B (4:26)

Every LP says the canonical wisdom and the theory of venture as you scale performance goes down. Do you legitimately think then that with the expansion of these markets you can maintain 5x + net funds at scale?

A (4:43)

Well, I think the difference though Is that, imagine that you're an LP and you have a billion dollars to invest. Would you rather get, would you rather invest $50 million and get a 5x on that? Or would you rather invest all billion and get a 3x on that? And the answer is you'd rather get a 3x on a billion than a 5x on, you know, 5 million or. One of my good friends is this guy Mickey Malka at Ribit. I was lucky to be an investor in his fund one personally. And it's like that was like a 55x fund on, I think it was like an $85 million fund, but 55x, like that's insane. But you know, at some point you could ask Mickey this too. It's like you're better off with like a 5x on like a very, very large fund. Like the harder thing to do is to just return gross dollars, period. Like that. That's what LPs actually want. It's amazing to get a hundred. Like I've, I've had two funds that I've invested in. One is Mickey. This other one is this fund called AngelPad which was kind of like a third rate, competitive. I don't want to call it third rate, but it was like it was not, you know, there was Y combinator and, and then it's like there was AngelPad. It was just like this, this small little experiment that was 120x. I got 120 times the capital that I get DPI.

B (5:52)

How big was the fund?

A (5:53)

I think it was $8 million. But this is the thing, it's like, that's incredible. Your point is very valid. Like can you get 120x on a $2 billion fund? Probably not. I'm willing to bet you that you can't get 120x on that. But you can return far more dollars if you're very, very good. And this is the question that you originally asked was, and this is why I called it the death of the middle. Like my view is most asset classes you either have to be a large generalist or a small specialist. And the hard thing is to be like a mid sized generalist because then you're largely going to lose to like the big generalists or the small specialists. So like, you know, Ribbit as an example, like they really focus on fintech. That's how I know them. Well, like that's a specialty. They're not trying to do everything or Kazak in Latin America. Like they are focused on a specialty. And they can be small, like they're not trying to do everything across the entire planet. The entire job of venture capital is to find, pick and win win investments. If they're good investments, the winning is very, very hard. And the winning therefore goes to the person that is like the best, like you. You have to sell like this is a sales job. You know this, right? You have an entrepreneur. They're amazing, they don't come along very often. This is the best entrepreneur you've ever met. You have to convince them to take your money. And how do you do that? You have to say, I am the greatest person in the world to help you. Which means I have this amazing specialty and, or I have all these things that I can do for you. I'm connected to everybody on the planet. Given the scope and, and scale of my kind of general generalization. Right. Like on the big side, if I'm just like, hey, I kind of do a little bit of everything and I don't really know that much about your business and I'm not that big and can't help you that much. It's just you're going to lose. That's why the death of the middle is what tends to happen for a lot of these asset classes like, and then LPs, they want to chase returns. It's also sometimes hard to reach LPs, so like, you know, the big generalists kind of gobbled them up or the small specialists that, that generate very, very good returns. Well, we'll gobble them up as well.

B (7:44)

I have so many things to say. The first thing I do just want to say is Mickey Malka. You mentioned Mickey. When I was 18, helped me and agreed to be a mentor of mine. Twelve years ago, when it was completely not obvious, I had no idea why he spent time with me. And he's been incredible to me ever since. He always taught me, you're never one or lost, you're only ahead or behind. Keep playing. And I love that you mentioned that about kind of the scale of dollars and actually wouldn't you rather do 5x on 250 than I don't know, Exxon 10 or whatever it is? Yes, but there's an opportunity cost of dollars and for an endowment fund they are able to put it into the smaller fund. And so do you accept with that then that you just scale out of certain LPs and it's no longer the best risk adjusted place to put money then?

A (8:33)

Well, I bet, I think it's a. Obviously you can't disprove an unknown future, but I would posit to say that if you were trying to find, pick and win the best deals and maybe you disagree with me. I'm like the kind of the small specialist or the large generalist. But who wins the best consensus deals. Every now and then there will pop up a non consensus deal that everybody thinks is terrible. Nobody wants to, Sequoia doesn't want to do it, we don't want to do it, you don't want to do it, nobody wants to do it. And then it ends up being a thousand X and then somebody who is not the best known venture firm, you know, ended up winning that deal or being sold that deal, I should say. And then it ends up with a, with a great return. But a lot of the best deals will go to the best firms. Like that's what's very different about venture capital than like private equity. Like if, if you and I are trying to take a public company private KKR and on Blackstone we're both trying to, you know, take over RJR and Abisco or something like that, they're just going to sell to whoever offers them the highest price per share. I mean, they have to. Whereas in venture capital, as you know, you have to win the hearts and minds of the entrepreneur and win that deal. And a lot of the best deals are somewhat obvious. Like it's not Surpri. Like everybody wanted to invest in Uber, everybody wanted to invest in Facebook. Like it was self evident that these were very, very interesting companies. May maybe when the price gets high enough there come some doubts in people's minds. Like, ooh, I don't know if I want to invest at 87 million pre for the Series A of Facebook, but everybody wanted to do it at 20 million pre. There are a lot of companies that people don't want to do at any price. But the reason why I'm saying this is I don't necessarily think you could take it as a given that a small fund will outperform a large fund. Now I think it has the capability mathematically. Like again, if you're, if you're Mickey and you invest in the Series A of Coinbase and you have a very, very, very small fund, of course you can generate a bigger multiple of that fund. That's just, you know, algebraically true. But the best deals in Fintech, like Mickey gets to do them because he's a great firm and he has a much, much bigger fund right now. So that's the thing that I think it's hard to know. I mean, it's like again I agree with you. Algebraically, I would put my own personal money and I do. Right. It's like I invest in our funds. Like I would put my own personal money in funds that have, you know, kind of the small specialist or the big generalist, because I think that's where the best returns will be.

B (10:45)

Can I ask you, when you think about the best returns, what is the multiple of your best return, give or.

A (10:50)

Take, for a single deal? There's a seed deal that I did probably marked up at like 200x right.

B (10:58)

Now you said about consensus deals and I immediately thought of actually an Andreessen deal with which is like 11 labs, which was the most non consensus deal ever at seed, where it was like you're competing with OpenAI, you're in London. It's a pre seed. It was very non consensus. When you look back at your best deals, have they been consensus or non consensus?

A (11:20)

Well, I think. But if you look at 11, the entrepreneur was pretty consensus. Like, it's like, all right, Mahdi's super. Like that whole team is incredibly talented.

B (11:29)

Sure. But the pre seed and the seed a lot of people turn down.

A (11:32)

Yeah. But I, I think our job. Tell me if you agree with me. Is we find the smartest people in the world that have very high agency. Like there's been this thing going around about agency. Agency. How do you define it? It's like people will, they're not going to be told what to do. They just take matters into their own hands. This is a very rare trait. Right. Like you obviously had this trait when you could have just done the, the normal thing for a 19 year old to do or however you were, you were, you were younger than that when you started.

B (11:58)

17. Yeah, yeah.

A (11:59)

It's like what you did is not normal. You had agency and said, I am going to not do the normal thing. I'm going to go like email every famous VC to death and get them to talk to me. And like, you know, it's pretty incredible what you've done. That's a very rare trait. You find people like that that are hopefully experts in their domain. And I think that this is why the specialty thing that I mentioned is very, very important. I believe that there is a certain level of consensus around who has agency and who is an expert in the domain. Like if you, if you talk to an amazing entrepreneur, it's like, wow, this person knows everything about this. They've studied it for decades, they've read every book about it, they've talked to every entrepreneur who's tried this before you have to give them money. That's our job. Our job is to find these people, give them money. It won't always work for sure. But I actually don't agree that 11 was a non consensus deal. Like, if it was a high enough price, if it was not a seed, if it was like, okay, it's a Series B. They have half a million dollars in revenue and it's shrinking every month. Yeah, of course it's not going to be consensus.

