapest solution, And the cheapest solution might turn out to be open source.We'll see.
But that means just massive pressure pushing down what people can charge for their API.So then what does that leave?That leaves verticalized applications.And I think that's where AI is but one component of it.Multiplayer mode, when you're using, pick any verticalized tool, Zendesk, Grammarly, etc.You know, multiplayer mode, your history, the features, Squarespace, constantly releasing new features, it kind of makes these things super sticky.And so I think that's what's happening here.We're starting to see startups get traction and people really enjoying their products.So I'd say this is like the sampling era.
Enterprises are sampling these products.And the really hard part is going to be, are they accurate and useful enough? not are they like intriguing intriguing is easy to cancel and i think we're kind of like this is where founders have to work really hard from intriguing to essential you know some things can be intriguing and you try them you put in your credit card i put oculus like you know vr into this i say it's like try oh my goodbye people try every holiday season these Oculus, the latest version, they're like, Oh my god, this is incredible.And then it goes into draw and nobody ever sees it again.And I really have this fear about AI right now that there's a lot of sampling.It's intriguing. But are people actually using it?I think we're going into the, what do they call it?The trial of disillusionment.
And then we'll actually come back.So it's going to be a very interesting couple of years.1% is, you know, what YC always kind of accepts.That's kind of what we accept too, just under 1%.How many people were in the class?Does anybody know the exact number?260.That's pretty big.Yeah, that's still pretty big.So they're still doing 500 a year.
Yeah, shout out to Dave McClure, 500 Startups.I'm starting to see a lot of sampling, and we'll see if people can make these tools so good that enterprises renew for years two and three, and they expand it beyond pilot.So it's pilot season.We'll see who gets picked up. One thing that drives me crazy is when I want to buy something on a website, but there's too much friction when I go to checkout, right?I want to make the impulse purchase.I'll be totally honest.I see something I like.I got these new reader glasses.You know what?
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SPEAKER_05: Tomas, when you're going after a market like AI that's changing so much, are you still focused on backing the best founders?Are you more focused on the application and the market?
SPEAKER_03: I think it all comes down to the team.I mean, what Jason said resonates with me, which is this market change is so fast.It reminds me of the crypto market two years ago where you'd go to sleep and you'd wake up and there'd be two or three new research papers on how to do something in a better way.So whether it's a new machine learning model or a new technique for analyzing the data and the performance characteristics are significantly better. And so we're looking for our founders who understand what the current state of the art is and are planning for that state of the art to change rapidly because you know, like the cost structure will change.I mean, if you look at the current GPT-4 model and you pick the fastest and the fanciest one, that's about $60 million, $60 for about a million tokens.And if you take the version just before it's 120 times less expensive. And so there's pretty huge difference in pricing power from those models tell you they come on a time super fast. In this ecosystem, I think the companies that will win with AI, they have two attributes.The first is they're the companies who can respond to technology changes really fast and don't have a dogmatic view on how to solve the problem.
All of a sudden, the transformer, which is a key innovation in the current wave of AI, is no longer really the right thing to be willing to abandon it for the next version of AI, whether it's multimodal or any of these other techniques.The thing that really matters and what I think will sustain is distribution.That's what we realized in the software wave was acquiring a customer is actually more expensive each year.Over the last five years, there's been a 60% increase in the cost to acquire a customer across software companies broadly.And so the founders that we really get excited about are the ones who look at the technology and say, I can build a product.And as a result of building that product in a very particular way, I have a customer acquisition advantage.And so I can acquire those customers less than my competition can, ergo, I can grow much faster on less capital.
And so that combination of finding a technology advantage that is produced as a go-to-market benefit, that's what we're really after.
SPEAKER_05: Dave, as a fund of fun, you have a lot of your GPs going after the AI companies in this new wave.Are you happy?Does it make you concerned that so many of your managers are going all in on this trend?
SPEAKER_02: I think it's really interesting and just interesting to listen to the discussion between Jason and Tamash as well, because I think one of the things I'm hearing there is that we're still so early in this shift that it's almost impossible to get a sense of where the value is actually going to accrue, who the long-term winners are going to be.And to some extent, it reminds me a lot of the dot-com boom back in the late 90s, where there was a lot of excitement early on.There were some really interesting experiments that were underway.But ultimately, very few of those companies that emerged during that time went on to build sustainable businesses.And And I know Jason's stat about 80% to 90% of these companies ultimately aren't probably going to make it is something that we wouldn't be surprised to see.But I think the flip side is that just as we saw a handful of companies emerge out of the dot-com era to build really significant businesses, I think the expectation that we would have is we'd see something similar from this paradigm shift on the technology stage. So our expectation is that there are going to be some huge franchises that are built out of the AI space, and you have to make your bets.And so we would be very disappointed if we weren't seeing our managers being very active in this space.
What I think you will see is over time, it will be the best managers who can really differentiate themselves. And I think, you know, just as we saw during the dot-com period, we saw it during the mobile period as well.And, you know, perhaps with crypto, I'm sure there'll be a new breed of managers that emerge that are, you know, AI native that really start to emerge from that pack.So from our perspective, I think it's always really interesting to during these sorts of times, because you will see huge amounts of disruption at the company level, but also at the venture firm level as well.And I just hope that the bets that we've made with our existing managers ultimately prove out.They've been able to navigate a number of these technology shifts before.And just looking at some of the early bets they've made in this space, we're hopeful they'll be able to do that again.
SPEAKER_06: Yeah, that resonates with me a lot, which is, you know, it's kind of our jobs as GPS to figure out where the opportunity is, and to pick the best teams to pursue those opportunities.But at the end of the day, the founders are on the front line, their talk, you know, it's kind of like if you if you think of it like a war, you know, there's people on the front, and when you're on the front, and you're seeing what's happening, hand to hand combat, how people are using it, they have really good information there, they're going to be able to pivot and find the opportunities. And, you know, we're kind of like generals moving back.And then there's like the LP class, which is enabling the generals to then enable the troops.And there's some metaphor here that works, but we're abstracted a little bit, you know, in distance from the work.And there's advantages to be distance, right?You know, Dave can look at Thomas, myself, and others, and kind of think about how we're thinking about how the front line is, you know, engaging in this war to see who's going to win it. And it's very early, we're very early in this.And, you know, we look for great teams that are technical that have multiple co founders that have product velocity, and that really understand their customers and are talking to their customers constantly.And what I found in my career is the people who are very close to the customer base, who have product velocity, who are aggressive, and
and have, you know, really good builders and are close to the customers, they find the opportunity right quick, right?This may take a couple of pivots, they can be major pivots, they can be minor pivots.And that's the mode we're in right now going to be a lot of zeros.And that really is the name of the game.If you think about Y Combinator, Launch, Founder University, Techstars, any of these programs that are really early, you know, what we're doing is experiments.And then I think, Tomas, you're writing these 500k to $2 million checks in the seed stage, mostly now?
