C (2:41)

Leo, we're stoked to have you join us. As a friend and fellow venture nerd, what was your reaction?

B (2:46)

Yeah, I mean, I actually agree with a lot of what Martin just said, which is eventually you have to get to consensus, whether it's when you're investing or later, because otherwise if you're dependent on capital markets, it's very hard to keep the company alive if nobody wants to fund it. I would say, like for me, and maybe we invest like a tick earlier, more like towards pre seed and seed, but for me, a lot of my best investments have been more on the non consensus side. Not in terms of I had some crazy good insight and nobody else had it and like I'm just brilliant. But more like these companies often struggled in the early days because before there's proof points, it's not obvious that it'll be a good idea. And then once they get good, the valuation skyrockets so fast that like you could still get good multiples, but they're just much lower than the early stages.

C (3:27)

Yeah, and then there's sort of broader commentary on looking at a list of big winners over the last 15, 20 years and, and saying, hey, what was consensus? Which were consensus, which were non consensus. And then Martin, what were kind of your reactions to that sort of broader commentary?

A (3:43)

Well, listen, I mean, again, it wasn't meant to be a technical tweet where like the wording was exact. And so like, like on the face of it, it's almost like an ill defined statement because we don't know what consensus means. Right. And so then everybody picks apart the consensus. But here's my reaction to the list of like the Airbnbs and this and that, which is, I think we need very careful not to conflate a company having a hard round with market consensus. Right. Like if you look at the list like Keith Rabois put out, which is great and I love Keith. I mean these are like MIT founders, known spaces. Like I'll bet if you took like the median value of their raises over the life cycle of the company, I'll bet they're way above market. Many of the companies were YC companies. And so I just think it's so easy to like come up with these anecdotal, oh, this one company had a tough, tough raise when that's definitely not within the spirit of what I was trying to say, which is markets are actually quite efficient. If the market's efficient and it's a good company, the price is going to be high. And if you don't recognize that, then you're probably beating yourself as opposed to the market. Right. And so like it really comes down to you shouldn't be looking for good deals with respect to other investors, you should be looking for good companies and price shouldn't sway you from that. I mean that's really at the heart of this. And so I just don't think that list, unless you actually run the numbers, which we haven't done. I just don't think it demonstrates that the idea that consensus is important is wrong at all.

C (5:20)

Yeah, and I think there are a few quibbles I had with some of the names on that list. Like some people put Andrill and it certainly was a controversial investment. But you know, Palmer Lucky, you know.

A (5:29)

Second time founder, billion dollar exit, Trey, who's phenomenal. You know, this is in the shadow of Elon, who that you can already create these defense tech companies. I mean if that's our definition of non consensus, it just shows how insular we are as a community. I mean it's almost an indictment of us that we even make this list.

C (5:48)

And wasn't the seed round at like 100 or something? Like it was a very expensive.

A (5:52)

Every, every round was super expensive.

B (5:55)

Yeah. I'm not sure an ex unicorn founder would ever be non consensus really.

C (6:01)

Yeah, it is interesting because there's also sort of, you know, there are rounds that are maybe non consensus at 10 million or something, but then become super hot rounds at fifty or a hundred and then become $10 billion companies or a hundred billion dollar companies. And even if you invested at that consensus round, you 10x or 100x. And so it's sort of in the face of, hey, if it's a hot deal, that must mean it's not good. Peter Thiel once had a line which was like, the faster and higher the up round, the more you should invest because it's like working.

A (6:30)

Yeah. I would love to do a correlation analysis actually. Leo and I had, I thought, a very interesting discussion on trying to figure out how you'd actually measure this, how you'd actually throw some data at it. And we actually have an Analyst working on it now, like the data isn't ready yet. So I, I have a new one actually. I want to test this with you Leo, on a good thing to test. So I'll bet the best prediction of a, the best correlate of a high up round outside of the business is the fact that the previous round was hot.

B (6:54)

I think that's probably true.

A (6:56)

And if that's the case, it would suggest that the market's actually pretty efficient because it's almost inductive that like the previous round knew that the next round was going to be hot.

B (7:06)

So I do agree with that. I think the question for me is like where is there more opportunity? Right. Because if the five hot companies keep having great rounds and then there's like 10,000 not hot companies but a hundred of them will become hot over time even though the odds of becoming hot or low, most of the hot companies end up coming from the not hot batch. Right?

A (7:25)

Right. So the question comes down to is it easier to spot the company nobody sees or get into the company that's obviously good and maybe even further than that, which is to what extent do even high price rounds under price hot deals? Because if I'm right, if the view is correct that hot deals are hot because they're good companies, not like actually the market is very efficient and that drives the most of returns, then I think the next obvious question is well if that's the case then the market isn't that efficient because it's underpriced the company. Right. If the majority of returns are in high priced rounds and the market has underpriced it. But I think risk adjusted that's not necessarily true, which is it could be still price. Right. Because there's still chances it goes to zero. So I guess my sense is until we run the numbers we're not going to quite know the answer. But I think a lot of these theories prove out pretty anecdotally and I think maybe that's the problem. There's kind of an anecdote for every theory.

B (8:37)

Yeah, I think the basket analysis is probably the most interesting one. Right. Of like not how did this one company do, but how did this portfolio of companies that raised a really quick follow on or had like 10 term sheets at the series A, like how did those end up doing over time?