B (12:57)

That was going to be my. Which is like, at what stage does that no longer hold true? You know, the Series A partner who leads our Series A fund is like, ah, the seed guys have it easy. You know, amazing founder, great, let's roll the dice for us, it's not quite enough. There comes that series.

A (13:13)

Is it the series? I agree. Like, at some point reality converges with reality. And if my, my kids and I have been watching Silicon Valley, the show, and like there's that famous scene where it's like, wait, you know, like they got, you know, the Mark Cuban character is on the phone and he hears revenues. No, no, no, you can't do revenue. You have to be pre revenue because then you're a pure play. So there is this element. I mean, the way to explain this financially is we buy out of the money call options. You know what a call option is, right? We were buying out of the money call options and we hope they expire in the money. Because this is how I explain to people, like why it is that a Series A that has a million dollars in revenue and is losing $10 million a year is, you know, worth $100 million. Of course it isn't worth $100 million. What you're doing is you're buying 15 or 20% of the company and hoping that eventually your call option expires in the money. That's the thing that you're doing. So eventually that value converges on like the equity value. It's like, oh, what's the discounted cash flow? Blah, blah, blah, blah. Like once it gets closer there and it's not a binary thing, right? Like at the seed, it's like, okay, out of the money call option, this guy or gal is very, very smart. I want to buy 20% of whatever they're doing and hopefully it expires in the money. And like, they're the smartest person I've ever met. Like, we do these deals 100 times a day. We will do them 100% of the time. Consensus, non consensus. Like there isn't really Anything to be consensus or non consensus on. Right. It's just like this is a very, very smart person. It only becomes non consensus to your point when the price goes up high enough. Because I think most people have the same viewpoint of this is a very, very high agency person who has studied history. Like, there's a. There's a memo that I wrote internally for our firm about how to invest in people. And I think you want to invest in people that can materialize labor, capital and customers. Especially today, where people get paid a fortune to stay at OpenAI or Anthropic or Meta or any of these companies. If you quit your job to start a company and you can snap your fingers and five people follow you tomorrow for a 50% pay cut, that's pretty magical. Like, that doesn't happen every day. So that's the materializing labor. You also want to make sure this kind of goes into the consensus, non consensus part. Like, is this person really good at fundraising? Like, are they telling a good story? Can they convince people like me to give them money? Oh, wow, they really can. That means hopefully that n +1, n +2, n +3 rounds will be a little bit easier. They will converge on reality in terms of numbers, for sure. But they have the thing around raising money. And then this is more of an enterprise focused thing. But can they get their first five customers? Which is as hard, if not harder than getting their first five employees. Because imagine this company, Toast. You know Toast, it's the restaurant POS company.

B (15:42)

Yeah, I love them. I did. I'm a vertical Sassner.

A (15:45)

This is. I know, I love vertical SaaS. Right? But like, imagine that, that you're Chris at Toast. You start company, you go to a restaurant and say, hey, I want you to use my. My product. And the restaurant asks some very good questions like, okay, well, how much cash do you have left? It's like, I have a week. Okay, interesting. How many other customers do you have? Zero. That's impossible. How can you pull that off if. If you are this rare breed of person that can materialize labor, capital and customers? And then I have kind of two sub appendages after that. I really, really like people that have studied the history of the space. And I say this because the best entrepreneurs that I've met, they have learned everything about the space to show what a great investor I am. When I was a. When I was running my company trialpay, I met with, I think, Patrick Callison. I know a lot about payments. I've been doing, like, payment stuff since 1997 on the intranet, which is. Which is kind of early stages for Internet online acceptance of credit cards. Meet Patrick. And obviously I passed on doing the seed round of Stripe because I'm a genius. It was called Dev Payments. At the time, I was not in the Driesen Horowitz, so don't hold it against me. It didn't hurt our dpi, and luckily the firm invested in them. But two things, you know, I asked Patrick, you know, where are your customers going to come from? Because everybody uses Chase Payment. He's like, oh, my customers don't exist yet. It's like the stupidest answer I've ever heard. But obviously it was genius. But number two, what really did impress me is that, you know, he knew everything about the history of the payment systems. I think he actually went out to go meet Dee Hawk, the founder of Visa. John Collison gave me a book on, like, you know, one of those Springer yellow, you know, academic textbooks on the origins of the payment system. Like, just. They had studied history so much. Same thing for Vlad at Robinhood. Studied history so much same thing for a pervert. Instacart, like, you know, went out to go meet the founders of webvan. This is a very, very classic trait. On the other side, I will meet people that will start a company almost exactly like trial pay or almost exactly like a firm. And I know a lot about these two companies because I started them right, and they're like, oh, what? What was trial pay? Or, oh, I'd never heard of this. And it's like, come on, man. Like, how are you? You're going to spend 10 years of your life building this thing. And you really should study history. Brian Chesky at Airbnb studied everything about, you know, bed and breakfast and hotel industry in the 1800s. Like, this is a very, very classic trade. So, so let me just finish with this. So. So again, Labor Capital customers study history. And then my favorite book of all time is the Count of Monte Cristo, because it's a story of revenge. And the reason why this is so important, if you know the book, it's by Alexandre Dumas. Edmond Dantes is wronged. He's sent to prison for, you know, bogus reasons for supposedly being a Napoleon supporter for, like, 17, 18 years. Eventually gets out, becomes the richest person in the world, but doesn't give a fuck if I can use that language. Just does not care. He wants revenge. Like, he wants to destroy his enemies and just, like, conquer the world or just really destroy his enemies. And you need that Kind of motivation because going back to fun size, if somebody offers you $100 million and you're an 18 year old kid that is transformative, you'd have to be an idiot to turn that down. Or you have to want revenge or redemption. Revenge, redemption, kind of same thing. And I find a lot of the best entrepreneurs, they have that going. Like they want to prove they're better than everybody else. They had some childhood chip on their shoulder or they were wronged at their last company. Like Dave Duffield has this hostile takeover of PeopleSoft. Of course he starts workday and he's like, fuck you Larry Ellison. There's always that kind of energy. So the Cat of Monte Cristo thing, I don't know how to describe it but like the motivation has to be beyond. I want to make $50 million because if that's the motivation, like it's not going to work for our fund size. I love seeing that, that fire. And again like a lot of the most successful companies that I've seen, they always have that. Like Renault Laplache starts Lending Club. Fired from his own company. He's made tons of money, doesn't give a shit. He starts a competitor called Upgrade. No, no accident that the company's called Upgrade. It's like an upgrade over you Mfers right? Starts Upgrade. Upgrade has a multiple of the market cap. It's probably like worth 10 times more than Lending Club now. So that's a very, very classic commonality.

B (19:41)

I want to stage the questions there because there was so much to unpack. You said there about kind of, you love them studying history and you said about passing on stripe. That was my concern, which is there is a level where you can know too much. I think I know quite a bit about lending now. I know beginners, beginners compared to you. But I know quite a bit about lending where it's quite easy for me to say to see a lending business and go fucking horrible. It's a hard market. I don't want to be. Look at Lending Club, look at the market cap. They're very dismissive as many were with stripe when they knew payments. How do you prevent yourself knowing too much that it's a negative?

