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Educational Alpha
S2: Conversation with David Frazee, Founder, CEO, Demystifying Silicon Valley
00:42:32
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- [00:05]
A
Welcome to Educational Alpha. I'm Bill Kelly, CEO of CHI association and your host. Bringing you on the ground conversations with business leaders, educators and industry colleagues from around the globe. Educational Alpha is sponsored by iCapital, the financial technology company with a mission to power the world's alternative investment marketplace. Part innovator, part educator and part navigator of the alternatives industry, iCapital offers intuitive, scalable digital solutions that have transformed how private market and hedge fund investments are bought and sold. With iCapital, financial advisors, wealth managers and asset managers around the world now have access to everything they need to deliver the return and diversification potential of alternatives to high net worth investors. To learn more, visit icapital.com in this.
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B
Episode, Bill sits down with David Frazee, a Silicon Valley based venture capitalist and innovation advocate to explore the dynamic intersections of venture capital, global entrepreneurship and the democratization of innovation. David shares his fascinating career journey from high tech law to to investing in groundbreaking startups, many of which have become unicorns. The conversation covers the challenges and opportunities in venture capital, including the evolving dynamics of liquidity, the rise of entrepreneurial ecosystems in emerging markets, and how risk capital drives transformative innovation. Listen in.
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A
David Frazee, welcome to Educational Alpha.
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B
Thank you. It's a pleasure to be here.
- [01:54]
A
Looking forward to it. And this is going to be an interesting conversation of discovery. And I don't know all my guests very well, so you're no different in that regard, but our mutual friend Effie Datsun introduced us via email a month or so ago. We finally had a conversation last week, but it backed up against another schedule so I had to cut the conversation short and said why don't you come on to Educational Alpha? So that's how we vet the guests. The less prep the better. And I'm looking forward to a very organic discussion that's probably gonna center on early stage DC and Silicon Valley, which interests me a lot around capital formation. But before we get to that, you, like so many of my guests, have had very interesting backgrounds. So maybe introduce yourself to the audience and we'll take it from there.
- [02:36]
B
Sure, I'd love to. So I actually started honestly, and it's a mistake in retrospect, but I started as a high technology lawyer. So I co founded the first intellectual property strategy practice in Silicon Valley back in the 1990s. Did a lot of work around how do you use intellectual capital to stimulate multibillion dollar market opportunities, capture the value of what you create, and how do you use your creativity to channel economic productivity? I've had my own startups, my first we raised 128 million from GE. Met Jack Welch for 30 seconds. He has no idea who I am, but it was in the hallway. And we took that company public and sold it. And I'm now on the venture capital side where we have invested in 10 deals and four of those are today unicorns, and there's a fifth that may yet make it so. Adding 400 is not so bad in baseball, not so bad in venture capital either. I've had a parallel passion through all of this, which is what makes the best companies, what makes the most innovative companies. I mentioned our statistic. There are about 20 funds at the early series A stage and seed stage that find most of the US unicorns. And so I became fascinated with what are we all doing? And it turns out we're all roughly doing the same things. And so I have been taking that message not only to our own portfolio, obviously, but to emerging countries. And I've spent a lot of time over the last 25 years going to places like South Africa and Bogota and Ho Chi Minh City talking about entrepreneurship and innovation and how you create entrepreneurial economies, because to me, it's the greatest anti poverty tool that's ever been created.
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A
It's interesting when you mention some of these regions like Ho Chi Minh City, certainly taking some agency and country risk to go to a place like that. But alpha is usually not found in interesting places nearby that are highly developed. So there is an interesting model there. So maybe a couple points on that and then we'll get into specifics in Silicon Valley. But if you go to a market like Ho Chi Minh City, are there enough entrepreneurs to oversee these businesses? Because agency risk is a big risk for the VC model.
- [04:33]
B
Actually entrepreneurs, there's no shortage of. They grow up like the grass between the cracks on the sidewalk. Entrepreneurs are everywhere. The issue, it turns out, is middle level management and investors. And one of the early problems with every market is that the people who purport to do venture capital, at least domestically, are converted from real estate retail industries that really are used to treating the talent like cattle. And Alfred Hitchcock had a quote that actors are like cattle and should be treated that way. And that's actually most investors. Venture capital is exactly the opposite. We give majority upside to the investor. We take like 20%, not 51% or 95%. We have all sorts of tools to help mentor and nurture the iterative experimental process. With lean startup design thinking, there's a toolkit that we use and people who are transplants from other industries don't have that. Similarly, a good entrepreneur, once they reach a certain tipping point of scale, needs middle level management. And so aside from capital, one of the great problems that we're seeing is the CEOs are great. It's there's no VP of Finance, there's no people to do data analytics, there's no people to do some of the SEO, optimization and marketing tools that we need at the elite level. And so we often end up having to outsource that to other regions. And in the case of Vietnam, we would look probably to China realistically or Singapore. So we're getting there and things are definitely better than they were 20 years ago. But it not without its problems. And that's even beyond the usual things like currency, risk, rule of law, the ability to get money in and out of a country, the returnees coming back from the US or sophisticated venture markets to help found the next generation of companies, which all are very important things.