SPEAKER_03: A little bit later, typically like two to three to about 20.
SPEAKER_06: Oh, okay.So yeah, you've moved on.You've moved down the funnel.So you're putting in two or three million.You're looking for teams that have a product in market and some customers already.And then where we sit in that pre-seed, we're looking for teams with velocity and one customer, maybe two.And they're figuring it out.Tomasi, maybe you could describe what you're looking for when you make your decision. Because we're really betting experiments.You're betting on a little bit more proof, yeah?
SPEAKER_03: Yeah, we are.We run a really concentrated portfolio.And so the way that we work is we'll research a space for six or nine or 12 months.And we have about 100, we call them theorists, who help us understand those markets and who are buyers.So they can be heads of data, like major software companies or inside of big banks. And we just talk to them and try to understand.I mean, one of the major problems in selling AI software to every major enterprise right now is security.Everybody's afraid that... I'll give you an example.A friend of mine runs a company.One of his engineers deployed a large language model inside of the company, opened up a chatbot.
One of the employees asked, what is David's social security number?And David's social security number came out.And so there are all these kinds of new questions, right?Like there's a, there's another question, which is, okay, there are these agents that are acting on behalf of people.How do we onboard them into a company?Do we onboard them through like classic HR processes, permission them and give them permissions like that?Do we give them performance evaluations like a human?And then we offer them when they're not performing.And I, you know, it's a little bit tongue in cheek, but like,
I think there are lots of questions that we're looking to answer.And once we have that information, then we try to exactly what Jason said.We're looking for really strong teams.They might have a handful of different users.We try to introduce some of those startups to some of those buyers, see whether or not we can help them close some business.And if there's good signal, product market fit, then our goal is to invest.
SPEAKER_05: Moving on, Carta just released very fresh data from its Q1 2024 startup valuations.Round sizes at the seed and late stage are significantly up with the late stage experiencing an increase in valuation.Tomas, if exit valuations continue to be depressed due to the IPO market being closed and regulatory issues around large M&A, what does that mean for venture?
SPEAKER_03: Yeah, this is a big question.So we had this era for the last 10 years, zero interest rate environment where you had forward multiples, which is the way that we value publicly traded software companies, go from about 5x to about 15x during that period.And venture was amazing.It grew from an $8 billion asset class to about a $300 billion asset class at the best exit market ever in venture. and now we've gotten to a place where rates are at five five and a half percent larry summer said today that he thinks the fed will actually increase rates uh and so that that sort of depresses exit valuations now the question is okay well the exit valuations are depressed but the entry prices are going up basically at the rate of inflation three four percent will returns be squeezed And, you know, I mean, the reality is when we make an investment on average, it takes about seven to eight years for it to be sold.If it will be an M&A and it'll take about 12 years to go public.So the current valuation environment, not necessarily representative of where it is.On the other hand, you do have a lot of regulatory pressure.So if we look at what the antitrust against Google and Facebook or Meta, Microsoft and Apple, if you look at the top five or six companies who are historically been the big acquirers
and you look at the AI entry valuations, and assume that those companies are out of the market, right?Like even the strategic investments that some of Amazon is making into some of these LLM companies or Microsoft is making into OpenAI are now suddenly subject to regulatory scrutiny.If you take those five or six companies and assume that they're out of the M&A market, that's about 70% of dollars and 75% of market cap.And so your largest trillion dollar scale acquirers are basically out of the M&A game until there's a change in the regulatory regime in Washington. So that's probably a short-term issue rather than a long-term issue.But I think it is an important consideration when you're looking at entry valuations.And what we've seen, particularly for the hottest AI companies, is they're being priced the way that they were if company startups were being priced in 2021 at the height of the zero interest rate environment, where a company at $2 million in ARR is being traded at $200 to $400 million. One AI company, 250K in ARR, raising $50 million at north of $250 million valuation.And the idea there, the excitement from the investor side, there's some rationality, which is, this is a power law business.
One or two of these companies in a portfolio can make a portfolio super performant.But you really have to pick your spots because the entry prices are big, which means that the check sizes are big.So if they don't perform, the loss to the venture firm can be significant.
SPEAKER_06: Yeah, and I just thought I'd bring up as a proof point to what Tomas is saying is, you'll get this Reuters story here about the Microsoft deal to buy inflection.They didn't buy it, but they did some sort of $650 million licensing deal, took the top talent.This kind of feels like an acquisition to me.They gutted the fish.They took like the prime parts of it.They took the tuna belly.What's left?There's some carcass that was thrown back in the ocean. And this feels to me like, you know, what capitalism does when you try to constrain it.You try to constrain something like capitalism in a democracy like America, people get real creative.
And, you know, Microsoft, pretty creative organization, and they just stole this company. I don't know how this works on a tax basis.I don't know what this does to the venture firms that invested in this company and the LPs who back those VCs to do this.But, you know, they took Mustafa and they took, you know, Karen and all these people away from inflection.They left some carcass. uh and you know but inflection ai had raised like a billion dollars so what is happening in this and i think this when you know it seems like trump has a you know whatever 55 45 60 40 chance of doing of you know winning this election and then lena khan's going to be out and then what does m&a look like in this next cycle If, you know, and listen, I'm no fan of Trump, I've said it here before, people know my feelings on him.But I do think getting back to a more healthy M&A environment would be better for our industry and for innovation, writ large.And so we got to figure something out, because these kind of weird deals going on, or remember, Microsoft is saying, Oh, we'll just take the whole open AI team, we'll all just come over. This is a direct result.
And then there was Apple with the watch team.They just raided that company, didn't give any money to them, got in a big patent dispute.So weird stuff is happening when you try to put your thumb on the scale of capitalism. And so we got to figure this out.Entry price does matter to the card of data we're talking about here.Entry price matters.And when Tomas and I were starting, seed deals were five, series A's were 12 to 20.Now seed is 12, series A's are 30, 40.And so, you know, it's arguably 3X.And I don't know that the exits are going to, maybe the exits are bigger.