A (20:17)

I think this is a great question and this is the number one thing that, that. So I do a couple things. Number one, if it's like an ad tech company, I know a lot about ad tech, I know a lot about payments, I will force somebody else to join me for the pitch. That is like a beginner's mindset mind. So I Think that's one is just like, have a sparring partner internally that has that, you know, what if it works? You always have to be like, what if it works? So that's number one. Number two is I like to ask the entrepreneurs, like, what is different? And the thing that's different, like, the reason why Patrick and John made Stripe work partially is it's like they just believed that a great number of new companies will be created and they're going to pick the best product and they're going to have the best product. And actually, this informs a big part of my investment thesis now. I mean, I call it Greenfield, but there's a saying that I use a lot, which is the best companies have hostages, not customers, right? It's like, you'll appreciate this if you're an enterprise SaaS guy, right? It's like the best companies have hostages now, customers. So if there's a company that has something marginally better than workday, right, they're not going to go like, workday has hostages. They don't have customers. They're not going to go be able to sell GE and say, oh, wow, I love you two YC kids. Like, I'm totally switching my HRIs from shitty workday to amazing, you know, AI, whatever, YC, Silicon Valley HRIs never going to happen. But if the rate of new company creation is high enough, those new companies will pick the best product and they're like, oh, wow, I could use workday, but I'm not a hostage, so I'm free. I'm going to pick this other thing. Like, I was the first investor in Mercury, the SMB bank, and like, until SVB failed, they never stole a customer from svb. But if you're a brand, as long as the rate of new company creation is high enough, you can play this game that I called Greenfield Bingo, where it's just like you pick every software category, you build a better version of that, and then you've got a shot. And that's what stripe was. I mean, like, that's why it worked. If the rate of company creation is very low, like if I build a better ehr, like electronic Health Records company, it's just not going to work because the rate of new hospital creation is too slow, right? It's like you can't just. You can't just sell to the new companies, but you can do that for payment processing, right? You can do that for erp. Like, you do it for a bunch of other categories.

B (22:24)

So you will look for Greenfield Bingo markets where the rate of net new companies being created will supplant the slow, slow sales cycles of the larger enterprise customers who will eventually switch.

A (22:36)

Or maybe they don't, right? It's like, who cares if they switch or not? Like, it's like they'll hopefully die because they're using shitty software. Like, the fact that they won't switch is actually indicative of like their mantra on everything. Like they want to use old technology or they're hostage to old technology. Let's just sell into the future. And you know, betting on the future is more fun. I mean, like one of the things that's very, very challenging is you go start a company, you recruit 10 hotshot people from Meta, Google, whatever, and then they're bored to death. Why are they bored to death? Because they can't do anything. It's like they were used to making little tweaks that a billion people experienced every minute, every hour. And now they're at a startup and the startup, it's been one and a half years and they've made one sale that's quite tip. And then like you end up losing your talent because it's boring. Like you can't actually do anything. So, you know, it's nice to have these markets that can ramp quite quickly and you kind of want the market to be a tailwind for you. It doesn't mean that there's not value in kind of creating big companies that sell big, you know, startups that sell big software products to big companies. You can do that. It's just, it's a much, much harder thing culturally for Silicon Valley.

B (23:44)

I think shows are a bit like venture, which is the majority that you do are actually not very good. And then you get the once in a while episodes like this which remind you why you love what you do so much. You know what I mean? When you meet that special founder, oh, 100%. It's so great when you have a show like this. My question to you is, you said hostages, not customers. How should I think about that then? In a world of cursor or any of the foundation models, your anthropics or your OpenAI's where they are customers, not hostages, they can switch very easily. The promiscuity of customers has never been higher. How should we think about that?

A (24:22)

It's a really good question. I mean, this is where behind every technology revolution and kind of go back to like Silicon, then the personal computer, then the Internet, then kind of Internet 2.0 where you could write to the Internet, things like, things like Facebook and YouTube then mobile, then cloud. There's always been an infrastructure layer and an application layer. So, you know, you go back, like the infrastructure layer for PCs was, I don't know, like Microsoft and Apple, like the operating system players. The infrastructure player for the Internet was like Cisco and Akamai. The infrastructure player for everything AI are all of these backend model, you know, providers, and then there's the application layer on top. So if I do something, you know, we were talking about Ask Leo, right? Like that's an application layer company. If I were Vlad, I would love to be promiscuous with all the backend models, because I should be. And then the infrastructure players are like, oh, shit, you know, all of our customers are being promiscuous. Let's figure out how we specialize in a particular area. I imagine that, like, that's why Anthropic, I imagine, has gotten very good at coding, but it's kind of. The application layer tends to be a little bit stickier. But the problem is you might have 9,000 competing companies at the application layer, in which case you'd rather be the infrastructure layer. But the infrastructure layer is pretty hotly competed as well right now. So I don't know. I mean, it's. The more relevant question for me is in 2025, the ability to go create a software product is so easy. I published this chart with the help of my friend ChatGPT, of how long it took VisiCalc, which was the first spreadsheet that came out in 1979 to lose to Lotus 1, 2, 3, and then how long it took Lotus 1, 2, 3 to lose to Microsoft. And it took about five years from VisiCalc to go from 100% market share because they were 100% market share, because they were the only one in the first to 50% market share. It took about 15 years after that for Lotus, which had, you know, 70% market share in 1986 or something, to almost zero. These, this would normally take a long time in 2025, this can take weeks, which is bonkers, right? Because all of these layers of past innovation have kind of like almost like a Russian nesting doll kind of concentrically grown against each other. So because you have cloud and because you have mobile, everybody in the world has a smartphone in their pocket. All of those smartphones are connected to like, you know, infinite computing in the cloud or near infinite computing with like a dearth of energy in the cloud. And now I build something marginally better. I can get into the hands of a billion people overnight and that's just so, so different. But I think on the hostages point, if you build a system of record, right, like, it's just so hard to switch. That has not changed. But now I can go compete. I could build a software product in like two weeks. That would have taken me two years. So that's going to massively increase the pressure on the application layer. So the best thing that you can do if you're an application layer company is hopefully, you know, have something that, you know. I hate to say it, but it's like you want to have hostages. You want to have all of the data in your company, you want to have all of the data of your customer in your, in your product. And then just make sure that. I mean, this is, I think the thing that we talked about last time was on your show, it's like, you know, the battle of every startup versus incumbent is whether the startup gets the distribution before the incumbent gets the innovation, right? So what do you do? You go boring. You build the most boring thing possible. Nobody really cares about it. Nobody's that interested in. I mean, that's why I love Vlad. You know, Ask Leo is like, who cares about procurement? It seems kind of stupid. It's not attracting 9,000 competitors, but hopefully you get all of the data in there and then you can build these interesting things on top and you're not going to attract that much competition. And even once you do, it's just, it's kind of hard to switch. So I don't know if that answers your question.

B (27:57)

It totally answers my question, but it leads to several more questions, which is the theme of this discussion, which is the speed with which it takes to compete with the incumbent has reduced and you are able to take customers or market share quicker than ever before. With the extension of private markets, do we not have a liquidity problem? Then when we look at. I don't want to pick on anyone, but fuck it, I will say like a company like Sneak in the cybersecurity market, which has been going, it's now getting eaten away by new incumbents before it's had the chance to return shareholder money liquidate. And so do we not have a fundamental challenge here where companies that have not gone public yet or not provided returns to investors are already getting eaten away because that compression time is shorter.

A (28:42)

Yeah, I think this is a big challenge. I mean, if you look at all of the unicorns and how many conform to rule of 40, it's pretty small. Many of them are shrinking. So probably of the unicorn class, I would bet that maybe 5% will ever be able to go public, which is kind of shocking, right? And then because so much money has gone into venture capital, you have this problem of. I mean, I will say on the record, I hate massive secondaries because it kind of turns you from the Count of Monte Cristo to, like, the, you know, whatever the opposite of that would be, like the I'm now going to go vacation in the Cote d' Azur or something like that's going to now say, I am now at a fundamental disconnect from my employees and my investors because I'm rich and they aren't. That's not a good setup. You kind of want everybody to be in the same boat. The reason why I mentioned that is, like, you have some companies where it's like, you know, founders taking a $51 million secondary, that's fine. If they just turned down a $10 billion acquisition from Google and they were the Count of Monte Cristo and they want to go for it. Like, okay, that. That can make sense to me. And if you offer that to all employees and all investors and everything else, I don't love the idea of. It's like, people are looking at this as spreadsheets. There was a. There was a fund in 2021 that did, like, a massive secondary into one of my companies, and I was really against it, which made me super popular with the founder. You can imagine they were like, oh, well, we own 4% of the company. We want to own 8% of the company. Because 8% is more than 4%. I'm like, dude, I totally agree with you. 8% is more than. You have now introduced moral hazard into the equation. Because if you give somebody generational wealth, you can hope that they're going to kind of maybe, like, the upside would be like, they're going to swing for the fences and go for it. Because otherwise I would be happy selling for a billion dollars. Now it's like, fuck it, I'm going to go for a hundred billion. Okay, that's great. Now we're all aligned. But the other option is now they don't care about getting liquidity for investors. They don't care about getting liquidity for employees. They're quite comfortable. Like, you don't want to have that set up.