A (8:50)

There are even cases in my portfolio where a super hot company from an investor standpoint, so many term sheets the business didn't work out at the level that you would kind of expect, but the outcome was still really Good. And so in some level, even independent of the productive asset, human opinion about it matters. So there's almost two ways you can slice this conversation. One of them is the asset is what's productive and produces the value and the market will determine if that's valuable or not. So that's kind of this productive asset view and that's kind of the one that I hold, which I think that actually investors are very smart. I think that they know which companies are good and then they pay for those. That's kind of my view. But that's a productive asset view. But there's another view which is independent of whether the company is good or not, there are things that people think are good. And so you're almost like playing to like the human perception of the company independent of the underlying business. And I would say again, anecdotally, until we run the numbers we want to know, that also seems to be a bit true.

B (9:58)

Yeah, so I've been in venture for like 12, 13 years now. I've definitely seen this in sectors where like sectors fallen in out of favor. Right. We have like E commerce was hot and then it was dead and then like dollar Shave Club got acquired and it was hot again and it's like E Commerce. I think the fundamentals didn't change that much year to year, but like the valuations and the like appetite for investing and maybe starting companies changed a lot year to year. And so that to me is sort of an indicator. Like it's not just the fundamentals. There are all these other like forces as you mentioned.

A (10:24)

Yeah, totally.

C (10:25)

One other part to your tweet, Martin, that I think was underappreciated was sort of the risk to founders of being seen as non consensus in the same way that because founders need to raise money and they need to raise follow on funding within 18 to 24 months, sometimes even sooner. And so if everyone's passing on you people are bragging about how other investors don't want to do your deal, that's not going to be super helpful to you in your next round.

A (10:50)

I actually think the most interesting aspect of the tweet was like the sociological study that followed of like how different people interpret it. Right. Like the tweet itself was pretty banal. Right. It's just kind of non statement, it's almost tautological. But like, like different constituencies viewed it very differently. So like I would say relatively inexperienced investors kind of used it as an opportunity to be like, oh, Andreessen Hort's consensus invests which anybody that knows Anything about our investment knows that's just totally not true. Even my own portfolio, many of the top deals I've done, nobody else was in the deal, et cetera. Right. So like, this is a statement about consensus investing. So that was one cohort, there was another cohort like Leo and Keith, who have a lot of data and they've had a lot of really interesting things to say and that ended up in great discussion. I think the there's still a lot more to do there, but most of the founders and I got a bazillion DMs were like, you're totally right. So the founders clearly feel this tension that it's dangerous to be non consensus because they have to cater to VCs and they know it and they see the pattern match responses. They deal with this all of the time. And so from a founder perspective, it's like you almost have to be non consensus to have alpha at the actual product market, but you have to look consensus when you're raising. And I think that's actually probably right.

B (12:10)

I think this is probably one area where I differ a bit. I think there's benefits to being non consensus because from the company side, I think when the money's hard to raise, you tend to be more frugal with it. And then also if the next round is less certain, like, I think there's less of a sort of like, it could crumble at any moment aspect, right? Because I think when it is hot and you're raising subsequent rounds very quickly under the assumption that things will go perfectly if anything slows down, it's like, now you can't raise any more capital all of a sudden, right? And I think if you're in the mentality of growing quickly and spending, I think that's pretty hard. On the flip side, if you're not consensus, it tends to be like, you tend to be more cash efficient, you tend to be more frugal out of necessity. I think the other side depends on the form of consensusness. But sometimes there's also much softer diligence. I think the worst form of consensus I've seen is like, oh, Sequoia or Andreessen did this round, let me just do a 2x markup in two weeks because I want to be in the same company and then there's no diligence there, right? It's just like, oh, this is hot, let me do it. But I think then like, maybe you're overlooking, like, is it actually a good business like Sequoia and Andreessen, but like we all make good investments and bad investments. And so it's like maybe this is one of the bad ones and you're just marking it up because you want to be in the hot deal and like that ends up not being good for anyone.

A (13:19)

I think this is a tremendously important and good point. I tend to believe now that most companies fail from indigestion, not starvation, which is they just raised too much money too easily. They don't listen to the actual market, which is the customer base, and as a result they just have a bunch of bad practices and end up running out of money. And I think that there's a lot to that. I actually think in 2021, if you just did a study of that cohort, the companies that had these billion dollar bees, if you remember that time was totally crazy, I'll bet that's probably one of the biggest wipeouts of capital. So I definitely think consensus investing is definitely very dangerous and only leaning into this founder is definitely dangerous. But I also think the flip side is true, which is you're totally blinker to it. I think your life is pretty tough.

C (14:08)

And there's a broad question as to like of the companies that do win, how many of them are sort of competitive rounds versus not competitive rounds and sort of what is the duration between them being non competitive rounds and then becoming not non competitive and what percentage are really able to. And one question I have is like, is the market getting more efficient over time? A lot more investors, we should be getting smarter as asset class on how to evaluate these companies. A lot more capital, are we getting better? And if so, what does that mean?

A (14:40)

Oh, I'd love to hear Leo's view on this.

B (14:42)

It's something I've been thinking about for a while. My take would be that for non consensus companies it's getting more efficient because the more investors there are, the more likely you are to find at least one or two that like what you're doing. I think for the consensus companies it's starting to get more inefficient, right? Which is like when you have 10 term sheets, you get 5x the market, like what maybe the fair value should be and then it's great for the founder and maybe again a little bit more of a house of cards if things go south at all. But it's also not necessarily great for investors because you might have to pay 2.3, 4x over the actual intrinsic value of a company or the likely future value of a company in order to get in and.