You know, if the exits are big enough, fine, but you know, there's very few decacorns.And, you know, that ever get created.And I think the way the portfolio architecture work, and Dave, you would know more about this than us, because you've done all this data.But what is a three or $400 million firm need to do in order to have one of their companies pay for the fund or double the funding and get you at least to a two and a half X for the fund?How do you think about that portfolio math, given the exit strategies?
SPEAKER_02: Yeah, it's an interesting one.And I think, you know, for us, it's a real challenge, because I think when we look at what firms are doing on an individual basis, it kind of makes sense, because, you know, particularly for early stage firms, the bigger mission you can make is not going after that top 1% company, because the valuations are a little bit too rich.We've seen it time and time again, where if you get the selection right, in a way the valuation is much less important at the early stage.And so I think as an individual firm, Those firms are acting logically and rationally.It's when you combine all of that activity that it starts to look a little bit crazy because you know that there's only a limited number of those top 1% firms by definition that are going to generate the value that they need to do in order to justify the price and to generate those sort of returns. Specifically to your comment, though, Jason, if you're looking at a sort of $400 million to $500 million early stage fund, if you own 10% of a business, that needs to be a $5 billion business for that company to return your funds.If entry prices, rather, are starting to rise significantly, then either you're going to have to write much bigger checks, so you've got less shots on goal from that $500 million fund, or you're going to have to reduce your ownership. And if you reduce your ownership, that means that your exit size is going to have to increase in order for you to get that to the fund returner level to return that $500 million.
So I think we've seen in the past several things like that happen.There have been a couple of funds that we've invested in that have kind of gone from having 30 early stage deals to just over 20.And they did that because they wanted to maintain their ownerships, but they didn't want to increase their fund size. So there you're putting real pressure on your ability to select that one company that could go on to be that fund returner.And you could argue that if you're doing a third less deals, that's giving you a third less chance of finding that one company that could go on and really drive your performance. I remember Chris Dubos, I think it was, who said that venture works best when capital is scarce and time is plentiful.And I would definitely buy into that.So it is something that does give us pause for concern. The challenge is what can you do about it?Because you know there's going to be some of those key companies that will emerge over this period.
So you don't want to step out of the market and fail to participate.I think the best thing we've seen is for firms to remain reasonably disciplined and to make sure that they're still operating over a three-year investment period and not get carried away with all the fear of missing out and the excitement that they put funds to work in in 18 months.And it may be that forces them to raise the bar in terms of what they're willing to do in order to get to that three-year investment period. I think that's the key thing that we would say when we're talking to VCs in this sort of area.It's keep that time diversification in your portfolio because as we saw with the deals that were done in 2021, it doesn't take very long for that environment to change and those deals and those prices to look very different.
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And if you have existing numbers with other services, no problem.Open Phone is going to port them over easy peasy, lemon squeezy, no extra cost.Head over to openphone.com slash twist to start your free trial and get 20% off. So what you're saying is a fund should take the full 36 months to do that primary deployment, not shorten it to 18 to 24 months.And you got to take your time.And yeah, that's a little scary to think that some folks went from 30 to 20. a third less shots on goal while prices are going up, because they want to maintain their ownership.But man, it's it's really hard to find an outlier.And they still need to if you're a $500 million fund, you still need to find a DECA corn.DECA corns are hard to find.
It's like Robin Hood or better, right?
SPEAKER_05: We're not even in the, you know, Uber 100 exit exits are hard.Valuations seem to be plentiful.
SPEAKER_06: It's kind of, you know, I don't know.Tomas, how do you think about it?How many shots on goal are you going to have in this fund and what fund are you on?
SPEAKER_03: We're on fund one.We'll probably have 15 shots on goal.So we have a very concentrated portfolio.Wow.And we're really focused on ownership.So I think we ran a bunch of simulation on historical venture data to kind of come up with our portfolio construction.
SPEAKER_06: But you said 15?
SPEAKER_03: Yeah.
SPEAKER_06: 15.1.5.That might be the lowest I've ever heard.When I wrote my book on angel investing, I asked everybody I could find how many angel investments you think you need.And that's early stage, seed stage.Do you think you need to hit an outlier?And the most common answer was 30 or 40.So...
SPEAKER_03: Yeah, so that's what we're running.I think there's two dominant strategies that kind of come out.One is a broad index with a later stage concentration vehicle.I think that's one model that comes out of the analysis.And the other is a highly concentrated fund where you have significant ownership of the companies.And you model what you think the exit valuation will be primarily for M&A.It's hard to bet on IPO.The IPO market's been closed for it.
SPEAKER_06: What did you do before the fund?Were you doing just syndicates or seed deals?
SPEAKER_03: No, I was at Redpoint for about almost 15 years.Got it.And I was the managing director there for about eight.
SPEAKER_04: Yeah.
SPEAKER_03: That's a bunch of companies.
SPEAKER_06: When did you raise this fund?
SPEAKER_03: I raised it.We closed in March of 23.Oh, wow.
SPEAKER_06: It's a hard time to close, huh?
SPEAKER_03: It was a tough fundraising environment.I remember this was when all of a sudden the stock market was tanking and rates were going up quite a lot.Most of the LP population was simply just trying to understand how much of my book is in public markets, how much of my book is in private markets.And the public markets had obviously corrected a ton, but the private valuations hadn't been written down yet.So everybody thought that they were massively over-allocated to it.
SPEAKER_06: How big was the fund and how many meetings did you have to do?We raised about $238 million and we had a lot of meetings.
SPEAKER_03: Hundreds.
SPEAKER_06: That sounds like 200 meetings.
SPEAKER_03: How many?
SPEAKER_06: 12 months?18 months on the road?
SPEAKER_03: A little less.We were able to raise just under four, four and a half months.
SPEAKER_06: How was it during the Silicon Valley bank implosion?Were you caught up in that?
SPEAKER_03: Yeah, good memory.So the day we were supposed to have our first capital close was the day that SB imploded.And so, as you can imagine, all the LPs in the fund called and said, we're not wiring because we have a Silicon Valley bank account.We don't know where our money is.We don't know if the website's not loading. Pretty scary.So then it took us... Actually, it was really hard to get a bank account.I know that sounds ridiculous, but we couldn't get a business bank account.The GCIF, the Global Strategic Investment Banks, they wouldn't take us.J.D.
Morgan wouldn't take us, and Wells Fargo wouldn't take us because it turns out venture capital firms are terrible customers.We raise lots of money, but we don't actually maintain very large balances in our bank accounts that we have. In and out.
SPEAKER_06: Capital calls in and out.Yeah.