B (30:33)

I don't think that's actually the problem. I mean, this was the greatest of respect. I think we assume the next strategic steps will be the same with that money versus without that money. And I think what we've both seen is the foie grasing of startups. And then they do 10 things, not two things. None of them work. The team is disincentivized, they break up. Culture sucks.

A (30:55)

Moral hazard. That's the economic framing, right? It's moral hazard on both primary and secondary. To your point, necessity is the mother of invention. So if you have $100 billion in the bank when you really should only have $10 million in the bank, you're like, I'll do 50 things. I'll have, you know, multiple layers of people that I don't need. And it's interesting, I find that a lot of people, when I, when I think about, like, the difference between conservatives and liberals or people that believe in big government, small government, a lot of it comes down to the disconnect between more input is better output. Like, a lot of people just believe this. It's like, okay, you know, the irs, the Internal Revenue Service, like, oh, you know, there's a lot of tax fraud. We need to hire more people. And if we, if we have more people, we're going to do a better job of catching tax fraud. Or like, oh, the military, we should have more people in the military because that way we're going to do a better job. Whereas actually, as you know, it's like, sometimes there's addition by subtraction. Like, if I have a smaller team, there's less communication necessary. You're going to come up with more creative ways of actually solving the problem. You're going to solve it with technology. Whereas if you have, if you just say, I'm going to solve it on the input layer, I'm going to, like, address my constituents by saying, I'm going to just allocate more money to this thing. You're going to get a worse outcome versus I allocate less money with great people. This is the key. So you can't just say, like, I'm going to, I'm going to allocate less money and give you the worst people on earth. And then, no, but it's like, you know, take, take tax fraud. I would rather have two people at the IRS than 80,000 people, but have those two people be the Noam Shazir and some other, like, super genius. Because if Jeff Dean and Noam Shazir are running the irs, like, oh my God, like, that would be so much more efficient, but the input cost would be like 1/100th as much. And there's always that disconnect.

B (32:33)

I actually am in trouble with my team because I just tweeted today, series A is the worst place to be investing company Progression is minimal. Price is 4 to 5x the seed price and we're paying 150 to 200x ARR with little signs of product market fit. Do you agree with me it's the worst place to be invest?

A (32:53)

Well, I think the problem is that there's the nomenclature which kind of varies company to company. So like when I started trial pay, we raised our series A was 3.1 million on 9.5 million pre. And that was expensive. I remember like arguing with the partner at battery. It's like, this is the most expensive deal we've done. This was 2006 at Site Advisor. I think we raised 2.7 on 2.7 pre. So even lower. Hence. Hence he was right. So now you have a pre seed A seed a seed extension a seed extension two. Like what is a Series A, right? There's not like this like normally a Series A would be like the first institutional round of money. Now there's so much variance because like, oh, there's the Series A where it's like five superstars out of OpenAI and they need tons of money for compute. No moral hazard on that. You're not going to go spend money on people, you're going to spend money on GPUs. That's one form of Series A. Another form of Series A is like I just did a Series A where the company had like, like $10 million of ARR when I invest in it. So it's just all over the place. So I think it's just hard to kind of cast a generality. There are certainly ones where like I used to call this the Series B trap. But again, I think the nomenclature has shifted. Like I would have agreed with your team if you called it the Series B because at that time there was a seed, there was a Series A. And the only difference between Series A and Series B is that you increased your burn and built infrastructure and kind of scaffolding. So it's like, I have a company, I have customers, I have signs of product market fit. I know now I should hire an HR team and a marketing team and all this other kind of shit that doesn't actually have any kind of impact on the, on the, you know, metrics of the company. And that was the Series B, right? And then it's like, why would I invest in a Series B? Because I get half as much ownership and nothing has changed vis a vis the Series A. So yes, there's a class of Series A's that look like that. But I would say, like, of the Series A's that I personally did in the last year, like, most of them have been like, holy shit. Like, revenue is really scaling and these numbers are insane. And you know, those were, those were Series A's and I get very excited about those. But it just. I think your mileage varies because the nomenclature is all over the place.

B (34:55)

Do you worry about the quick succession rounds? When you look at companies like a Rylit or a Tacto, there's just like a week later there's another term sheet for a Series B with literally no change at all. And it's buying the call options. Do you worry about those rounds?

A (35:11)

Well, I did one of them. Right. Like, I'm on the board of Rillet. I did the Series B And it was 60 days after the Series A, and that's unfortunate. I would have rather done the Series A or rather done the seed, of course, but if you find the winner, it's also very expensive not to do that deal.

B (35:26)

So that's so interesting that I'm so pleased because I'm so sorry, dude, I totally forgot that you did the Rillet B. But like, you got to pay up for that. Going to the point, you've got to assume that the next strategic steps will be the same and be as focused even though you have just foie gras the company. Sorry. Probably.

A (35:45)

Well, but this is where I think the motivation of the founder is very, very important. So going back to like, I mean, Nick, who's the CEO of Real it. I mean, I think he does have a bit of the count amount of Chris Joe in him. Like, it's like he doesn't want to go take this money and go spend it on extravagant things. So I think you have to make sure that there's kind of like founder capital fit. Nobody ever talks about that. It's like, okay, if I give you a dollars, what will you do with it? And 99 times out of a hundred, the answer is going to be bad news. And not, not even bad news around waste, but just bad news in terms of mindset. Like, it's another form of moral hazard where it's like, I'm never forced into making hard decisions because I have infinite capital and you kind of want to force people into making hard decisions. And like, I live this. I mean, I've. I've tweeted about some of these things during my. My painful existence at trial day where, you know, I think we had to lay off 70% of the company. And then we eventually Turned it around and sold it to Visa. And there were all sorts of tough times therein. But you run into these like very, very challenging scenarios. And it's like, option A is bad, option B is bad. You have two of two choices. You're at a fork in the road. And there's a funny expression by Yogi Berra, this famous baseball player in the US when you come to a fork in the road, take it. It's like, what does that mean? He said all these like things that make no sense. But what a lot of entrepreneurs don't realize is that the worst option. You think you have two options, but there's a third option which is making no choice at all. That's the worst option. You're better off like just choosing something and both of them are bad. This option is very bad. So therefore I don't want to make any choice at all. But you're better off making a choice and committing to something. And if you have infinite capital, you could just kind of continue this. I'm not going to make any choices. I'm just going to sit here and just like, all right, well I have more money. You know, my ARR is more driven from the interest on my, my giant hundred million dollar cash reserve. If you ha. If you. Sorry for, for rambling on this but like this kind of goes to like founder capital fit. There's a certain type of person where it's like, I give you a lot of money and I know you're still going to make decisions very, very quickly. I know it isn't going to distract you and really it's just benefiting me. I hate to say it selfishly, but it's benefiting me is in that now I'm on the cap table, I own part of this amazing company and it's not going to fuck up the company. The moral hazard is the number one thing. It's like now it's going to fuck up the company either with too many, too much primary or it's like, oh, I know, I won't, I won't mess with the primary. I'll just buy secondary. It's like that also has, you know, existential risk. As I mentioned, for a certain class of person. There are other CEOs that like, you know, one of my, One of my CEOs did a very, very big secondary in 2021. Like he and the company is hit on some tough times, but like he has stuck it out and like he's doing a phenomenal job.