A (15:21)

But that would be actually but that would be actually efficient. Right. It's just, it's the price is actually approaching the, the return profile. From a market standpoint, that'd be efficient. I mean, it sucks from an investor standpoint because prices go up.

B (15:33)

Yeah, that's what I'm saying. Right. Like for, for, for founders, it's getting like hyper efficient or maybe like, you know, like there's, there's such an imbalance for like the really hot companies that, you know, maybe your price gets bit up way past where it should be. Um, yeah. And similarly, like for non consensus companies, it's the opposite. Right. Where like there's not enough investors. So your price is lower than it should be perhaps. Right. But I think there's like, like there's, for me, like those two are kind of opposite, opposite ends of the spectrum.

A (15:59)

Yeah, this is a great, this is a great, I, I, I totally agree. This is a great question. So I think we can all acknowledge that there's a failure mode where the consensus gets bubbly and then companies raise too much capital and then there's a bunch of wipeouts. Right. So that has always happened. That will always happen. So that's just part of the market, I think can also all agree that there's parts of the market where there's probably unnecessary pessimism. So for example, right now, during this AI craze in my area of traditional infra or of infra, a lot of the traditional companies that two years ago would be great can't even raise right now just because they're not in the sweet spot. And so I think that will always be an aspect of the market too. But in general, for the mean investment, I do feel like the market over time has gotten a lot more efficient, meaning, you know, we can deploy more dollars with more regularity and the price is converging on what will ultimately be a fair price. You know, this is acknowledging both of these failure modes on either side of this. Yeah, we're seeing one right now. I mean, it's the reality. I mean, AI, you know, there's AI companies that clearly are raising, you know, speculative money where nobody even really understands the business model. And there's great companies that can't get invested. So we're seeing this right now. But I will still say the reality is OpenAI has grown tremendously and Anthropic has grown tremendously and Cursor has grown tremendously. And so like there is some underlying market signals to, to, to, to fuel the chaos.

B (17:48)

Yeah, I think part of it's like if you Ever look at vintage year data for venture funds? It's probably a good way to see if you know how consensus and not consensus do over time. Because when you look at like the dot com bubble years, like I think the, the median fund was terrible and I think it's just like, hey, everyone overpaid and then the companies weren't worth that. And so like, you know, even though everything was high, like it didn't do well and then a lot of the funds didn't do well. And if you look at like the Airbnb, you know, Uber, like 2010 ish era, it's kind of the opposite, right? Where like I think the, the top quartile funds like crush it. It's because the market was pessimistic and so if you're willing to invest and like you had a different opinion, you did really well. And now it's probably kind of somewhere in the middle.

A (18:28)

I mean, maybe, maybe I'll just go through like kind of my own startup just as kind of a single anecdote to frame the conversation a little bit, right? So you know, I did my PhD at Stanford. I was a classic, you know, take the research, do a startup. You know, we had so many term sheets before we had any idea what we were doing, you know, and it was like the hottest thing ever. And, and, and it was great. And so we did a seed fund actually. Andy Radcliffe, you know, benchmark Andy Radcliffe joined my board and you know, we rose at the time, which would have been a super, super high price kind of seed round, which is 10 million post this is in 2007. Then the market tanked in 2008 and we still didn't know what we were doing. And it was just a bunch of researchers. And so we couldn't raise any money at all. I mean, Sequoia very famously gave us a black eye and we couldn't raise. And then as we started to come out of the, of the recession, Andreessen Horowitz, NEA, LightSpeed, a few got very interested and then we had a pretty hot round again. We went Andreessen. It was actually over the market price, even though the business wasn't quite working, but it was starting signs of life. Then we had an incredibly hot round because beans started working. And then when we actually sold the company, I mean it, you know, it returned a fund, you know, it was one of the highest acquisitions on multiples of revenue at the time in enterprise software. And so you kind of asked the question, was the initial flurry of interest warranted or not because it turns out like we were probably a month from going bankrupt and we actually didn't know what we were doing and the company definitely wasn't working. And actually what we had pitched at that time didn't make any sense. Like we were like, we're going to change, you know, switch hardware, which didn't make any sense. And so there's one view that's like the market was over, exuberant, you were lucky. There's another view that says actually the initial conditions were there to do it. I just feel like if you run the data, it just seems that the companies that have good outcomes did have sufficient interest along the way because there are enough signals to do it.

B (20:47)

I think, at least on my side for a lot of the pre seeds and seeds I've done, I went back, I think over my top 10 investments, maybe six or seven or eight took a month to raise a seed round. And you know, and like a lot of times, like a lot of passes, like they were all, you know, down to the wire, but then they ended up doing better over time. I think that transition from like non consensus to consensus ended up being really important because if you never transition, it's really hard, right? And if you're always, you know, if you're always consensus, that's great for you. But like one thing I noticed that was interesting is a lot of the companies that struggled, obviously some of them just go to zero, right? Because they struggled because the business isn't that great. People recognize it. But the ones that did well, a lot of times the gap between like the, the seed and A or the A and B was literally like 20x or 50x. Right. And so I think part of it's like as an investor you can still get good returns at like the series A or B in those companies. But it's just, I think it's so different to invest at the seed where there's like a thousand x versus like the A at a billion where now maybe there's still like a 10x or 20x which is very different.