SPEAKER_03: And so the big bank said we needed to have a billion in AUM before they would consider taking us as a customer.Crazy.And I called a friend of mine at one of the banks and he was able to get us the banking up.But it was six weeks later.And anyway, we were finally able to execute the capital call.But it was a wild time.
SPEAKER_06: David Clark, you were talking before about how many funds were in market.You may have seen a stat and it was kind of unbelievable to even think about.But, you know, you've been in this for 30, 20, 30, 30 years, I think, as a GP.I mean, how many venture firms are out there?How many are hitting you up?And how sustainable is the number of firms right now?
SPEAKER_02: Yeah, so I just very quickly saw a stat that was on a post on LinkedIn that I saw that was referencing data from pre-QIN.And they said in January this year, I'm sure the number was 6,500 VC funds were looking to raise capital, which to me seems incredible.I didn't know there were 6,500 VC funds, though I think I've probably had cold emails from half of them since I was last on your podcast, J. Cal, so thank you for that.
SPEAKER_06: Just so people know, I'm not in the terrific 12 yet.I'm still trying to convince David.But you're very selective.I mean, it's just crazy how many funds there are and then how many aren't even making it to their second fund.The venture tourism... is like a real thing.
SPEAKER_02: I mean, it's a real thing.That's the big challenge that we've seen.We've had the misfortune of being in the final funds that a manager has raised and it's never ended well.So I think if you were an investor in that fund one and the manager is unlikely to raise a fund two, then that's a pretty precarious position for you to be in as an LP.And I think one of the things that's you really need to get confidence in as an LP is, you know, is that manager going to be around for the duration?Is this what they're going to dedicate the next 20 years of their life to?Because, you know, Thomas said it's taking, you know, 10, 12 years for companies to go public.It takes 15 to 20 years for a venture fund to be fully realized.So this is a long-term business and you absolutely have to have that confidence that the firm is going to be around to manage that out.
SPEAKER_06: I'm just reading from PitchBook here, Dave.More than 247 first-time managers who close funds between 2019 and 2021 will not be able to raise sophomore funds according to PitchBook estimates.So there's going to be a lot of those funds.And it's got to be a bummer if you were an LP in those because you took all that time to build that relationship and then the person can't sustain it for the next fund.Yeah. I mean, I guess it's good for the survivors, but it does feel like this is going to be a survivor's game.
SPEAKER_02: Yeah, no, I think so.I think that's absolutely right.
SPEAKER_06: There's definitely too many people.I mean, Tomas, can you pronounce how you pronounce Tomas so I can make sure I'm doing it right?
SPEAKER_03: Oh, it's Tomas with an S-H at the end.
SPEAKER_06: Ah, Tomas.I knew I was doing it wrong and my dyslexia is going crazy.Tomas with an S-H.I'm curious, you know, when you're... co-investing are you seeing because you're doing so few companies and are you seeing a lot of co-investors kind of go dark or disappear on the cap tables and how do you have you had that happen where board members are like yeah you know we're out of business and so they stay on the boards and i'm wondering what happens to those 250 funds that pitch books identified
SPEAKER_03: Yeah, it's a good question.I mean, we definitely see some board members change.A lot of the times that's senior partners who are deciding it's their last fund and they're calling a career a career.I think, you know, in the case where a company raises fund one or a firm raises a fund one, has a board seat, and then isn't able to raise funds to go do something else, they still have a response.I mean, they would have a view here, but they still have a responsibility to see out that portfolio or sell it and liquidate it.The strip sales and the secondary part of the market where venture investors are selling their stakes to somebody else is still a pretty small part.Everybody thought, I think, in the last 18 months that there would be many more secondary sales than there have been. So, but if you raise a fund, you're committed to it.You sign a document.
This is the limited partner agreement that says I will continue to see how this fund, as long as I, um, and all the positions, as long as I'm capable.And so, yeah, I haven't seen a ton of it, but I think, I think you're, you're, and I think the other dynamic there is a lot of those first time funds are probably They're typically not lead investors.And so they're not typically taking the board seat.And so there's less supervision that they might have to oversee the portfolio and understand what's going on within the companies.
SPEAKER_06: All right, everybody, welcome back to the program.Stephen Estes is with us again.He's a principal at CLA.They're a professional services provider.They specialize in CPA, tax consulting, and wealth advisory.His areas of expertise lie in VC-backed startups, VC funds, high-growth startups with complex tax issues in multi-state and international filings.Welcome back to the program, Stephen. Hey, thanks, Jason.Appreciate it.All right.
Give us an overview of how CLA works with startups.What kinds of companies do you like to work with?Is there like a specific zone where you like to engage with startups?
SPEAKER_01: One of the great things about CLA is that we're nimble enough to work with two startups, right?So whether that's a seed round or series A company, But then on the flip side, we're large enough that we really have the depth of expertise that's needed to help companies when they become multinational entities with a lot of tax complexity or audited financial statements, consolidated corporations, M&A, due diligence, whatever it is.So we can truly take them from incubator all the way to IPO, and then really come alongside some of the founders with our wealth management platform also after the exit.So I think CLA is really unique in that regard.There's not a lot of firms out in the US that really operate with that sort of breadth and scale of helping companies at early stage and also being able to help partner with them as they become really large and complex.
SPEAKER_06: All right.You need a trusted advisor.Tax is accounting.You don't want to play games with this stuff.Get it right.Get a great partner like CLA.Go to claconnect.com slash tax. and let them know your boy Jake Howell sent you.Once again, claconnect.com slash tech.Dave Clark, I got a front row seat to this because I started inviting, I asked my team, you know, we're doing this liquidity conference in Napa.
We used to call it the Angel Summit, but since we became more of a fund than an angel and syndicate, we rebranded it this Liquidity Conference Summit. And we had a list of like VCs who we refer our founders to.So we just decided we'd email them.And they did it from my email address.All of a sudden, I get all of these responders.I'm no longer with this firm.I'm no longer with this firm.This person's no longer at this firm.And I was like, whoa, that's a lot of people. no longer with firms.
I don't know if either of the Davids are seeing a lot of VCs like move to venture partners or move out as the because, you know, the the usually the management fees go from whatever two and a half down to two and a quarter to 1.51%.It's just not going to be the money to pay these GPs, right?