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A
And this has gone in seasons. But a challenge in the private markets is fundraising. And things were great until they weren't so great anymore. And I'm talking about maybe the transition through 2022. And while some of that funding is coming back, I think more from a distance. VC has been slower. It's the riskier end of the spectrum. And what funds are flowing there seems to be really dedicated toward AI that seems to be sucking all the oxygen in the room. So you've got a greater insight into this. And money always has a way of finding good deals. But what is the overall flow of the capital and where do you see it going over the next 18 months to maybe two to three years?
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B
Well, there's an even bigger problem than the AI monster which is swallowing everything. I literally got a deck from someone who's just using a very specialized database application and calling it artificial intelligence, just so they have that label slapped somewhere. And there's always trends, there's nano, there's clean tech, we go in cycles in these things. People lose their minds, but there's always something fundamental. The bigger issue to me has been the length of time to exit, the dearth of exits, and what this has done to early stage venture. A lot of the money which is going into venture outside of AI or even with AI is going into later stage deals like the 2 to 300 million late stage rounds which used to be the IPOs. We have a company that was valued at 3,6 billion. Instead of going public, they raised 400 million and they can stay private effectively forever now. And you've seen this many Times with what people like Softbank and Fidelity and others are doing. So if you go back and look at the Series A series seed investor, which is what we need for the economy because we're the ones that hunt and gather the talent and nurture it to get to the inflection point of scale. What used to be a 4 to 7 year IPO cycle and then a 7 to 10 year IPO cycle is now 15 to 17 in some cases. So you have Series A and seed investors as well as the talent who are stranded in deals for well over a decade. Funds are now being extended to 14, 15 years that are supposed to expire at 10. The entire model of four year vesting of a 10 year year fund life was around the way we worked in the 1990s and that hasn't been the case in a very long time. So among the implications of this, it's very hard for funds like us to do new deals. I can tell you I have four unicorns, but we have no liquidity to give back to the investors or to do new deals. And I'm not alone. Most of our colleagues at the top level are facing this exact same problem. And there's no good secondary market that isn't completely predatory. So we're all trapped. In some ways people can still raise money. There's still capital. It's not like that doesn't exist. But as the biggest macro news item for what I do at the early stage is the conviction led Series A3 to $5 million where someone wants to take a hard problem with sophisticated entrepreneurs, not kids in mom's basement with another app. But solving something big that matters, that requires money is becoming harder, if not impossible to raise. And I see this time and time again, business plans and decks that would have been funded in two or three weeks are now going months or never. And the terms that are being offered are in some cases quite horrible. And the top funds are suffering from this. That's actually the biggest story for my end of venture capital. There's different stages. There's late stage, middle stage, there's growth. There's different nuances in different parts of the world. What I said doesn't apply to China for example, but that's what's really affecting the Silicon Valley elite stage investors for the seed and Series A's just the liquidity trap.
- [09:26]
A
So a couple follow ups, maybe to reset for the audience. David, so you've done a lot of interesting things, including being a contestant on Jeopardy too. We may or may not get to that, but broadly Speaking. I think your day life has two verticals. It's Richmond Global Ventures, which is, I think what we're talking about now. And then we're going to move in a moment to demystifying Silicon Valley, but I want to stay with the GP side of venture. And this may apply to Richmond, it may not. I'll leave it up to you as to how much specifics you want to cover there. But you mentioned these four unicorns, and if you had four unicorns 10 years ago versus four unicorns today, as you alluded to, the exits would be very, very different. And we definitely have a bit of a plumbing problem now that we have high quality merchandise, just no way to get it off the shelf. What would be the likely outcome for unicorns? Your four or anybody else's, where maybe in the good old days there's an ipo, but maybe now it's a sovereign or a public company that's looking for a strategic fit. Maybe it's an ipo, maybe it's just a strategic buyer and it can be multiple ways. But what do you think is going to be the ultimate maybe killer app in terms of exits once we get to the other side of this plumbing problem?