B (38:15)

How do you get comfortable about growing into that price that you have well overpaid for. So again, we're super candid. And this is where I love where I'm at in my stage of life now versus where I was like eight years ago. Because it wasn't kind of the same. I lost to Seema on your team for Ask Leo. She's amazing. You guys are amazing. Hugely well deserved. You guys did not pay more than me. I hate this bullshit VC thing where it's like, oh, they overpay. No, it was like the same. You just beat me fair and square. Well done. I reflect on that and I'm like, you idiot, you should have paid 300 and doubled them. Because when I map out 18 months time, I looked at their revenue projections and in 18 months time when they need to go raise their revenues would have been so much that I could still see a 3x on that 300. That's how I get comfortable with paying up for something. How do you get comfortable preemptively paying up so much?

A (39:10)

I mean, I think it's the same, it's the same math, but it's dangerous on both sides, right? It's like I always have this speech that works, you know, maybe one time out of a hundred that I give it, which is kind of like the Spider man speech of like, with great capital comes great responsibility. And if you raise it too high of a price, you're fucked. Because I lived this. Let me tell you my story. I raised it this price for my Series C. Then I had like Google that wanted to buy me, but it was like at the same price. So therefore it tanked the thing. And then my next round, everybody asked me what was the price of my last round and nobody wants to invest. Like, I, I go tell this story, I can introduce the founder to 10 other founders that, that have lived the exact same thing. It's like, I wish I hadn't raised my round at such a high price. But who starts a company? Let's just think about this for a second. The people that start a company are irrationally exuberant. Like if they thought that the company was going to fail, if they thought they had a zero percent chance of raising a Series B, they wouldn't start the fucking company, right? So that's why the speech doesn't work. Because I always tell people like, hey, the reason why you shouldn't raise your Series A, like there, there is a deal that I guess we should have done candidly because like this company just raised it like a billion dollar plus valuation, but we turned it down. Company had like less than a million dollars in revenue and they wanted like a $200 million whatever post money series. It was just so crazy. I was like, look, you guys haven't started the company before. I have. Not to, like, pull the, the old bald guy card, but like your Series B, like, even if you have $20 million in revenue, you're fucked. Like, you have to be able to walk into a room. The number one question you're going to get is, what was your last round price? And people should be wanting to compete to pay three times that price. Like, they want, like, oh, my God, what will it take to do this deal? And if you say, like, hey, my la. My Series A was raised at a billion dollars and I have a million dollars in revenue, you have ended the conversation. Nobody want. The psychology of that round is all wrong. So I give this speech and it just doesn't work, unfortunately. But, but I think the smart entrepreneurs, they kind of have this risk balancing thing. It's like they're irrationally exuberant. That's why they quit their job and started the company. But they realized, oh, wow, there actually is a good point around, like, my whole team now says we have a hundred million dollars in the bank. They're going to be wasteful. That culture is something that I don't want. Yeah, I guess I would want the option of maybe selling the company for a billion dollars and having, you know, salesforce come in and say, what would it take to buy the company? What was your last round price? Because I will tell you 100% of the time in every M and A conversation, in every fundraising conversation, the number one question, the first question is, what was your last round price? And if it's like insane, they're like, ooh, that's not good. And then as an entrepreneur, you're like, oh, no, no. But I would take a discount because my company sucks. You can't say that. It just destroys the entire conversation. It's just game over.

B (41:39)

Can I ask going, there's just staged conversation, otherwise I'm going to lose the thread here of what I want to ask you. We mentioned kind of the rillet element and the successive rounds. I hope it's not too forward and you can say, dude, don't want this in there. But you do the successive B because you lose the A. When you sit down and we're sitting down as a team, how do we reflect on that? When you reflect on a rillet review, what was the takeaway from that when you sat down?

A (42:05)

Well, I mean, there are a lot of deals that we lose because we're not willing to kind of go the distance on price. That is a common thing where it's like, did we really lose? Like, this has happened to us a number of times. It's like, all right, we wanted to do the deal. This is again like consensus and non consensus. A lot of times the difference is just on price or ownership. If we had shown up and said, hey, we'll do 10% of this company for an A RAL, like we could win every deal. It's actually, I think one of the competing elements that has shown up. I'm interested to watch how Standard Capital does. This is kind of the YC offshoot where I'm going to take 10%. That's very, very bad for big funds because in order to make the math work for a big fund, you have to have high ownership and you know that your ownership will get depleted or will, will get diluted over time as option pool expansions happen, even if you take your pro rata in every single successive round. So I mean, we can win all these deals. But a lot of times, you know, I, I, I am much more preoccupied with ownership at the A, because we're buying an out of the money call option. And, and the reason why I, I kind of tell this story is because there's something that I've used as a benchmark which is if you're hiring people and 100% of the people say yes to your job offer, what can you infer from that? Number one, you could infer that you're the greatest hiring manager of all time. But number two, you might be overpaying. Would you agree with that? Like, if you only get 50% or 20%, like, how do you know to test this hypothesis? And if you win 100% of the deals, that's a very, very good sign. You should Try to win 100% of the deals that you want to do. But if you're winning them with very low ownership, you're probably not testing like this kind of efficient frontier of like how far you can go and you want to have more ownership, right? Like that. That's our objective. Like, the founder wants less dilution, the investor wants more ownership. The two are like kind of perfect complements of each other. Eventually you realize like, I don't want to be a fucking idiot. Like this is the answer to your question, right? It's like, all right, I wanted 20% in an A round for a company that doesn't have that much Traction. Because you know, I'm, I'm at Andreessen Horowitz and I've got this big fund and everything else. And then it's like, no, no, they're going to do a 15% round or whatever. It's like, oh, fuck that, I don't want to do that deal. And then it's like, holy, they've run away with the market. This is the market leader. I'm not going to be stupid, right? I'm not going to just say, this is why. Actually, by the way, I love talking to investors. Because investors, like most humans, do not have the capability to admit that they were wrong. They just want to say I'm right. I'm say I'm right. I say if you're an investor, you're just going to lose money all the time. The most valuable insight that you can have as an investor is the self reflection to say, I'm an idiot. And if I'm a hedge fund guy, it's like I get to sell. It's like, oh, I thought I was a genius buying Herbalife, blah blah blah, like oh wow, this company's not good. I'm going to sell everything versus no, I want to prove to the world that I'm right. Well, I'm going to lose all my money. So it's the same thing here, but for upside we can't sell, but we can say like this is the winner. I want to be in the B at a lower ownership because like this is the fucking winner.

B (44:52)

But if I was your partner, I would be pushing you with all my might to take the 10% at the A and have a higher win rate specifically with your profile of fund. Because I get it in other funds where you don't have the ability to follow on and lead the B, the C, the D. You may even not be able to do the pro ratas, in which case I get that thinking. But when you can, why are we not having a higher win rate and doing 10%?

A (45:14)

Well, I mean this is actually one of the things that we looked at because I kind of feel like my job here is kind of quasi portfolio manager. So I run our apps fund seven different funds. And my job is to make sure that like that fund is as successful as possible. And you know, we're winning the right deals that we, if we just say, hey, everybody, win every single deal, just win every deal. It doesn't matter, that's all I'm going to optimize for. And we end up with 5% checks in every series A, like, you know, that's not going to work. Right. We can win every deal that way. What is the front? How far on this curve can you go? And it's the, again, it's the exact inverse conversation that an entrepreneur is having where it's like, I want a tier one investor. I want, you know, an amazing specialist. I want whatever I want on, you know, this person I want on my board. What is the least amount that I can give up to get an amazing person? And they would love to get 5% a round deals done, but they're like, oh, wait a minute, like that's not going to work. And like that, that's the, the tension between the two. So I, I, I, I agree with you. But I think, you know, where do you, it's like Zeno's paradox, you know, that is right. It's like you will never get to the destination if you go halfway each time. Like, is it 9? Well, why not just do it at 9%? Why not do it at 8? Like where do you draw the line on that?