SPEAKER_02: Yeah, I think we've seen a small number of what I would call senior partners decide that now's the time for them to step to one side a little bit and don't want to be doing this for the next fund cycle.And if that's managed well and there's an organization behind them and a team behind them, then that's fine. I think one of the things that VC generally doesn't handle properly is succession.So to see some of the senior partners take a decision that they want to move sideways and still be involved in some capacity, but not be one of the main deal-doers, I think makes sense.The other thing that we've seen is a little bit of attrition at the junior levels as well, where people... actually realize that VC is not just about going and writing checks to your friends and being everyone's favorite person.It's about really grafting and working hard and oftentimes having to deliver bad news.So I think that we are seeing some people that got into the industry as a first job or a second job over the last few years decide that actually this is not what they want to do long term for their career.
SPEAKER_06: It is definitely, you have to have a certain personality type, I find, to do this job well.You have to be super positive and optimistic and, you know, really be able to deal with challenges.And at the same time, like you're saying, deliver bad news.Hey, we're not doing the next round.Hey. We're not we don't do bridge rounds or pay, you know, we need to talk about, you know, replacing you as CEO or firing your co founder or whatever hard discussions are going on at the board level.And just I find one of the when we hire researchers and analysts, I have a program, I call our a researcher analyst associate, I don't hire associates anymore.I only hire researchers get them to 500. first meetings, then when I make them an analyst after 1000 meetings, then they qualify as an associate, which means you're doing four meetings a day, three meetings a day, you know, call it 1520 meetings a week, you know, you can get there in a year, no problem.
Or two, but just saying no, to good companies waiting for a great one, I find some people can't handle that.It's just too and I have to sit them down and have like a talk with them.Hey, our job is to meet with 200 companies and pick one. Like, that means 199.And by the way, you sorted through half of them, you didn't even take the meetings.So you sorted through 400, you met with 200, we invested in one.That's like a hard, that's hard personality.That's like going on 400 dates to pick one person like to marry, but that's probably a good idea.You know?
SPEAKER_02: Yeah.And there's a 90% chance that the one that you pick isn't going to work out as well.
SPEAKER_06: There's your reward.Congratulations.You did 4000 meetings to make 10 bets or 2000 meetings to make 10 bets.And one worked.And the rest is sadness.I'm literally this past year, I cannot tell you how many companies I just had to talk with the founders about the wind down.And man, I feel like your whole reputation in this business is determined by how you do hospice care. Like I had to somebody was selling a company was going to be like very poor returns for everybody.And I just said, Listen, you got you got a return.Let's, you know, do your time at this acquirer.
Do a great job.And let's focus on your next company in two years when you get your own out.But man, I don't know.Tamash, what do you what is your take on the on the personality type and your own personality in relation to what works in venture?
SPEAKER_03: Yeah, I think there's probably two different archetypes.One is, like you said, an optimistic grinder. where you're just meeting lots and lots of companies.You have basically infinite patience because feedback cycles are decades.And then I think there's another type, which is a person who comes out of industry and has a really strong network and, as Dave said, bets on all their friends and actually it turned out to be pretty spectacular.So I think, I mean, there are many others, but those are sort of the two dominant types.
SPEAKER_05: Tamash, when you started at Redpoint, were you advised to take a bunch of meetings before you make a decision?
SPEAKER_03: It took me two and a half years to make my first investment.It was a really long time.Candidly, I had no idea what I was getting myself into.I was a product manager at Google before and I didn't even know venture capital was a career before I came to California. and uh just fell in love with the idea that you could learn about new technologies every day but we all know there's there's a lot more to the business than that and uh it took me a really long time to understand um you know and it was at a time when the firm was investing in many different things i remember our first day first company was a commercial led company the second company was a clean tech business and the third was an on-prem software company so like the The number of spaces we needed to cover or just get up to speed to have a strong point of view were much broader.
SPEAKER_06: And you can be right.This is the most frustrating thing I think about this career is you could be right about your thesis.Hey, we know AI plus professional services, legal, tax, whatever. is going to be big, hey, we know mobile photos and sharing is going to be big.And you pick color instead of Instagram, you pick some video site, you know, you pick sidecar instead of lift instead of Uber.And that is I think could be soul crushing.You know, you figure out where the future is, but you place the wrong bet.And you came so close to it.Somebody, I was watching Gary Vaynerchuk, Gary Vee, and he said every now and then he opens up his email from Brian Chesky at Airbnb and just stares at the fact that he didn't even reply.
you know, and he just stares at it.And when I introduced 21 people to Uber, I remember Mark Suster was in the room and he couldn't get there.And he missed the investment.And to this day, Mark and I are in a couple deals together.He just shakes his head sometimes.Oh, man, how did I miss it?It was a four and a half million dollar round of Uber he missed.And then there's other people, you know, I find another interesting thing about the psychology of all this you know, you hit some giant win, like some of the Facebook investors, it's very hard to get out of bed again, no embedding on companies knowing there's a very unlikely chance you're going to hit another Facebook.You're just statistically you hit one of the top five companies of all time, you know, they're, they're, it's in the fang, it is the fang, it's the first letter of the fang, right?
And you just, you're not going to do it again. That's got to be hard.That's like, I won a championship.I'm never going to win another one.Can you imagine you're LeBron and you're like, there's no chance of me winning.So I got to get up and suit up for basketball every day.Hard to do.
SPEAKER_03: Yeah.Even a typical salesperson, like a really good salesperson will close one in five deals.Mediocre salesperson might close one in 10 or one in 20.And then in venture, like we said, right?It's like one in 200, one in 400.
SPEAKER_06: Yeah, if you're listening to this, and you're a young person, don't take this job.It really is like a survivorship bias.People look at the people who made it work and got to their second decade.And they're like, Oh, I want to be like them.They just don't see all the people who did it for six months, six years and quit.And we're like, I'm never gonna get those years back.You know, I should have just started a company, the world needs less venture capitalists, less capital and more entrepreneurs and more talented people on the management teams. For some reason, this job got super popular over the last decade.It shouldn't be as popular as it is, I don't think.I don't know what you think, Dave.
It's too many VCs?
SPEAKER_02: Yeah, I think it certainly feels like that.At the same time, you look at the sectors where technology is having a major impact now, and it's just the opportunity set is so much broader and so much deeper than it ever has been.And so, clearly, the amount of capital that the industry can invest can sensibly consume is bigger than it was 10, 20 years ago.And then the number of firms it can sustain is larger than it was 10, 20 years ago.But it certainly feels that over the last two or three years, we've kind of overshot the out of where we should be.And so I think it's inevitable that we'll see some kind of reversion to the mean over the next couple of years.