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B
Well, some of these are short term problems, some are long term. And then I have a fantasy look, all of us have a rich fantasy life, which is disappointed is why we love entrepreneurship. But the short term issue is we have backed up hundreds of IPOs and the confidential numbers of S1s and F1s before the OCC is not released. But friends in the iBanking world were telling me even a year ago we had 300 and so I assume that number is larger now and there's many that would be on file if the market weren't Frozen for tech IPOs specifically, let's take SPACs off the table because that juices especially the 2021 numbers. Traditional old school underwritten IPO with one of the good banks or even like the B plus banks for the smaller check sizes. That's largely frozen right now for tech companies there are some, but we don't have the floodgates like we used to. So that too shall pass. That is a temporary phenomenon. It will take time. I was just with a group of entrepreneurs yesterday where I said this feels to me like 1996. So we'll have 97, 98, 99, and then March of 2000 will eventually happen because these things inevitably go around in circles. So that's a short term phenomenon, but there's a longer term phenomenon which is what it takes to be public and the rigor and discipline, the expense, the time. That has dramatically changed and people are much harder on the tech sector than they used to be. Now there are good fundamental companies and there's a lot that aren't. There's always wheat and chaff and markets are supposed to sort that out and they do over time. In the short term, it's often irrational and haphazard. So the IPO part will be taken care of. The M and A is interesting when we look at companies, especially because a lot of our deals are in emerging countries. We spend a lot of time thinking about who are the seven different acquirers, Are they in different verticals? Do they have different metrics as to why they would acquire? They want a Latin America presence, they want a multiple of ebitda, they're looking for subscribers and what is it they look for? And the M and A market has not dried up. It is contracted a bit for what we do. And we have the problem, at least with ours. There's just too big to be acquired. There's only maybe one acquirer or two in the world for what our companies have become. They've just grown too big. So they're all going to have to be IPOs. And I would have not told you that five years ago to said most of these will be acquisitions. I changed my mind just because facts have changed in terms of what one does about this. I look at different things that other countries have done. I'll give you an example. And I haven't looked at the data in a long time. So everything I say may be completely wrong now. But I used to work with the government of Poland in a patent office on intellectual property reform and innovation economy. Things like I do with many countries and they were putting together at the time a stock market focused on this gap between the companies that could go to Frankfurt, to London, to New York and where the capital ended in their country. So companies that could be public with not watered down standards in terms of fraud compliance, but just watered down expectations of financial performance and that they were still growth companies. So they'd exceeded venture capital, but weren't ready for the elite global markets yet. And I'm just going to confess I thought that was a bad idea. And at least for a while it was the best performing market in Europe. And that probably isn't true anymore, but it was doing really well. So one thing that some countries have looked at is there's some intermediary what London AIM could be if it were done a Little better to allow a place for companies that aren't ready for the large multibillion dollar ipo, but they're too big for venture. And we haven't had a real pressure for that because what's happened is you've had again these large funds come in with 400 million checks, 500 million check taking the place of that. So while that solves maybe the problem of the company as an issuer of stock, it doesn't solve the problem of the early stage investor getting money back into this economy. Because we're a hydraulic system. Pressure goes in, pressure goes out. Pressure is money. I can't spend stock certificates and unicorns to do a new deal or give an LP distribution. I need cash or cash equivalent. So the long cycle we're going to have to do something about if we want to change the profile of series A investments. I mean, the fundamentals of this are good. It's just taking so much longer and it's skewed what we can do at the early stage.
- [14:25]
A
So a couple of things and this might or might not be a transition to demystifying Silicon Valley, David but if I think about where there are a lot of pools of capital and we need more capital in this space, it's the individual investor. So by many counts they represent 150 trillion of assets. So more than 50% of this global aum pie. They're controlling their retirement now through a 401k, 403. Very few people have a defined benefit plan. And then we've got this generational transfer of wealth that cerule is pegged at almost $100 trillion coming down. So there's all this capital sloshing around and I wonder if we could wave a wand, if it would be better to have that trying to look at all this inventory and get in at a very good price for quality companies versus creating fund X plus one and going out and putting more product into the inventory. So I just think that there's a lot of optionality for somebody coming into the space for the very first time because the secondary market is probably 1% of global private capital. 15 trillion is the denominator, about 100 billion in the numerator. And I think the secondary market is still young. I think there could be a lot of innovation there and we need the capital. So I don't know what your thoughts are about how this gets into transfer of wealth. And I think it does start to play into what we're trying to accomplish for the average investor to get them on the grid. Where capital formation is happening, which is early to late stage venture capital.