A (21:53)

So I've got a question for you Julio, because I think that you play a bit of a different game than we do, which is. So if you have a seed which is, let's call it non consensus and again we're using this very vague definition of a consensus, but they're having a tough time raising. You're the only person putting money in. Do you have a theory on how it will be consensus or is your belief that the underlying productive asset is going to do very well. And that by definition is consensus. Do you see the question? So the question is, is that this is just true belief in the underlying business. Like, like, like the ultimate, I mean the ultimate sign of, of success is just the business is really working. So are you like for the next raise the business will definitely be working or do you have some other theory on what will attract the investors?

B (22:41)

I'd say it's often the latter. I would say, and especially true these days because I'm investing more in deep tech companies. And so at Seed, it's very rare to see like, oh, there's an asset that's going to be working here at the Series A, because usually the asset's still going to be like being developed at the Series A or maybe Series B. I think what I'm looking for is like there's maybe not enough here for somebody to write a 5 or 10 or $20 million check, but the company has milestones that I think if they hit them then it would become, you know, sort of consensus enough to merit a check of that size. And then I'm basically trying to evaluate like, okay, the company has these milestones. Do I think they could hit them or not? And also if they hit them, are they compelling enough? But I think that's sort of the big, you know, investment wager.

A (23:23)

Yeah, yeah. So I mean, so in this case you do think about like what the follow on thing is going to want to see. You, you, you have reached a conclusion for the current round that is non consensus.

B (23:36)

Yeah. And I would say like the consensus piece is part of it in that I definitely meet companies where they're like, we're raising three right now, it'll help us through these milestones and then we think we can raise 10. And then there's other ones where it's like we're raising three now we're going to hit these milestones and then we want to raise like a 50 to $100 million Series A. And that's actually a much harder bet. Right. Because you're saying you have to assume they're going to be consensus by the time they raise the next round and it's going to be like a top 5% series A. That's a hard bet to take for the companies where the capital needs are more modest or they have a more tranche roadmap planned. I think it's a little bit easier to predict like, hey, would these milestones be enough to raise 10 a lot of times I don't know if it'll Be enough to raise 100? Probably not, but 10 feels pretty feasible if you do the things you think you're going to do with this.

A (24:22)

Three, has your view on this shifted in the last. Do you find this AI wave to be different than previous waves or are fairly similar?

B (24:34)

I'm probably a bad person to ask, actually. I haven't invested much in AI because of the deep tech angle. So I see maybe like 10, 15% of my companies are pure AI. Others obviously use it in some way, but that's not the product.

A (24:46)

Well, how about, how about deep tech then? Because I think that's also, you know, like pretty different than what we were all investing in five years ago.

B (24:54)

So maybe on the AI side and I'll touch deep tech next. I think AI is interesting to me because on the one hand I've never seen faster growth. People talked about the triple, triple, double, double, double thing for a while of getting from a million AR to 105 years. And that seems so antiquated now. Right? The best companies are doing in one or two years. I think on the flip side, the endurance, how long those companies endure and last and grow feels like much more of a question mark. Because in the triple, triple, double, double, double era, like if you hit a hundred million ARR and there was no one close to you probably just keep growing and now it feels like you could hit a hundred and then you drop to 50 because someone else came out with a better product. So, you know, I think there's like, the growth is amazing and then the moats are weaker and so I think there's a counterbalance there and I'm not sure I'd evaluate it because I've invested that much in that stuff.

A (25:42)

I agree. Yeah.

B (25:44)

On the deep tech side, I definitely see areas with a lot of hype from time to time. Like we, for example, we invested in Defense a lot three, four years ago, and then we kept looking, but basically paused for a year and a half or two because after Ukraine and Israel prices just went up like two, three, four times. But the company fundamentals didn't change. And then it started being an opportunity cost of like, should I invest in this defense company at 40 when there's this really great energy company at 15? And so I think Defense was kind of like that. I think Bio has had a lot of ups and downs. I think in robotics, like Humanoids are probably one of the most hyped areas where the valuations just get crazy before there's any revenue. So I think that actually I feel like I kind of lost the thread in the original question, but no, this is great.

A (26:29)

I mean, I was honestly just wondering how you thought about this current wave. And you did a great survey of the set of the waves. And I actually agree.

B (26:36)

I would say for the consensus areas like Humanoids, we end up not implicitly avoiding them. Because once you have a few companies that are raised hundreds of millions, whether they end up being great outcomes or not, I think it's pretty hard for someone to start something new with near zero resources and team.

A (26:53)

Yeah, it's interesting when you do the Humanoid. So I think there's all sorts of types of investing and they're all pretty valid. One type of investing is Humanoids are clearly interesting. Big companies are clearly interested in it. So why don't you back a bunch of good teams and worst case, they get acquired. And I think that's totally legitimate. But that's not how I think at all. Like, for me, like, the company has to make sense as a standalone business at scale. So things like Humanoids are tough for that just because the unit economics right now are just so unknown. Like, competing with a human body is a very, very hard thing to do. And then of course you can be like, okay, well, we'll put it where human beings can't go, like a car factory. But then all of a sudden, now, you know, you're building a manufacturing company, you know, so you verticalize heavily and the company has to look at kind of whatever sector that the robot's going into and it's more constrained and I don't understand the competitive set and, you know, yada, yada, yada. So I just feel like from my standpoint, the idea that this is very buzzy and hot, you know, in the industry for big companies, and it may have an M and A, I don't know how to invest that way. I just don't know how to handicap that. And so that I tend to view these things, I mean, for AI, for better or for worse, you have great unit economics. Everybody knows, kind of like. And we always talk about the open AIs and the anthropics, but do you talk like the 11 labs, for example, or mid journey? I mean, these are just famously model companies where the unit economics are great, they grow very quickly. And so I understand that, but I think there's kind of been this weird. And this happens, you know, a lot where people take the, the example of these model companies and they apply it to totally different spaces where you don't have the proof points, you don't have the economic case, and they kind of apply it. And that's one thing I don't know how to do. So certainly I don't believe, you know, we should all just follow like the common consensus around areas to invest in. But I do think that, like, there's going to be a pool of capital and it's going to want companies to look a certain way. And if you don't consider that when you're investing, I think life will be a lot more difficult.