SPEAKER_05: I think there is an efficiency in the market.You shouldn't have 6,500 managers.And I think that's highly correlated with the fact that so many of them are not able to do another round. I do think we need, at least as many VCs, we should just be investing much more earlier stage.A lot of the talent has now gone upstream.It used to be that the large funds that seed fund, seed checks, now they do series A checks.And as those multi-stage funds continue to grow, they're going to be concentrating their talent in the later stage.So, I do think having a healthy early stage ecosystem from the emerging manager standpoint is very healthy, both for the ecosystem, but also for new startups.Think about all these companies.
Jason, I know you helped Calm when they were almost going to die.And if you hadn't been there, if they didn't have the incremental seed investor, they may not be the behemoth that they are today.So I think having a lot of capital, almost by definition, having... enough angels and early stage capital is something that's really positive for the ecosystem.
SPEAKER_06: I think that's like, Tomas is like kind of proof that like, a concentrated portfolio is like an easier thing to manage because you're picking people with a greater chance of success with more of the questions answered than at the level Gary Tan's doing or I'm doing or, you know, other folks and then between us is probably pair VC or you know, 500 startups or 500 global tech stars, whatever.And it really is hard at that early stage to deal with the number of companies going out of business.So I've had to come up with a methodology or maybe even a philosophy, a life philosophy of how I talk to the founders, right?And I just tell them, like, listen, if you lose 125k that we gave you for 7%, it's okay with me. I just want you to promise me that when you do your next company, we get to be the first investor.And I have that conversation over and over again with them.And you know what, when Raul did superhuman, he came to me and said, Hey, you know, you did report of, you know, you put 50k, and we gave you back 250 or something.And you had said, Hey, let me know when you do your next one.And he came back to Dharmesh from HubSpot and myself, and we were the first two investors in superhuman.
And I think he says like Dharmesh, he tells Dharmesh he was first and he tells me I'm first.Well, he's pretty good about that.But you know, you have to be built for it.You have to be built for, you know, whatever the amount of, you know, zeros there are.And man, I can tell you as a high stakes poker player as well, That's what's taught me a lot about this.When you lose a hand that you're supposed to win, you know, you're 70 80% favorite, but the 20% comes in, you have to get your brain chemistry used to this possibility.I think that's why a lot of people when Trump beat Hillary Clinton, not to bring up Trump twice in an episode of liquidity, but when he beat them, people were like, got mad at 538 or whatever.And they were like, how did you get these statistics wrong?
And they're like, no, we told you it's a 36% chance of winning.It's a one in three.You just didn't believe us.And you don't understand basic statistics.So you I think you have to learn how to take losing and zeros and And, and really, like, get comfortable with it.And it's taken me a decade, I have to say, like, I used to get very tweaked by losing.Even to this day, I get really upset about it sometimes.And it's really something I have to manage my own psychology, managing your own psychology and gambling, which is what we do.We're placing bets, let's be honest about what it is.
You know, David's placing bets on GPS GPS are placing bets on founders, founders are placing bets on markets and customers.We're all placing educated bets.And this is why poker is so popular amongst investors.And so important because you have to learn to lose. And when you win, when you're not supposed to win, you get lucky.But when you lose, when you're supposed to win, you get unlucky.Understanding this, taking it to heart, but then still being able to improve your process because that's all you have.And, you know, Dave, when you were on the episode, we talked about your terrific 12.And I think that's what it's right.Terrific 12.
I dubbed him.Yeah. Like your discipline, that was what I took away from your discipline of adding these managers very slowly, very thoughtfully.And like, maybe you could unpack that here and just explain how you pick managers and how thoughtful you are about it.Because I do think the psychology of how you pick managers and saying no to them. I don't think you're in Tomash's or my fund.I don't know.You could be in Tomash's.I don't know.Maybe you picked him over me, but you're not adding that many.
So I don't take it personal that you're not in my fund.Just like I don't think a founder can take it personal that I'm not in their startup, right?We already said 199 we don't go into.
SPEAKER_02: Yeah.I think, I think it's really interesting.And, and, and, you know, Tomash, what you were saying about the scenarios that you, that you ran and, and, you know, where you ended up in terms of, you know, what you thought the best parts of the market to play in the, the, you know, the, the focused early stage or, or slightly broader kind of growth stage in a way we've, we've sort of done that, done something similar, um, not through running a series of models, but through actually investing over a 30 year period.Um, I think part of it as well is aligning with where we are as individuals and the level of risk and the level of uncertainty that we're happy to take and the types of risks and types of uncertainty that we're happy to take.I think one of the characteristics of venture is there's still a high degree of randomness.The earlier you get, the higher that degree of randomness is in each individual decision that you take, whether that's as a GP or or whether it's as an LP.And I think for us, we found a level where we're comfortable with the risks and it allows us to consistently produce the sort of returns we need to do in order to add value for our investors.And so I think finding that where psychologically you're comfortable, but where you're still able to perform at a high level is really important.
And for us, it just comes down to, you know, we know ventures are power low industry.We know it's the top 1% of companies that deliver the majority of the exit value.And so, you know, we have a very simple screen, which is every time we look at a manager, we ask ourselves, you know, how many top 1% companies have they backed? What was their role in doing those deals?Were they invited in?Were they a bystander?Were they actively leading that deal?Have they been able to do that multiple times?And the more times that we see them invest in those top 1% companies, the more confidence we have that they'll be able to repeat that.
SPEAKER_05: And David, your model allows for a bad vintage from time to time or sub-average, knowing that it's probabilistic in nature.
SPEAKER_02: Yeah, absolutely.You're always going to have good managers who, as you said before, they had the choice over company A, company B. They got the macro thesis right.They just chose the wrong company for whatever reason.And that's always going to happen.And so I think for us, understanding that just because you have a bad fund doesn't make you a bad manager is really important.Now, we want to make sure that the manager has really examined the reasons why. Behind that bad fund, was it just a case of choosing company A over company B, or were there structural reasons behind the fact that that fund hasn't performed?In some instances, you do find there are underlying structural reasons, and then you want to have that conversation and make sure that they're addressing them. But even the very best firms go through periods where things don't always work.You look at some of the challenges that Sequoia has faced over the last 18, 24 months.
Are they performing as well as they've performed historically?You could argue perhaps they're not.But would you argue that they've got the people there that are going to fix that? And, you know, would I bet on them to, you know, to be in a much better position in 24 months time?You know, absolutely.I think they absolutely will.So I think you have to recognize that the, you know, the path of a venture firm isn't always like that.There are, you know, significant ups and downs and it's how they navigate those challenging times that ultimately I think leads to the really sustainable franchises developing.