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B
Let's put aside accreditation and crowdfunding. Let's leave securities law out for just a second because that complicates an otherwise simple discussion.
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A
It gets in the way, but you have no way to restart it.
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B
Those laws are lowest common denominator, but for a good reason, because securities fraud is real and ever present. The problem you're talking about is actually one that's weighed on me and I've honestly, you don't know this, but I've actually been thinking about this problem because the beginning of the year some of our LPs wanted to take some money off the table. It's been 10 years. Things change. It's dad's money, he's died. Now the kids want to do something different. They have other priorities and we're locked. So we had a mandate from some investors. Can we do a partial sell some of our better positions just to give some partial liquidity without selling the whole thing off? We still want the runner, which should be trivial. And most mature markets with liquidity and with information symmetry, it would be trivial. Venture capital is neither of those. There's lots of asymmetry where people are trying to pawn off their lemons and dogs on you and there's not a lot of capitals you just mentioned. So I even talked to other funds and they're in the same boat. One of our really close co investors that we do a lot of deals with try to unload six and a half million dollars, one of the best deals on the planet right now. And it was just brutal for him, it took him months. And there is a real opportunity right now which I've even been pondering, which is coming in and helping the early stage investors, which are the seed and angels as well as talent. By the way, we were talking to an entrepreneur just the other day who's making $180,000 a year with a company that's worth $500 million and will be a unicorn on the next round. I mean, they're just killing their space. And they are a natural monopoly given the network effects of what they do. Yet his girlfriend is mad at him, like, why can't we get married? We can't get a house, we can't do the things, we can't start a family, we can't live on that in this region of the country. So there's a lot of people being hurt by the lack of liquidity. All of his friends are making 800,000 at Google. So we're also competing against that which didn't used to be the case. Now the best tech companies are acting like startups and paying the talent with public salaries, but giving them a lot of the autonomy and creativity of a startup. So they're doing the best of both worlds. So there is a huge opportunity to match people into this gap and there will like all arbitrage opportunities and temporary inefficiencies. This too shall pass. I don't know if this one will pass in the short term. I mean this could be a 20 year edge for anyone that wanted to do it right and didn't want to be predatory. And the problem by the way with the people who are doing the predatory pricing will give you 20 cents on the dollar for this amazing deal, doubling every year in revenue. When the economy turns, they have made enemies because they've been exploitive. And part of this is we have a world in venture capital or it's a multi turn game. I can be mean to you right now to get the best deal, but when the economy turns, you will be punished severely by being frozen out at the best deals. And this is a power curve, not a bell curve. The very few outlier deals create almost all the value. So you don't want to be shut out of the good stuff. You don't want an insurance pool with the sick patients. You want those elite 3 standard deviation events because that's where the money's at. So to do that you have to be kind and nice to the entrepreneurs and the funds that curate and have those deals. So a slightly less non predatory but still very aggressively priced option would be taken up and would be welcomed and would make friends for decades. So you'd have almost a permanent pipeline. I'll give you a different angle on this. A lot of especially larger family offices, which isn't what you're talking about, necessarily do get into venture at the late stage. They follow Fidelity or Softbank and they've mostly not done very well. But we have this enormous opportunity. If you have the pipeline and know the people and know the players and know the metrics to look for to get not an early stage risk, but a mid stage risk, like a series B to C risk, a series D company just because of the need for capital and the desperation of a lot of LPs right now and even some GPs. So a lot of the hard work of growing companies which we do at the seed and a stage has been done. The de risking has happened. You can look at the key KPIs and metrics going 30 to 50% a year and there are lots of those companies out there. Even if only 1 out of 20 of the companies in SEC registration which have a 2 to 4 year projected IPO horizon meet these criteria, many more do. That's more supply than can be handled with even doubling the current inventory of secondary money. So it's a great opportunity right now and I've actually been thinking about it not because I wanted to, it's just because it's so big and it's so pressing and it affects so many people in our fund and our friends funds that it's hard not to look at it.
- [20:04]
A
So maybe then firmly turning the page to demystifying Silicon Valley and I don't know enough about it. So I'll make this comparison. We'll find out in a moment if it's true that I think you've taken a very specific part of capital allocation and gone even deeper than Kaya. Kaya is a very narrow and deep on alternatives. So we cover all of private capital from VC all the way up to buyout and then certainly infrastructure, real estate, natural resources, all tucked in there as well. But your focus, if I understand it right, is to bring not only greater transparency to the VC space, but try to get the average person on the street into this space either as an investor or an entrepreneur or maybe both. So I may have misdefined it. Maybe tell me where I got that wrong. Or better yet, describe what demystifying Silicon Valley is all about.