B (29:08)

Yeah, I agree. I, I'm sort of an aside here on the humanoid stuff. I think what I, what I've seen over the last like 10, 15 years is if, if the market is big enough, it really distorts like VC investing because everyone, you know, it used to be that you'd look at a market, you're like, oh, it's, you know, it's a 2 billion a year market. If there's a 1% chance they could capture it, they'll be worth this much.

A (29:29)

So true.

B (29:29)

So let me justify a seed price. If the market's like $5 trillion of human labor or something, like any price makes sense. Right? But then, but then I think that really just starts of like, how much value is there?

A (29:39)

The most boneheaded partner meetings were like, well, yes, it is cold fusion, but this is the largest market ever. So on the off chance it works like, this is an engineering man. This is like laws of physics. I'm not sure that like, you know, a good, you know, software founder is going to bend the laws of physics, but yeah, I think, I totally, I totally agree. I also feel like, man, I don't, I don't, I don't want to harp on this too much, but like, unit economics is so important. I mean, like, what is the story for autonomous vehicles? Right. The story for autonomous vehicles is, is that even after the industry's put $100 billion in it, 100 billion. The unit economics are still, you know, let's call it on par with Uber. Let's just call it that. Right. And so does that make sense for venture investment? It's really, really hard to build a standalone business with those types of economics. I mean, Google can do it, sure. And Tesla can do it, sure. But can Startup X do it? No. And so you're either playing for, this is a great company that got acquired, which a lot of that happened and people made good money. But like, that's again, that's not saying that you know the startup, or you're building picks and shovels, like applied intuition, where you're building software for this market. But I do think that a lot of investment dollars do follow these spaces where there really is no thesis on the ultimate unit economics. And I think you're exactly right. I just think that there's this kind of market tam sloppiness that says, well, if the market's infinitive, then the expected payout is high.

B (31:15)

Also infinite.

A (31:17)

That's why. Also infinite it exactly right.

C (31:20)

When I look at my portfolio, I see both. There were some, you know, of the winners, you know, Pave and Scale were non consensus, non competitive, you know, unproven, but very talented founders. And then, and then on the more consensus competitive, Jack Altman and Casser were.

A (31:38)

How is, how is scale non consensus at seed?

C (31:44)

You know, Alexander Wang was 18.

A (31:46)

It's a total known space. He's phenomenal. The A was done by Volpe, who's amazing. I mean, I just feel like this is a very narrow definition of non consensus.

C (31:59)

Sure. For nearly most of the rounds it was, it was competitive. So, so yeah, I can, I can.

A (32:06)

I can agree that Dan Levine, Dan Levine was. I mean, come on, these are like the best investors in the world.

C (32:12)

I just mean to say that I brought the example to say that Caster's round was almost an order of magnitude more expensive. And I think what people have been late to really internalize and what A and Z was super early to internalize was just the outcomes are order of magnitude bigger, maybe, maybe two orders of magnitude bigger. And so you can get seed like returns at, you know, order of magnitude or even two orders of magnitude more, more expensive. I mean, remember YouTube, Instagram were considered, you know, very expensive acquisitions at, at, you know, just a few billion dollars. And you know, in a few years we're gonna have more trillion dollar companies. And so once we truly internalize, sort of the outcome expansion, the order of magnitude, I think it makes sense to Leo's earlier point that then it would beg the argument of like, okay, but can you have, you know, thousand X like returns and at and not just what we used to consider seed like pricing, but maybe at series A or maybe even series B.

A (33:02)

Well, this is a. This is a very interesting question because you actually do run into fun mechanics as, as an actual, you know, price modulator in this discussion. Right. So you're exactly right. So again, I'll go back to my company. So my company was acquired for $1.2 billion. We had, let's call it, you know, less than 10 million in ARR. So does that make any sense? And then A lot of people are like, this is totally crazy. This makes no sense, except for when, you know, the run rate of the three and a half years later, like the run rate was, you know, $600 million within VMware who acquired the company. And then right now it's, you know, let's call it 2 billion, right? It was actually at one point in time, I think it was 40% of the growth of VMware, like the business unit that I ran that was part of the acquisition. So clearly it made sense to VMware. So as a result, you should say all the check sizes should be high for the winners because the outcome was so good. And this was, you know, this actually returned a lot of money to a lot of investors. The problem with that is I just think that that would mean fund sizes would be too large and you'd have to unlock different pools of capital, which by the way, did start to happen during the SoftBank and the Tiger in the Code 2 era. So you could argue that all of their theseses were correct, right? SoftBank was actually right and Tiger was right, and it was actually a macro issue that caused all the pullback. And that's going to come back again. I mean, that's, I think, a very legitimate thesis. But I really feel the reason that prices don't continue to go up is more just access to LP capital. So, Leo, I just, let me just try to make this a bit more concrete, which is, I think what Eric said is correct, which is the outcomes are so big, it suggests that high prices, like the prices are too low, that we actually pay. I think the prices, you know, the fact that we get the returns, we do suggest the prices are too low. So the question is, is why are the prices too low? And I think the answer is, is like we just don't have the dollars to place all of those bets. And a number of people have actually questioned exactly this. Very famously, SoftBank questioned this tiger question, this. And so they rose these, you know, raises insight question to say, raise these huge funds and they deploy a lot of capital. And those experiments had very mixed success. But it's not obvious to me that the reason they had mixed success is because the prices were too high. I mean, there's a lot of reasons why those could not have worked, including kind of macro cycles and also the fact that none of them were Silicon Valley insiders, none of them were traditional early stage investors, et cetera. So there's a very reasonable question which is maybe someone should just go run the Tiger strategy again. But as a Silicon Valley insider.