SPEAKER_06: I couldn't agree more.You know, it's really like thinking about how you make decisions, like really examining how you make decisions is like a very meta concept.I'm curious how you examine your own betting, and your own thinking about betting and your own thinking about portfolio management.Like, how often do you examine it and think, am I doing the right thing?Is 15 the right number?Or should it be 25?Or should it be 10?Or should I, you know, how do you think about thinking and your getting your betting strategy and your portfolio strategy?
SPEAKER_03: Yeah, well, we've evaluated the portfolio construction every time we raise a fund and update the priors.That's really important.And then in terms of the decision-making process, we run the firm with six different roadmaps.And one of those roadmaps is actually improving the investment process itself.So we capture structured votes.We have... quantitative research on companies that we do.And then every quarter, because we're so concentrated, we need to update our reserves.So we run probabilistic scenarios for each of those companies to determine where we think future dollars will go.And I think, you know, big driver, we, we,
Maintain a lot in reserves.So a typical Series A firm might have a 60-40 initial dollars invested, 40% reserve split.So it becomes really important to think about those reserves because it's basically half the fun.And there's a bunch of research out there coming from out of Stanford on portfolio management, it turns out. you can actually move a fund from top quartile to top decile with active reserves management.So that's a really important part of how we think about driving great returns.
SPEAKER_06: So you're looking at those 15 and saying, of those 15, which two or three, 10%, 20% deserve the final 50% of the dollars?
SPEAKER_03: Yeah, it will change on, I mean, as a function of what's happening within the underlying portfolio.But the idea is we have to be actively managing those reserves because that's what will drive, because it's basically to have fun.Two follow-up questions.
SPEAKER_06: How do you communicate that to the... 15 founders and founding teams that they are or aren't in that group right um and then do have you done preemptive where you say hey i i know this is a winner i think this is our uber i think this is our coinbase whatever it happens to be and then say to them like sequoia did with whatsapp hey would you like more money and preempt them from doing around so you take that in either order
SPEAKER_03: Yeah, so I've worked with a bunch of companies where we preempted, one company preempted the C, preempted the A, in fact, all more close to 60 to 70% investments we've made so far, preemptions.Wow.Yeah.And that's because we do all that research, we prepare, and then we try to put ourselves in a position where we can invest before the company goes out to market.
SPEAKER_06: So you spend more time studying your existing portfolio than new deals?Is that correct for people?
SPEAKER_03: The preemptions are in net new companies rather than existing companies.So we're only a year in.And so we're not yet in the position to be able to preempt a lot of the internal portfolio.But the idea is the same.I used to build a big body of research.
SPEAKER_06: How do you think about communicating that to founders?Or do you communicate it to founders yet?Like, hey, we have reserves, but here's how you qualify for them.
SPEAKER_03: Yeah, we're really clear.We're really clear on milestones.We set up internal plans for those portfolio companies where we expect them to be.And as you said before, Jason, the way that you communicate and articulate the candor is your reputation in the industry.
SPEAKER_04: Yeah.
SPEAKER_06: David Clark, how do you think, how do your terrific 12 think about reserves and think about communicating to their portfolio?Do you get that deep in the weeds with them?
SPEAKER_02: Yeah, certainly on the reserve side, I think, you know, it's the reserve equation has changed, I think, over the last 10 years as more of those firms have have raised separate growth vehicles.And so I, to some extent, we've seen reserves in early stage funds reduce because they kind of see the growth funders as filling that filling.
SPEAKER_06: Why is that?And is that the right way to do it?Or should it just be in one fund for simplicity?How did we get here?I'm curious.
SPEAKER_02: Yeah, I think we got here because companies are staying private for longer.And I think there's a different return profile that can be built by investing in later stage businesses that can still deliver on aggregate, attractive risk-adjusted returns, but it's a different risk return profile than what you would expect from early stage.So I would say that if you look at the variability of outcomes for a growth fund, it's a much tighter band than you would get for an early stage fund.That's not to say the best performing fund we've invested in over the last 15 years has been a growth fund, which is doing 15x. something what did they hit they must have hit something that's like hitting a royal flush or something right yeah yeah yeah they they hit probably the um the most valuable private company um in the world today stripe they hit stripe okay got it uh not necessarily in the u.s oh okay wait so wait is that wait wait who's the uh oh adyen would be adyen then yeah
SPEAKER_06: contemporary maybe is that that top two privates i don't know david you would know the other david
SPEAKER_05: I think Saudi Aramco, but I'm guessing they didn't invest into that one.
SPEAKER_06: Yeah, no, I don't think they got into LVMH or Saudi Aramco.
SPEAKER_02: No, no.So I think going back to the reserves question, for us, being able to deploy that capital sensibly is really important.And when we look at our data, what we find is the best managers can actually reduce their exposure to the loss-making companies and increase their exposure to the 5x, 10x fund returning companies.And if you're able to do that successfully, then you are having an impact on the initial bets that you made.So I do think being able to manage your reserve strategy effectively is one of the areas of being a really successful VC that perhaps doesn't get spoken about as much.And I know I've had conversations with a number of emerging managers and seed funds who don't want to do any reserves at all and see it as diluting the initial check.And interesting, Tamash, that you were talking about some research that you've seen there that can push funds into the top decile if they do it properly.That's certainly the sense that we've had when we look back at the data from the
500 plus VC firms we've invested in.
SPEAKER_05: Is there a magic number, David?Have you segmented by reserve strategy and TVPI?
SPEAKER_02: No, no, we haven't got that level of granularity.Well, what's your intuition tell you? I think certainly, yeah.I mean, certainly we've seen something around a 50-50, 40-60, 60-40.That sort of thing is historically what we've seen.I think there are firms that have done well more recently where they've been 70, 30, even 80, 20, but where they have that growth vehicle.And the growth vehicle, just to be clear, the growth vehicle will do the best companies from the early stage funds, but it will also do net new companies as well.So it's not necessarily just looking at making those follow-on investments.