B (46:23)

I would, I would do the simple mass of where do I think? And this is a very dangerous and bad answer to your question because the biggest mistake and venture have been when you underestimate market size and you don't see what it can be. But I'd sit down with you and I'll go, okay, 10% entry, 5% on exit. Assuming a 50% dilution, do we think this can reasonably be a $15 billion company? If so, that is a number that returns the fund with comfort.

A (46:49)

I know, but the problem is it's kind of garbage in, garbage out. It's like you can always say that for something because otherwise you're like, oh, wow, I underestimated the size of the black car market. It, it's hard. I mean, the way that I do it just kind of to be pithy about it is like we either want to buy any percent, any percent of something that is absolutely working or high ownership of something that could work. If you really kind of draw a line of like the, you have to bifurcate the market. It's like Facebook, if you look at that round, I think Greylock put 25 million into Facebook. Actually, I think the round was maybe 25 million at 500. I think that was the B round for Facebook split between Maritech and Greylock. But that was absolutely working. Working. Right? So it's like, are they getting 10%? No. Are they getting 5%? No. Like, but it's like the market winner and things can go wrong. But like, holy shit, it's absolutely working. And like, I don't see that many things that look like that. But when they, when you do, you throw away all the rules. Or it's like, this is not working. But this person looks like a super genius. They have high agency, they can get, they can materialize labor, capital and customers. But it's not working yet, right? So like I have to have high ownership in order to take, to correspond with that level of risk. And those are the two types of deals to do. The danger is you say every, you can say, oh well, this has a million dollars of ARR and they're ahead of the number two player that has 900k of ARR. Therefore it's absolutely working. Now you have to have a high bar on the absolutely word. Like, this is, this is crushing. This is the fastest growing company we've ever seen. It probably comes around once every decade. Throw away the entire rule book and you should be fine owning 5% of that company because it's an absolute winner.

B (48:15)

I'm so pleased that you said about the fastest growing company that we've seen. We've never seen growth rates like we have today. I'm a little bit stuck if I'm honest. And so I'd love your advice. When we look at companies going from 1 to 20 to 30 to 40, there's actually quite a few that do that today. Before that was completely unheard of. How much weight should we place on revenue growth today versus not. And is there a world where these companies that are going from one to three or four, three or four. I used to be good. I'd left behind.

A (48:44)

If you want to know the three investment theses that I have for our fund, I mean, this is exactly what I told LPs and we'll answer your question in a second. I think we have three. We have one which is we invest in system like I call it Greenfield bingo. And most of the green, like these are existing software companies, but selling to new companies as opposed to selling to the hostages that will never leave. They tend to be systems of reference record or a vertical operating system. So like the reason why Rillet, I love that company so much, that's never going to grow like 0 to 100 in like a month. But it is very, very sticky revenue like once you're on, like Netsuite has hostages now. Customers, they're not going to leave. You know, if this can, if, if Rillet can sell into every new company, like they're going to do great the revenue growth will be slower, but it will be so sticky. And they have infinite option value on adding, like, hey, do you want to have a collections AI agent that runs on top of, you know, overdue invoice, blah, blah, blah. And that's like optionality on top of your sticky system of record. So number one is greenfield kind of systems of record. Number two, and this goes to the fastest growing companies in the world that you're talking about is like software that does the job of labor. Like these are new. This is like, I'll give you an example. Like we have a company called eve. They sell into plaintiff attorneys. What is the dominant software product for plaintiff attorneys? It's called Microsoft Office. Right? Like there isn't one. There's so many categories. Like what's the dominant software for? Like manicures. Like, there is a. You could pick all these areas where there's no greenfield. Bing, there's no, there's just nothing. But because the thing that you're selling is effectually effectively in lieu of labor. The way that EVE works is if you're a plaintiff attorney and you get paid on contingency, you're not charging by the hour, you have a case where you will, with 100% certainty, win $1,000. Will you take that case? The answer is absolutely not, because it's not worth your time. So you turn down all the small ticket cases because you want the big ticket cases. But now you have a software product that can do all the work and help you win all the small ticket cases. Like, you're absolutely going to do that. These are the things that scale like crazy because instead of hiring somebody for $80,000 a year that I cannot hire, I can now hire this Software product for $20,000 a year. And before I was paying $0 a year for software. Those are all the things that are hyperscaling. But to your point, if they don't eventually back into a system of record, like if it's something that just does, does like outbound phone calls with an AI agent. It's a thin wrapper on, you know, OpenAI or Plus11 Labs, plus something else, it will attract so much competition, it won't be sticky. The conversation that I have with every entrepreneur that has one of these companies is like, how are you going to make this sticky? How, how are you going to, you know, pardon my language, get the hostages? How, how do you hold these customers and make sure that if, you know, if you are. I'll give you an example. Like I'm a, I'm an investor in a company called Salient, which is probably the market leader in kind of outbound loan servicing for autos. And this is a conversation I had with Ari. It's like, what if Taliant shows up? You know, the competitor is Salient, the make believe competitor Salient. How do you keep your customers? And they say, hey, we're going to do it for 50% cheaper. And I loved his answer, which is I'm, this is my wedge, right? I recognize that this is, this is, you know, not super sticky if we're just making outbound phone calls and combining these, these different layers of the stock because we're not the infrastructure layer but we are going to back into a software product. And that's, I love that answer. And it's true, like that's what they've done. So that's, that's my answer to your question is they might not be able to pull it off. Like every company that, that says they're going to do this, they might not be able to pull it off, but you have to back in this mega revenue growth that largely is predicated on doing the job that people would do before. And that's why you can grow so quickly into sticky software product that is not that dissimilar from software products of yesteryear. So it's like number one is, you know, Greenfield bingo. Number two is like software that does the job of labor. And number three, I wrote a post about this, but I called it the Walled Garden. And I'll give you two examples of this. There's a company in Europe called Velex and Velex was started by this entrepreneur, basically bought up every legal record in Spain, physical legal records at the courthouse, put them into like digital form and then started selling them to law firms. And I think he got this to like something like 20 something million dollars of ARR after 25 years, but then added AI and it grew like something like 5x. I mean something crazy. Why? Because OpenAI, let's just say OpenAI is purely, it's a sentient being. AGI is here, OpenAI has done it. Tomorrow 5 GPT 5.5 is here. If they don't have, if you say like, hey, help me draft a response to this like Spanish court case, blah blah, they don't have the data, they can't do that. Or open evidence has done this for, for health data, like you know, AGI is here. OpenAI has it. Amazing. I tore my Achilles. What do I do? I'd rather have GPT 3.5 plus infinite data of everything around medical science, which is walled garden that open evidence has versus like sentient being that has no data whatsoever. So that's also a very, very powerful way of building something sticky. So if you, if you find a company that has grown like this or grown like this, but just cannot be removed either because of the data that they have that is unique to them, which is, you know, honestly my hope is ask Leo or has, you know, kind of sticky system of record, like it's just not going anywhere versus other ones. Like you might take a flyer, it's like, wow, this is growing from 0 to 100. They make outbound phone calls and they're like, you know, 11 labs plus this, plus that. And it was all built and lovable and it's amazing. That's a harder pill to swallow.

B (53:55)

I'm so honest these days, dude. I'm too old and ugly to not be honest. We're in this business called aloe in Germany. It's like a toast for Europe, but a little bit better specialized to the European market. They've got great numbers, like 5 acts from like 500k to 2 and a half million raising their series A like you know, 8 or 10 on 50ish. Memory serving me correct was a bear was fucking horrible. And I was just like, oh my God, the triple, triple double double is so dead. Like we're in lovable as well. That obviously is a completely different fundraise journey. Is the triple triple double double dead?

A (54:28)

I don't think so. No. I think, I mean it might be harder for a certain set of people that are maniacally focused on like growth over everything else. But like what really matters is growth and stickiness and the triple trip. If you're a triple triple double double with like terrible retention data, that's going to be very hard. But if you actually have, you know, again, system of record, or in that case it, you know, it sounds like vertical operating system. That should not be hard. I would do, I love those things, right? Like, I would much rather have a slower growing, you know, permanent system of record that will never get ripped out than the fastest growing thing on the planet that has 9,000 competitors that are all built and lovable by 17 year olds. I think there's no comparison. I mean there, there are plenty of people that would be attracted to both would be my answer. I'm surprised that it, that was, it was as challenging as you as you portray it.