- [20:54]
B
I used to have this crazy communist East German art professor in college. I'm not going to do the German accent. He always say if you said that, you would not be wrong, but you would not be right. So it's close, it's good. The impulse is this is the companies that I've mentored, worked with, hot, consulted with in emerging countries in 2018 alone created 10 billion of revenue and from over the previous decade had created half a million jobs. They're changing GDPs of regions. The idea that we would have these dense rich tech clusters in places like Jakarta and Mexico City and Buenos Aires would have been unthinkable 25 years ago. Now there's some of the biggest, best places for innovation and entrepreneurship. And that naturally makes sense to me because My family made $6,700 a year. I grew up poor. I was always the poor kid mocked for my clothing at Stanford. And I haven't forgotten the people who did that because being born wealthy is not an achievement, it's a genetic lottery. And I look at what are the tools that allow people to create extraordinary wealth in short periods of time and transform their family, their community, the generations that follow them? And the answer is innovative entrepreneurship hands down. And venture capital. Let me talk about risk capital. Let's extract it from venture. Risk capital matters because changes who can solve problems and what problems can be solved. So as a poor kid, I don't have daddy's money, so without venture capital or risk capital, I can't solve substantive problems that need to be solved. And without risk capital, you're stuck solving problems that are immediately profitable in the next 30 days or that can be financed with bank loans or SBA loans. And SBA is an abomination unto nature if you're trying to actually grow the economy. I cannot be passionate enough about how we screw this up as a country. We have this gift and we just want to throttle it. So if you want to solve something that matters, like creating software defined light with spectral recipes, or credit scoring analytics systems, or analytics systems for national security and defense, which are three of our companies, or the blockchain that will be used by multinational central banks and governments, which is the fourth, you can't do that in mom's basement with an apple, with a million people with no money. That requires investment, it requires time. It requires entrepreneurs in their 40s and 50s who have lives, who have families, who have needs to be paid. So venture capital absolutely is crucial to this. And instead of being the province of a few regions of the United States, Silicon Valley, Austin, Boston, Northern Virginia, I mean, we can tick off the usual suspects. This should be a birthright of every person in this country to have the capacity to imagine and create and dream and have their vision put into the world. I grew up in rural Kansas on the Oklahoma border. And there's a lot of desperation, there's a lot of rage, there's a lot of anger, there's a feeling of victimization, that somehow something's been taken from us and there's people to be blaming, which is part of why the election that just happened happened. We have to find a victim and channel our rage. So a lot of desperation on both the left and right, by the way, is fueled by the sense of hopelessness and innovation. Entrepreneurship is the antidote. It says everybody has the ability to create, everyone has the capacity. If you follow these really simple steps that a precocious 12 year old could learn, you can start to turn your vision with very little risk into a substantial business. And it doesn't have to be venture backed. So the tools I teach can apply to traditional businesses like a flower shop or you have a hairdressing salon. You're not going to maybe use the deep AI tech enablement. But a lot of the things we use around growth, hacking and design thinking to bring joy to an actual customer and applications and services on a platform and thinking about innovative business models and how we leverage those absolutely can apply to almost any business. And even outside the business context, the tools I teach are enormously crucial to impact. And I say impact instead of NGO or nonprofit because one of the mistakes people make in solving say social problems is they get stuck into a nonprofit model as opposed to can I use this to create sustainability, economic sustainability, not environmental, or my organization can grow exponentially to the scale of the problems I want to solve. It is a human tragedy to help 300 people when you can help 3 million if you had some business then and to get off the donor merry go round and the gala dinners and the permanent fundraising grants. Writing so innovation entrepreneurship also helps solve the seemingly intractable problems of the world. And I'm not the only one who's come to this conclusion. The UN High Commissioner for Refugees has an innovation office. And if you look at their website, they do something quite radical which is we want to spur refugee led innovation. So it's not first world kids parachuting in with here's the solution. It's here are the tools of creativity and how you build things. Now you go solve your problems. And that resonates with me because when I go to emerging countries and teach entrepreneurship, that's the way I look at it. When I teach someone in some of these frontier markets like it's Johannesburg and teaching women from Alexander Township, I don't tell them what to do in terms of what business to solve. I don't know. I say this is how we structure, experiments and iteration and design models that work and can scale and become self sustaining. And if they want to go build a platform for say black housekeepers in Johannesburg, which a few of them did, that helps 30,000 women. That's what they do. If they want