C (35:44)

Well, in some ways, you know, there's the failure cases to some degree, but, but in some way, you know, I mean, thrive raise bigger funds, Founders fund raise bigger funds, we raise bigger funds. You know, the winners are also, you know, multistate have raised bigger funds.

A (35:58)

It just could be that this is just the market being efficient. Like, like actually the reason that more money is going into this and the funds are getting larger is because the opportunity set is larger and this is just the market working its way out. But Leo, you're very quiet. This is actually pretty controversial statement. So I want to make sure that like.

B (36:15)

Well, I guess I'm not sure what you mean by we should be paying more. Do you mean that like you think the current prices are still like well below where they should be? And I guess if so.

A (36:29)

But like I'm riffing off of Eric's statement, which I thought was right, which is, which is venture capital has been a top returning asset class and you can look at individual investments. If you just take the top 10 percentile of funds, you know, they return so much money. So there is an argument that even with these high prices, they're still underpriced.

C (36:52)

And put it differently, Leo, it's like a seed fund may say, oh, I'm not going to invest in something at 50 post or a hundred posts because I don't think there's a thousand X, you know, potential. I don't think anthropic is going to be a hundred billion dollar company or you know, OpenAI is going to be a $100 billion company or whatever it is. But it turns out it is like, it turns, you know, what we used.

B (37:12)

To think not to say OpenAI is going to be $100 billion company.

C (37:17)

Yeah, exactly. I mean, I mean, a few years ago, you know, and so it doesn't seem like we've sort of truly internalized that this is the norm, that there's going to continuously be a hundred billion dollar, you know, outcomes if not, or.

A (37:33)

That the market just continues to grow and therefore it necessitates larger fund sizes. I mean, I would say that probably the venture market was what, a hundredth the size 20 years ago?

B (37:44)

Yeah, probably something like that. It's kind of wild to think about.

C (37:47)

Yeah. And yeah, we did think a few years ago that there'd be a great contraction in the asset class, that 2021 was a blip and that it would sort of right size back to where it used to be. And it doesn't seem to be the case that it's going to 2010 levels, I'm not sure if you guys have the data on you, but when I talk to our team, want to talk to Thrive instead, it seems that people think no more capital is just going to keep entering.

B (38:13)

I think that's just because companies stay private longer too, right? Yeah, but, but I think the, the actual number of hundred billion dollar plus companies in the last 20 years is pretty small. I don't know the exact number, but I bet it's like 10 or 15 or maybe 20 or something. So it's like you really betting you can get like the one every year or two that gets there. If you're, you know, let's say you're doing a series A at like a billion posts or something, right? And you want 100x even ignoring dilution.

C (38:43)

We, you'd have to bet that there's more of them and that more of them going to happen and that there are also more ways of getting liquidity from, from them as well. Martin, you're going.

A (38:53)

But, but also just, but that also kind of suggests purely by the numbers that the most important thing is just being in one of those and not if, if you can. The most important thing is being in one of those independent of price. And that's the high order bit.

B (39:08)

So I, I think, I think that's, I mean, I generally agree, right? Like if you're in like the best company of the year, I don't think it like, I don't think ownership matters that much. I don't think like the price matters that much if it's going to be the best company like 10 years forward. I guess to your earlier point where you know, if venture funds had more money, they like do higher valuations. I mean, I mean it sounds like then you could do the higher valuation today too though, right? Because you could just be like, hey, if we just want to get in this one, we'll pay twice the price and get half the ownership or something.

C (39:35)

Right, but you also need a diversified portfolio. You need enough companies.

A (39:39)

No, you need the fund size to run that strategy. This is why I think a lot of this comes back to fund size. I mean even in the Andreessen portfolio, I was just thinking off the top of my head, we have three companies that are at the hundred four companies at the $100 billion mark, right. I mean there's Stripe, Databricks, Coinbase, OpenAI, and so they're not that rare.

B (39:57)

You guys have awesome coverage. I guess the question is how many more could you Name though, From the last 15 years, my guess is 150, not like 100. Right?

A (40:10)

Yeah. I mean 20 billion plus. There's a lot. And that used to be so in enterprise software, it used to be an adage that nobody ever broke 20 billion or 10 billion. Right. And Palo Alto Networks was at 15 and we were like, this is crazy. And now there's so many of them that have. And so maybe with 100 billion year. Right. But in the world that I live in, the amount of like Deca corns is or probably an order of magnitude more than what it was 10 years ago. And, and, and on the face of it, that would argue for an order of magnitude higher fund size. If you want to play the strategy of being in the winner, I mean there's clearly multiple strategies, but if you want to. Again, I don't know the. For me, the key question, I don't know the answer, I want to run the numbers is if you take a dollar of earnings, like a dollar of earnings for a venture capitalist, did that come from a company that raised at high prices or not? And I would guess the answer is yes. Just because the winners are so outsized.