B (55:12)

We got it done. But I was surprised too by, by how challenging it was Kirsty you mentioned about selling companies that. I spoke to David George before the show and he said one thing he's never talked about publicly. I don't think that he's a phenomenal master on his advice on selling companies. Ask him about that. I know it's a bit broad and random, but I do want to touch on it because David said I had to. What's your biggest advice on selling companies? Having seen so many and living it yourself.

A (55:36)

Yeah, so I'd say a couple things. You know, this is a very highly choreographed dance, so you can't just say, oh, I should raise, like. So if you're raising money, you're like, oh, I should raise money. I have the best metrics ever. I'm going to talk to five firms and they're going to compete to the death over winning my deal. Like, that was my experience with my Series B at trial pay. So it's like, oh, it's so it's like. And kind of corp dev is like, I'm either raising money or selling my company. It's the same thing, right? No, it's completely different. If you're selling your company, you have to spend, you know, in many cases years getting to know people at the potential acquirer. It's never the CEO unless you're like, you know what? You know, jan kum at WhatsApp. Like, let's just say that you have a company, you. You do something amazing, somebody at Salesforce should buy it. You would rather go public, but you're like, ooh. You kind of see the writing on the wall. Like, I'm going to hit a wall in a year and a half. What you should start doing then is. I kind of call it a background process. Like, if you know what cron is in UNIX terms, right? It's like you should have a little cron job where it's like 5% of your time as CEO should just be like, getting to know people at the three or four companies that might buy you. You never go say like, please buy my company. That's doa. You don't want to spend time with the corp dev people. Because most people are like, oh, corp dev buys companies. No, they don't. They execute transactions. If Salesforce buys your company, you're not working for the head of corp dev. You're working for like this, this SVP who needs. Who has some hole on their personnel or, you know, needs like, revenue growth in order to get their bonus. There are all sorts of internal mechanics that are going on there. So it's just this highly choreographed dance of just like making sure that you, you get to the right people in the company. Hopefully doing it years in advance, not just going to them when you need to sell your company. Because there are two independent variables here. It's like when your company is doing like the best time to sell, by the way, is your company's doing great. This is the, like the rocket ship is like 100x year over year growth and they want to buy. But rarely does that intersect. A lot of times like, oh, shoot, we started going like that. Now we want to sell, but nobody wants to buy this falling knife. So it's hard to perfectly choreograph this. But like the, the main piece of advice, spend time with, you know, three or four companies. Not under the guise. Because honestly, like, when I did this at trialpay, I wanted Visa to be a partner of mine. I wanted PayPal to be a partner of mine. It was not wasted time. It's like, hey, you know, PayPal, you should put, you know, on your receipt page, you should put coupons that we do for this post transactional product that we have and just spend Like, I was spending so much time because if I got that deal right, I didn't give a shit if they bought us or not. If I got that deal. It's worth so much money to us. It's worth so much money to them. Unfortunately, or fortunately, depending on your point of view, they're like, oh, wow, this is so valuable for us. We have to buy that company. But it's like that movie, my favorite movie is Inception. How do you incept this idea? And again, in that movie, it happens overnight on like a flight, whatever from Australia or something. It really needs to happen probably like a year and a half, two years in advance. A lot of entrepreneurs, they make the mistake of I have to go impress the corp dev person. Wrong. I have to only interact with the CEO, you know, sometimes, right? Like, you know, we hosted a dinner for, for the CEO of Visa and I sat Zach at Plaid right next to Al Kelly at Visa. Okay, that worked until it didn't. Right? Because of the, the Justice Department or something. But like, that can, if it's sufficiently strategic, you know, these $5 billion acquisitions that don't happen very often, but like, you know, a 500 million to a billion dollar acquisition that can happen at, not the CEO level. And you just have to spend the time and invest the, the time and resources beyond like. And by the way, this is, this is the same advice that I give people on Fundraising, Right. It's like this background process. If you're the CEO of a company, your number one job is don't let the company run out of money, which either means you become profitable, which is great, or you raise more money, which is, you know, not as great, but, like, hopefully leads to. To. To being profitable and. Or you sell your company. So you probably should spend 5 to 10% of your time, you know, meeting investors in a very casual way so that they know you and they know that you're a very strong entrepreneur and they can, like, just invest on the spot. Versus, like, this is how I raised my Series D, a trial pay. I had spent so much time with the Greylock guys as an example. I pitched them like, after I'd met Reid like 20 times. And it's like, he knew me, so he knew that he trusts, like, you know, he's investing in me, as opposed to, like a random dude that shows up, you know, oh, I should raise money because I'm running out and I'm growing. Let me go pitch five part. Like, they never would have done the deal otherwise. The background process is key.

B (59:58)

Before we do a quick firearound, I just have to ask. You mentioned one element being the labor displacement in the kind of. One of the three kind of pinnings that you have. I completely agree. My friend Jason Lemkin said this year will be the year where we see the demonization of technology leaders and that we see labor displacement materially shown up in labor markets. Do you think that's true? And will we see labor displacement in labor markets materially show this year?

A (60:22)

I'm not sure about that. I think in certain areas for sure. I mean, in general, I could even click up a notch, which is. If you think about SAS, broadly speaking, I think there are kind of three types of SaaS companies right now. There are the ones that are almost impervious to everything that's happening with AI and if anything, it's a huge tailwind because they're going to start being. They have the distribution, they're going to start adding features. And that's things like Workday and netsuite and these things where it's like they have the hostages never going anywhere. On the other side, you have things like Zendesk, right, Where it's like, how many licenses per seat do you need of Zendesk? If now every customer support ticket can be answered automatically, you need zero license. Like, their revenue could go down 100%. These are very, very different. And then you have things in the middle like Adobe where it's like, ooh, maybe I now whenever I want a logo, I just go to ChatGPT. I don't go to like the graphics team. So maybe you'll need fewer graphics designers. Maybe you'll need, you know, Zendesk, you'll need fewer customer support people. That probably is true, right? Like there are going to be certain areas that will get hit harder than others. But what technology has always done is, you know, people shift into other jobs or maybe some people will be 100 times more efficient. I think you'll have some cases where labor like now that, you know, take, take the Eve example that I gave you. Wow, now I can do a hundred times as many cases or five times as many cases as I did before. I'm going to hire three more people. Or I can now be in business by myself because the software helps me do X, Y and Z. I think a lot of that stuff is going to start happening.

B (61:47)

Dude, I so respect you. But when you look at like a decagon in the customer support, it's clearing out. When you look at like a Harvey, another business that you're in, I, I.