to do another food delivery app, I guess they could. I mean we don't need those. But there are so many problems of the middle class and the lower class that affect billions of people that are not just elite tech bros in San Francisco, which is what most things seem to be doing lately that need to be solved. There are large things, whether it's death and dying or things that affect all of us that innovation can apply to. So the purpose of demystifying Silicon Valley is nothing less than teaching everyone these tools. We have created the most innovative region and time period in human history. More than Renaissance Florence, more than the Industrial Revolution. I say this with no hint of irony. The last 40 years, centered in Northern California, has been this hub of innovation which is still exponentially growing. And if you understand exponents were just at the beginning of it, not the end, it's not the tail. And it's exploded throughout the world as people have taken our models and emulated it. The irony is in the United States, where somehow facts and science have become a liberal conspiracy and we're in the victim mentality, we've kind of abandoned our roots. We pioneered this. And it doesn't matter at some level where it happens. If the cure for cancer comes from a young girl currently in a rice paddy in Bangladesh, it's still progress. But I mourn for my country that we have this enormously powerful set of tools and we don't teach it to everybody. I see my kids friends posting these memes about eating billionaires and stringing up everyone who's successful. And I said, why don't we just teach every poor kid what Jeff Bezos did? Because I couldn't doing. It's hard. The analysis of what he did is not hard to understand. It can apply to almost anything. For profit, nonprofit, their church groups, their government, their current job, how to be more innovative and creative and take what we have pioneered and perfected and apply it to every other problem in the world. That's what demisciplin Silicon Valley is about.
- [27:25]
A
So I can see my way through most of that, David. But I think capital by design, if you want a fair return, is risk seeking. But it's also risk averse when it's the first dollar in or if it's in a hugely inefficient market like Bangladesh. And not that that's easy, and I commend the work you're doing. You could teach the entrepreneur and have them understand the VC model and how to be successful and how to build a business, but the capital is not an automatic. So how do you make sure that with all this teaching, you find a way of getting the capital flowing in these directions? And I guess part of the answer is they don't need as much as Silicon Valley, but the pump does need to be primed.
- [28:04]
B
It needs to be primed. And that's actually the magic of this. So there's two aspects of this. Let's work backwards. Venture capital is widely misunderstood, including by the people doing it. So I often have to remind people that HBO's Silicon Valley TV series is a comedy. It's not documentary, although it's a little too close to home sometimes. I don't know who their informants were, but they got some things right. But it's comedy. Real VCs, the elite VCs are very numerically driven. So let me just give a small riff that will help set something I want to talk about. What we actually do is really just scientific method you learned in seventh grade science. We have a hypothesis, we test it, we get data. We keep repeating. That's what we do. We're trying to find certain aspects of a business that work, that can grow exponentially so they have value. People use it, they want it, and it grows. Just take the example of Facebook. Facebook was like the 20th to 30th social network. There's Friendster, there's MySpace. Why would anyone want another social network? Why would anyone invest in one? Well, here's what the smart money saw is Facebook at the time was a college model. You'd have a Princeton. Edu or a Yale. Edu domain within 30 days of entering a college campus. 70% of everyone was on it and they were using it three hours every week. And some people every single day. A majority of people every single day who had value had growth. We understand our factors today because of COVID It's the infectiousness of the virus at a certain level of the whole planet's going to get it. So when we invest at the early stage, we are looking for the data which supports that we have a tiger on our hands, that there's exponentiality built into it and there's different models. Reality is an easy one, that there's a sustainable business over time and that the data backs it up, that they've built around a customer, the customer likes it, they pivoted. They've done experiments to get that information. The reason I say all that, because we all work around that toolkit. We have seven to 10 years to grow a company to a billion dollars. We can't mess around guessing and looking at our gut or passion. That's one of the biggest myths. I don't invest in passion. If the World cup is on the line, I don't take the most passionate fan from the stands and put them on the penalty kick line. I put Lionel Messi or Ronaldo. I mean, we put the best person. We look at the data. We look at data. And we want organizations that work off data and experimentation and a beginner's minds and are iterative and experimental and are willing to do the kinds of things that need to be done to create that. In emerging countries, I have not just taught a lean methodology, but a hyper lean understanding. There is no money in some cases. And so they do need to be able to create what are called minimum viable products or experiments that for almost no money or very little money, they can get the kind of data they need to show that they have something on their hands. We really are focused on nailing it before we scale it in