B (41:10)

I mean, I will say there's like multiple ways to play it right, which is if the outcomes are 10x bigger, you can have a 10x bigger fund and basically run the same playbook, keep the same ownership and a big outcome still returns the same amount of the fundamental. You can also do like more investments at like you know, a fraction of the ownership and then each investment maybe moves the needle less, but you have a higher chance of hitting like, you know, this pipe of the year, the Uber of the year.

A (41:34)

Totally. Yeah.

B (41:35)

Yeah, that's good. Yeah. So I think, I think there's definitely different models that could work here.

A (41:39)

Yeah, that's a good point.

B (41:40)

Yeah.

A (41:40)

No, you're all right.

C (41:40)

I want to make a few related points here. So one is I remember someone quote, tweeted Martin's tweet and said this is a sign that the asset class is dead or something. The idea of a more efficient market, and I think what that really means is more that that individual's firm is if an individual firm can't compete and win deals in an efficient market, they're going to lose. And so I relates my second point which is I think there's a lot of venture capital venture capitalist identity is tied in being non consensus, in being able to see things that others can't see because there it's hard to win against all these other much bigger Much more well funded players. And, and for that reason the I less want to use the terms consensus nonconsuit because it's so core to people's identity and more want to use the term like either it's a hot round or it's not a hot, you know, it's competitive round or not competitive. And I think another way of framing that it's not perfect is, is the company working or is the company not working at the point, point of, at the point of investment and let me add some nuance to it which is if it's, if, if something is working then it's okay. It's like, you know, what is the price and what, you know, what is sort of the, you know, potential return multiple and how does that work with your threshold, et cetera. There's some things that are competitive and not working but have an incredible founder or people, you know, whatever, it's early enough that people believe the vision and so you're still paying that price based on what you think. And then there's, there's lots of things that are, that are not working or are not obviously working. But, and we, we, we've chosen to do less I believe consumer things that are pre, pre traction. So it's basically it's like do you want to invest in things that have traction or no traction? And there's failure modes with, with both but it's a, it's. And not every hype thing, not every competitive thing has, has traction of course but it's, it's just another way of framing this to be. I'm curious if you feel free to quibble with my framing.

B (43:37)

I think I saw the same quote tweet. I'm probably somewhere in between. I don't think venture is dead. I think it gets a lot more fun if it's purely consensus. The reason is I think in a purely consensus world it all just comes down to the cost of capital. And so if my LPs want 5x and yours want 2x, you could pay 2 1/2 times higher prices and the company's not better. It's just like oh, your cost of capital is lower so you're going to win all the time. But also it's like we all see the same value. Everybody sees the same value of just like who wants the smallest return that can suck business. And that just feels, feels less exciting to me.

A (44:14)

Yeah, I, I mean that's, I'm going to, I'm going to, I'll get a little bit philosophical on this but like the Thing that I've always, that's always bugged me about PE investing and public market investing is it just doesn't care about productivity really. I mean it does, it does to some degree. But I just like, you know, if you're in a large public company like I was, you realize that the public markets really care about predictability over innovation for sure. I mean, and so innovation is stifled so much and in fact it kind of, it kind of causes large companies to protect themselves through kind of incumbency and monopolistic practices and everything else just because they're not allowed to aggressive on growth. Right. So I feel like it's almost this negative force on progress and innovation. And I don't want to be too dramatic about it, but I just feel like I'll bet if you draw a dollar at random that gets invested, you know, 90 cents of those of that dollar goes into like keeping incumbents alive and, or you know, predictability and not to growth. And I'm, I'm a huge believer in creative destruction, man. I'm like, fuck man, get them out of the way. Let's invest in growth. And so I love the idea of venture as an asset class getting more efficient and I love the idea of more money going into it because the entire thesis is growth. You never invest. I don't. I mean I'm sure you don't. I never invest on downside loss. I don't care. Right. You only invest on upside. And so to me, more dollars going into ventures only a positive for humanity. And again, I don't mean to sound too grandiose, but I do feel it's just a net positive.

B (46:04)

Well, so maybe on that front, like I think it's a really interesting perspective. I feel like a lot of the more from a company perspective than investor perspective, I feel like a lot of the most disruptive products were maybe non consensus at the time. Totally where you start with you know, like no buttons on the iPhone or you got like Uber instead of taxi, It's a stranger driving. And those are the ones where I think if you were like I'm going to build a taxi company, but it's like 20% more efficient. Like probably can be a big business, but not quite the same level of disruption and growth as like, you know, you take a big bet and you might very high chance you're wrong. But if you're right, like you're going to be, you know, in a really good position.

A (46:41)

Yeah. And this is so critical. I'm glad you brought, you brought it out. I really believe the best companies themselves are non consensus to customers. I just think that the investing market is, is, is, is different than that. Like they kind of understand that and therefore a comment on investors being consensus is very different than a product or being consensus. Does that make sense? Like investor sentiment I think is actually much smarter than people think. I think the adage is VCs are dumb, they just chase trends. And all of that is true. But the reality is as a group we have identified a cohort of companies that are quite disruptive and invested in them and price them and those the companies themselves tend to be actually quite non consensus to the actual consumer or to the market.

C (47:36)

I do want to build Martin on your point because I think it's so interesting just to comment on how not everyone's incentives are totally aligned here. Especially between sort of what's good for the individual and what's good for the ecosystem. And so in the sense that, yeah, you know, if you're an individual vc, you don't want more capital or if you're a founder, you don't want more founders in your space. But to your point, like competition is, and some people are saying competition is bad, you don't want competition, but competition is what fuels incredible product. It's like the Darwinian process. Like this is how, you know, we get, you know, a bigger, you know, more, bigger startup outcomes, startup ecosystem having more, more value, incredible products for, for customers and users.