A (61:56)

Don'T disagree with it. I'm saying it's not uniform. Like, that's why I kind of gave the, the example of like the three types of SaaS, right? It's like you're gonna have some totally impervious. And I'm talking about SaaS, not people. If you flip that to people, it's like, all right, the users of Zendesk are probably going to go away. Therefore that labor market might get decimated. 100% agreed. On the other hand, it's like if I'm United Airlines and now I don't need as many customer support people because now every answer kind of auto answers itself with AI. Well, you know what? I should probably take care of my best travelers better and give them like a personal human that will be really nice to them and remember their birthday and then they're going to buy more first class tickets for me. I might reallocate some of that labor to other things because I'm making more money and I no longer have this cost. I mean, Tony Hsieh, who, you know, sadly departed, who ran Zappos, you know, he had this whole thing, which I think is actually correct, which is I'm going to turn. Most people think of customer support as a cost center. They should think about it as a revenue center. You should love your customer and make them love you. There's the story that he would tell around like, you know, there was somebody who had something really bad happen and was on the phone with a customer support person. I think her husband died or something bad that had nothing to do with the shoe order. Zappos sends that guy or that woman flowers. Doing things like that, making your customer love you is something that you can now focus on. Once you take away the cost center element of something like this or if I'm a law firm, again, I agree with you. Like, you probably don't need people doing this tedious work and the number of people doing the tedious work will fall off a cliff. No disagreement. But I would not be surprised to see smart companies start reallocating them. Like, I actually gave a, I gave a talk to the exec team at JP Morgan about this, right? They're like, what part of our business is going to be, you know, least touched by AI? And I said, you know what, wealth management. Because what is wealth management? It's. Yeah, yeah, it's like hopefully like getting good returns for the dollars that you have with us. But it's really like that relationship guy or gal and like the woman that was running wealth, she was like, she like stood up in the audience like, yeah, yeah, yeah. But it's true. It's like if you have a high EQ and you're good at playing golf with people, like you're going to start hiring more people like that because that's how you get more customers. And you, you kind of, sometimes there will be an opportunity. The upskilling is not like, hey, everybody should learn how to code. The upskilling might be like stop doing tedious work. Like answering, you know, like looking at knowledge base and then you know, typing that back with lots of typos into like the, the, the email response in Zendesk. But actually start going into like, you know, send customer flowers. Like do get to know that customer really well. Go visit them at their, like, whatever for the high value customers that you just couldn't do before.

B (64:23)

Alex, I could speak to you all day. I know you do actually have to work as well. I want to do a quick firearm with you. I'm just going to give you a couple of quick statements. What have you changed your mind on most in the last 12 months?

A (64:34)

Months? I've probably changed my mind. Well, as I mentioned, you have to be able to change like it's more of companies where we didn't do the, we didn't do like the early round and then it's like, I'd rather be rich than right. That's that's what we often talk about. It's like, all right, I want to be right. So we've probably done a couple deals where it's like we passed, you know, round N minus 1, we end up doing round N. But I don't think I've changed my mind on that much. Maybe I would say, like this idea of private equitizing venture capital. I wrote a piece, I was probably the first one to talk about this in 2023, around how what you're going to start doing is you could buy a company and then add AI to it. I think General Catalyst is now like a bunch of firms are now doing this. I was the first person to talk about this and I called it Barbarians at the gate. With an AI, I'd probably become more bearish on that just because it feels like just a founder market mismatch. So that's probably the thing that I've changed my mind on the most.

B (65:26)

What product does Andreessen not have today that you would most like Andreessen to have you mentioned GC having like the fund there that does that roll up play. They've got the like consumer performance marketing fund. I can't remember what that's called, but what product do you not have that you're most likely to have?

A (65:40)

Something around credit for? A lot of our companies. So, you know, we have equity products, but we don't have debt products. And they have very different return profiles, obviously. But every one of our companies, they need, you know, General Catalyst actually has one of these. They have a credit fund. So either for customer acquisition or if you're fintech and doing lending. So that, that would be interesting. But in general, we just kind of, we listen. We don't want to be at odds with our entrepreneurs. Like, there's a very solid reason why we don't have that, which is like, oh, you didn't pay back the bill, I need to go foreclose. Like, that's a. As a venture capital firm, like you can earn a thousand x on a winner. You don't really want to like kind of beat up the, the companies that are struggling. And that's kind of what the credit instrument needs to do. But I think it's a good product.

B (66:20)

What piece of investment advice has most stuck with you? So like Josh Kushner once told me, if you're willing to take less, don't do the deal. If you're willing to go from 10 to 7%, like, yeah, sure, yeah, why not? Don't do the deal. What Would yours be?

A (66:33)

I think it really is. Find high agency people that know the history of the space that can materialize labor capital and customers that are the count of Monte Cristo and don't second guess anything. Give them money, be their best partner and go versus, you know, question the market question of this, I, I think it really is. I've just become 100% convinced this is entirely about people. 100% in every round. By the way, it could be a D round, it could be an E round, it could be an A round, it could be a seed round.

B (66:59)

Can you please tell Martin Casado? Because he tweeted and then took the piss out of me because there's this, you know, the graph where it's like, it starts here and then goes up here and then goes down here. And it's like, you start here, it's all about founder, and then you end here, it's all about founder, and here is when you think you're smart and no market and product. And he was like, you're an idiot.

A (67:16)

It's not that it's all about founder. I mean, you, you have to. Again, it converges on reality at some point in time. Like, this is going to be a public company. You can't, like, tell everybody in the order book of the IPO that's under subscribed, like, no, no, no. The founder is really good. Like, yes, of course it has to converge on reality. But I think it's like, it is like materialized labor capital customers. Like that. That's. That's kind of it for me, with the right motivation, which is the count.

B (67:35)

Of Monte Cristo, penultimate one. What's your biggest miss and how do you reflect on it? Like, I missed Steel's seed round. Another one of yours. I reflect on that.

A (67:44)

So it probably was one of the first rounds of Plaid, which I subsequently corrected myself for by doing the Series C of Plaid. So I think we invested at 2.4 billion for the Series C. And I was debating a $5 million difference with Zach for the Series B. I wanted to do it at 130, he wanted 135. And I think Goldman was willing to pay 200, but he was willing to work with me because of, you know, my, my fintech. And it's like, no, no, five. Like, that was just so stupid. Right? And luckily I was willing to admit that I was stupid and did the next round. But you could see the difference on this is why it's so important to, to do two things to correct yourself if you're wrong. And not be proud about it. But also if you really believe that this can be a huge company. And I, I was, I was burdened by what has been to quote the great Kamala Harris of oh wow, Yodeli which had predated Plaid that went public and had a terminal valuation of $600 million. So like of course this like 130 versus 135 or whatever the hell we were talking about was very material. But it was so stupid.

B (68:43)

I love that. Unburdened by what has been memo. That is the final one for you, dude. What is venture look like in 5 years time when we look at the dollars that you raised today? I mean it is obscene to even think that would happen five years ago. When we go back, what does it look like five years out?

A (69:00)

It ends up eating even more of the world. This is kind of going back to Mark's essay around software eats the world. That largely has happened. As I mentioned, like the five biggest companies on earth, they're technology companies, which was like unthinkable in 2005. Like technology companies were little service providers to big companies like banks and oil companies. Right. Think this momentum of kind of everything becomes a software company. It kind of goes into this like thesis too that I mentioned around software doesn't the job of labor. You're going to have all these areas where it's like there is going to be like, you know, toast vertical SaaS proved this or kind of V1. It's like, oh, how is toast worth $20 billion? You're going to have a lot of things like this where it's like brand new markets that have grown like crazy. AI is now allowing software and technology to do so many things that it didn't do before. And this is before even things like robotics, like if robots actually work. Wow. Like now you've expanded the market like another hundred x. I'm just so bullish on the ability of technology to create enduring value. So you know, my guess and my hope is that it's going to go up into the right Dude, I told.

B (70:03)

You this is like bancher. You have most shows which are like fine and then you have the once in a while which are truly special. Thank you for being my truly special show. It really is rare to have one like this.

A (70:14)

All right. And hopefully I'll see you in London soon.

B (70:19)

Thanks for listening to this episode of the A16Z podcast.

A (70:22)

If you like this episode, be sure.

B (70:24)

To like comment, subscribe, leave us a rating or review and share it with.

A (70:28)

Your friends and family. For more episodes go to YouTube, Apple Podcasts, and Spotify.

B (70:33)

Follow us on x1.6Z and subscribe to our substack@a16z.substack.com thanks again for listening, and I'll see you in the next episode. This information is for educational purposes only and is not a recommendation to 5. Hold or sell any investment or financial product. This podcast has been produced by a third party and may include paid promotional advertisements, other company references, and individuals unaffiliated with A16Z. Such advertisements, companies and individuals are not endorsed by AH Capital Management, LLC, A16Z or any of its affiliates. Information is from sources deemed reliable on the date of publication, but A16Z does not guarantee its accuracy.

A (71:14)

Sam.