a much more hyperactive way than we would be in the US where there's. Although we say there's not much capital, it's actually plenty of capital in some ways. You can get some pretty bad businesses going that probably don't deserve to exist. That's not an option in an emerging market or in a poor region of the US which structurally feels like an emerging country. So the tools that are taught are not passion and writing business plans. We don't write business plans. That's Junior Achievement 1975. No one does that. We create experiments and we create data and we test hypotheses that de risk it. Going back to your point, we don't like to invest in risk or we like to quantify the risk. So what I'm looking for is as an investor, you have value, you have growth, you have the models, you have some sustainable edge and the data backs it up, even if it's on a limited basis. Now, it may not scale the way we thought because we do have failures too. But there's some embryonic product market fit and so teaching that allows people to build better businesses now to capital. If you're trying to convince an investor from Singapore or China or the United States to invest in Bangladesh, they rationally should be looking for these numbers. They will still undervalue the deal compared to what it would be if it were in London or Berlin or New York, because they should, because there's risk. So in some ways you're getting Series C risk at series A value. So it's actually a good deal for an investor. But a good entrepreneur should be taught to do the experiments and gather the data that de risk the deal both for herself as well as for the investor. So it's always going to be a problem. But money follows deals. Someone told me yesterday VCs would drown kittens to make money, which probably more true than I'd like to admit we wouldn't, but a lot would. So we'll follow where the deals are and over time money will Catch up at maybe generations, at maybe 20 years, but eventually it will get there. But the other thing I'll say with regard to emerging countries where a lot of the money comes from actually isn't foreign investors, it's local investors. You have one entrepreneur who is successful and builds something that is a breakout. And then that management team and those founders all split off and form new companies and co invest as angels and become advisors and board members. Then they split up Excel mitosis, except it's not a hub and spoke, it's this dense mesh. There are maps that NGOs that work in emerging countries have created that show the initial embryonic, almost big bang of one or two companies 20, 30 years ago has led to this dense network of startup and entrepreneurship companies in the region. Places in Mexico that were when I grew up unsafe drug havens are now like dense tech clusters. So some of it just grows up from the ground, is uneven foreign capital.
- [32:55]
A
So it's almost like tiger and tiger cubs. Would that be a fair analogy? If you think about the tiger fund and all the funds that were spawned off that management, you've got this precinct.
- [33:04]
B
Level all of the world, it's happening all over the place. And entrepreneurship is just hidden in plain sight. And governments screw this up because they want to go to the universities and have semiconductors and stuff they can't beat China and Taiwan and the US on anyway. Entrepreneurs are just there. It's just a matter of teaching them how to grow, how to build, how to scale, how to attract capital, how to teach local capital not to mess it up. That was one of my first things, is how to renegotiate a bad deal because for $50,000 they give up 80% of their company. That doesn't work in my world. And trying to get people to renegotiate that is very hard because no one wants to get that deal up. So there's actually a lot of money in these places. I mean it may be concentrated in seven families. That's better than it was 50 years ago. There's money, there's entrepreneurship. There are more dispersed networks of talent. People now don't need to have everyone local. The Internet has a lot of bad side effects. But one great thing is people now can have access to knowledge and talent, this great conversation and people that can help them with their financing model or understanding how a franchise model works just by going to the right few clicks and it's there. There's a lot of garbage too. But what we need to create dense entrepreneurial clusters exists. And the Barriers have never been lower in human history. To build something, we don't have to build a whole data center. We use Amazon Web Services or Google Cloud or Azure. You don't have to hire a hundred thousand dollars person to build a website. I can have it up in five minutes. Now. It's a good looking website. We tried to remove all the barriers and friction points. And by the way, everyone always asks me at AI and it's partly fab, but there's something real here. One of the greatest things about AI is in five to 10 years, the exclusion of non technical founders from this magic I'm talking about will be gone. Someone who has no idea how to code will be able to articulate to AI how to build an app or a service and it can be built. So right now we have this technology divide that's going to go away. That's one of the greatest promises I believe in the next five to 10 years is non technical founders will have access to all these tools. Not necessarily one to one parity, but 80% of the value of what a sophisticated tech team from an MIT would have. And that's going to be an enormous democratizing force.
- [35:05]
A
I agree. So just maybe finishing up on the model itself. David, so how do you deliver this? I don't know how many people there are on staff. Do you go into these local markets? Do they come to your website? And is it certificate based programs or charter based programs?