SPEAKER_06: Yeah, I'm going 50-50.You know, when I looked at my first fund, which was, you know, 5x on paper, we've turned 1x already.And we had Robinhood, Superhuman, Calm, and Density in there, Density.io.And three out of those four we knew were definitive winners.And we didn't have reserves to double down on them.We didn't just consider it.It wasn't considered.You're just like, you get a $10 million fund, you make 100, 100k bets or something in that range.And now I'm just like, you know what?$50 million fund, $25 million into,
you know 100k 250k bets get whatever number of names that is and you know 200 names and then the last 25 million into the top five percent of that and then we've had to communicate that we are not we don't do bridge rounds we don't do our pro rata unless it's in the top five percent of our portfolio performers and we'll just tell founders like listen you're you're not the one in 20 you're here's where you stack rank and in for us to be involved we would just need to see a little bit more And it's a competition for those dollars.So I just tell people, it's a very small amount, a very small number of people are going to get those reserves.And it's a competition for them.That's it.You know, not everybody gets a max contract in the NBA either.Not everybody gets the $40 million supermax contract a year in the NBA.So and that's okay.It doesn't mean you're not going to be successful.But man, I find that a lot of VC firms are not clear about
with their portfolio companies, how they do reserves.And I've seen this really send founders into a tizzy, perhaps rightfully so perhaps, you know, perhaps all is fair in investing, but, you know, they just think, oh, well, this VC fought for this deal.And then when things get hard, the VC is going to do their bridge round. And they're like, yeah, we I mean, I remember Chamath from social capital just had a rule, we don't do bridge round, we only do price rounds.So if you do a bridge round, that's fine.We're just not participating in it.But when you get a price round, and somebody's leading it, then we'll consider our pro rata.And I thought that was very crisp, and clean language he gave to some of our portfolio companies.
SPEAKER_05: Let's move on to our lightning round where we'll dive into the top three investments from each of our guests.Tamash, you're up.
SPEAKER_03: Yeah, there's three companies I'd love to mention.One is a company called Motherduck, which is a next-generation database company founded by the tech lead from Google BigQuery, involved in the seed and NDA.And that... Big open source traction, completely different architecture in one of the biggest software markets, which is the analytical database space.And the really offices are full of rubber ducks.So if anyone ever gets a chance to go visit.Fun branding.Yeah, they've done a really nice job. The second company I'll mention is a business called Omni.And I was lucky enough to be on the board of a company called Looker that Google bought for about $2.6 billion.
And they were building VI tools.This is a part of the core team from Looker who's going about it a second time and taking some of the control mechanisms from Looker and the administration and balancing with the flexibility of Tableau.So I was involved in the C and the A and just involved in the next round too. And then the third one, just real quick, is a business called Arbitrum, which is a Web3 company founded by a team from Princeton that wrote many of the core papers underneath crypto and reasonably worth about $20 billion.And they process more transactions in both count and dollars than Ethereum, even though they're actually on top of Ethereum.
SPEAKER_06: Fantastic.Really interesting choices.I notice, you know, really seasoned teams there, huh? Yeah, you're right.Actually, that's a theme across these three. Very seasoned.Yeah.You know, we'll, uh, I'll give you some fun ones here.So we, you know, we've made some of these 25 K bets, um, in our founder university.And we like to make these small bets on odd, weird ideas and knowing that maybe they'll make it to the next stage again.
Um, this one newcomer is, is pretty funny guy obsessed with video games, teaching language in a video games.I don't think I have the sound on here, but you can see as you play this game, you, you know, it's like a Duolingo except you're playing a game. And instead of doing, you know, choices in your native language, you learn how to say farmer in Spanish or, you know, Greek or whatever you're doing it in.And, you know, people seem to love it.And it's getting some nice traction. This one I thought was very interesting, called recall browser extension.Everything you browse, you know, reminded me of delicious or other bookmarking tools.And as you bookmark, things are interesting in whether it's a PDF or a document that was sent to you in your email or a web page or a YouTube video, a podcast, puts it into your knowledge repository, and then you can start asking questions of it. The more you use it, the more knowledge.So it's like your personal LLM and we'll see where they take it.
But you can take any of these pages that you meet.And the one feature I said was, can I just automatically turn this on?They'd be like, it'd be very expensive.And I was like, yeah, you make a version for Wales where it's 500 bucks a year.Every webpage I do is indexed. And then pod engine, you know, obsessed with podcasts, you know, trying to track all the discussions going on really hard to do, right.And you know, that we've had some interesting conversations here about very granular topics.And so if your company was mentioned, or a topic, you know, getting that intelligence out of podcasts, summarized and into your email box or into a boardroom meeting, Very hard to do.And so this pod engine is basically indexing the world's podcasts and letting you track things and search them.
And so this is something where people will pay a lot of money for this.And so we're very excited about those three.And they're fun and interesting.Consumer is hard.But, you know, when you do hit on consumer, some of my biggest hits, romhood.com. And Uber, obviously, Thumbtack, a lot of consumers in there.
SPEAKER_05: And David, I know you don't share manager names, but you had a couple recent investments.
SPEAKER_02: Yeah.So we're just about to close on a couple of funds from a pretty large brand name firm.So that's covering early stage and growth.And we've been investors with them since 2012.I think we started with fund three with those guys.The last one we've actually closed on was at the end of last year.Again, that was an early stage and a growth fund.So I think it was fund eight was the early stage.Fund five was the growth one from Another established manager, this manager, they were one of the early investors in one of the big social media companies in the 2000s, have done some really interesting hardware deals that have ended up as fund returners.
And again, we first did them at Fund3 and have been investors there since 2010. And then the one before that was an early stage fund from that one of the top three or four global VC brands.And funnily enough, we were with them from fund three, but that was back in 1994.So that's a 30 year relationship we've we've had with those guys.So sorry, I can't mention specific names.
SPEAKER_05: But David, how does someone become your 13th fund?
SPEAKER_06: I'm going for 15th.I don't want to be 13th or 14th.I'm going for 15th.
SPEAKER_02: Fun five.I'll see you in two years with some good data.There's a couple that we're looking at adding.I think it just goes back to what I was saying earlier.It's about wanting to make sure that we're seeing firms that have got that history of being able to identify those top 1% companies, access them, win the deals, add value, and be able to structure exits around it.And also, we do think that venture is a team sport.And so we like to see a depth in the team.And where there are some fantastic solo GPs, individual VCs out there, But I think, again, from our kind of risk profile, you know, we like to see that we want to back a team.
And so, you know, we're looking at the sort of depth of the team.There can be strong individuals within that team.That's fine.But I think we, you know, we want to get comfortable that there's a group of people there that are, you know, that are working well together, that are feeding off each other and where the, you know, the sum of the parts is greater than the, you know, the individual bits.
SPEAKER_06: That's great information.What a great episode. Get us out of here, David.
SPEAKER_05: It's been another fascinating episode with two brilliant guests on the Liquidity Podcast for Tomas Tongas, David Clark, Jason Calacanis.This is your host, David Weisberg.Thanks for listening.