A (48:15)

This is how we solve cancer, man. More money goes into VC and we invest in companies and as opposed to investing in dying companies, ability to retain their place 100% like all of finance needs to change.

C (48:26)

And I think VCs are trying to straddle sort of, you know, LP incentives, founder incentives, their, their own incentives. And, and there is some overlap and, and, and there's magic there. But it's also just worth acknowledging that not every individual person is aligned and that's okay. I also do still very much believe in the, in the barbell that there will be, you know, these big, these big, you know, sort of massive funds that continue to, to, to, to win and invest in compound these, you know, smaller focused, concentrated expert. Yeah. Who absolutely crush it. And we all work together.

A (48:59)

So, so Leo, we're going to run, we're going to run the numbers. I was trying to get it done by now, but there's a lot to do. The numbers are fuzzy. I just want to walk through what we're going to be looking at and then maybe we'll schedule another podcast once the numbers are out to actually discuss it. So one of the numbers we're going to look at is if you look at, if you cohort companies into winners and not winners, call it looking to whether on average for that company the rounds were priced above or below median for other companies at a similar stage. Right. So this is going to, this will say whether you know, is relatively high priced for winners or not. And then the other one, which is even more difficult to determine is given actual returns are the bulk of the returns from companies that were on average high priced or not. And I think these two numbers will give us a sense to whether the market is actually pretty smart about the value and the price. You should not look for price arbitrage if you're looking for returns. Does that sound fair?

B (50:15)

Yeah, I think that sounds fair. I definitely agree with the not looking for a price average piece because I will say for me personally, my best investments have been ones on, on average that took a while to raise their seed round. A lot of people didn't get or didn't like it. But on the flip side, some of the biggest misses are also the ones where it's like, oh, we liked everything except the price and like we thought it should be of 10 and some, you know, some big fund gave them a term sheet of 20 and we passed and then now it's a $10 billion company. So maybe that was like, maybe that was not a good path.

A (50:44)

Yeah. You know, honestly, as we go through this conversation, it does strike me that I think a lot of this is honestly is just we have a bit different perspectives. Like I have to deploy a lot more money than you do. Right. Like I'm a series A investor who needs to basically cap out 30 to 40 million in order to have a significant position. And so I may have to be a bit more concerned about this than you do at the early stage. And I'm sure stage does color this conversation quite a bit. Everything you're saying is totally sensible to me. So I don't think there's any disagreement.

B (51:16)

It was definitely something I was thinking about which is I think if every check you write has to be at least 100 million, I think it's actually very hard to do non consensus because there's not a lot of companies that hit a stage where you'd invest 100 million, but it's still not clear if it's a good company or not. And I think the earlier you go, if it's $30 million checks, 10, 5, 1, I think you get more and more of a Category where you have the option and you could do either one assuming you have access to the consensus opportunities.

C (51:40)

Leo, I'm curious and you know, you guys have absolutely crushed it at seed with some, you know, Robinhood and Flexport etc. But I'm curious what you think of Romten's sort of thesis that multistage has won seed more or less in the last like 10 years. That when you look at a lot of the big winners, they were done from multi stage firms, you know, at seed. I'm curious one, if you agree with that sort of, you know, reading of history and then two, if you, if you think that's like, well, definitionally you probably don't think it's, it's unlikely going forward. Yeah, exactly.

B (52:13)

I actually thought this was an interview. Sorry, what's the second part of the question?

C (52:21)

Does, did multi stage win seed or more seed than, than seed firms win seed? Obviously there's you know, first round suse, you know, like lots of great seed firms but when you look at the aggregate of, of, of you know, of winners, do they have a multi stage seed or not? That's Rompton's argument, is they had a multi stage seed and that's why he co invests with multi stage as whole strategy. And then just, you know, past isn't, you know, isn't the future necessarily what do we think about the future?

B (52:44)

So I mean I haven't looked at, I haven't rigorously analyzed like the 10 billion, $50 billion outcomes for over, over the, the course of suicide. I think we've invested in like 10 or 12 unicorns roughly maybe like a third of those or quarter of those had a series A investor at seed and I'm not really counting like sometimes it was like oh, the series A Investor did a 50k check in the YC round or something. I mean like actually took half the round or more. So most of them still were seed only or were like seed funds dominated the early round and then they went to multi stage very quickly after that. But so in my experience I think there's a subset of seed where I don't know if I'd say multi stage funds won but they have a very strong advantage, right, where if it is a founder that previously built a business that exited for 100 million and they're like in the space that they know super well, that's going to get done at like 40 instead of 20 or 80 instead of 20 post and chances are it's going to be a multi stage and not like a boutique seed firm. So I think for that segment, like multistage hasn't won, but I think it's probably the predominant like the majority of the time they have a big leg up. I think for the other ones where it's less obvious, it tends to be much more seed seed dominated or seed fund dominated.

C (53:57)

Yeah, Martin Leo, this has been a great conversation.

D (54:03)

Thanks for listening to the A16Z podcast. If you enjoyed the episode, let us know by leaving a review@ratethispodcast.com a16z we've got more great conversations coming your way. See you next time. As a reminder, the content here is for informational purposes only, should not be taken as legal, business, business, tax or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a link to our investments, please see a16z.com disclosures.