- [35:20]
B
How does it work right now, the demystifying Silicon Valley staff you're looking at as the fun winds down, I'd like to spend more time on this. It's not a passion project in the sense of I'm indifferent to scale and growth because I apply the same metrics to me, I apply to our startups, but it's a time allocation problem. The way demystifying Silicon Valley started was I was doing live programs all over the world, often with partners locally like Endeavor, which is one of the leading world's NGOs to find entrepreneurs. I did a lot of programs with their national offices along with other parallel organizations on the ground that served entrepreneurs or venture capital or angels. And it's just one of those things, once you get into the system, everyone starts to call you because they attend the programs, they're excited. There's nothing like it. During COVID I was supposed to be teaching women entrepreneurs in Morocco and Egypt in April 2020. Obviously couldn't fly. So the demystifying Silicon Valley website was my Covid project. Rather than lose weight or learn French, I did this, and there's a hundred fifty hours now of content that goes systematically from ideation all the way through venture financing. And there are a few more courses to tape on exits right now. It's not a systemic thing where I am spending full time on it. I just did a certificate program for the World Economic Forum Shaper program. They had 350 people in 22 countries over six weeks complete the program. I'm doing programs like I said, one at King's College. There's another one about to come up at Imperial College in the uk so it's more the spot market. But there is a complete video series which has all of this. The goal ultimately is to take Demystifying Silicon Valley as the beachhead and get this out to angels entrepreneurs, investors in every part of the US and world. There's members in 30 countries right now. There will be sister programs that go along with it. One is the mass market. Because demystifying Silicon Valley is a little, I want to say too advanced. It's a little too specific, maybe a better word for traditional business. And so there's a sister organization called Demystifying wealth, which teaches the same principles, but to traditional business. And it also adds in financial literacy, lifelong learning, communication, negotiation, conflict resolution, things that people need. And I've been teaching some of those programs, like in East Los Angeles and even here locally, to refugees and formerly trafficked women. And the final part is the impact. I'm also about to release the third sister organization, which is Unleashing Impact, which teaches these same tools, but for people that want to solve social problems. So a lot of it's the same. The DNA is very similar. But we don't talk about venture capital. We talk about how do you create impact and how do you work with governments, how do you work with other organizations. But demystifying Silicon Valley as a core is something I really think everyone that goes through a business school program should be doing a supplement because the way it's taught is abysmal. It's mythology, not reality. Anyone who wants to be an investor is an angel. Anyone who wants to be an entrepreneur should really be going through this. And I would like to see policymakers go through this. Because a lot of what governments do actively harms entrepreneurship. We are obsessed as government with cash flow businesses that just support two or three people. The SBA is an example, like microfinances, examples like loans, just to keep the two or three person business alive. That's fine. We should have that. I want corner stores. Those are important. But I'm Talking about the companies that can create trillions of dollars of outsized value. Just eight companies, eight venture backed companies alone are worth $16 trillion. And that's like a week old data. Some the US election, probably another 4 billion. And that's just eight companies. That's more than the GDP of like Germany, Japan, the UK, France and Italy combined. We want the outliers because those are the ones that can transform generations. Their local economy, that can change poverty, that can change opportunity. So domestic in Silicon Valley is about teaching everyone that what we do isn't that secret. It's not some magical incantation that no one can understand. Anyone can understand this. The tools are easy to apply and it's our birthright to be creative and to dream and imagine. I mourn for people who will live their lives never knowing what it's like to put something of their own vision into the world they truly do.
- [39:07]
A
Well, your passion is palpable. And as I wrap up my day job at KAI at the end of this year, maybe I'll increase your headcount by a hundred percent and join you. It is a space that does interest me a lot and I think impact can and should have a double bottom line. And if you look at it through a short term lens, it's very hard to look beyond just the economic factors that are going to drive a return to me. But without a functioning middle class globally, society is nowhere. And the demographics in the US and Japan and most of the European countries, like in Italy for instance, are not very good. But you turn to some of these emerging markets, the demographics are awesome and they are the future of this world. And trying to find a way of getting them responsibly on the financial grid, that's good investment for everyone, buddy. So I do applaud what you do. So we're running up against time. Before I do let you go, just maybe a fun close. Tell me about Jeopardy.
- [39:59]
B
I was worried you were going to do that so you could plead the.
- [40:03]
A
Fifth if you want to.
- [40:05]
B
It was with Alex Trebek who obviously has passed away and it's ill to speak of, but he was a rude, nasty person, honestly to the staff and.
- [40:11]
A
The women really, because he comes across as such a class act.
- [40:15]
B
There's a middle school audience and he just was so, so rude to one of the kids and reduced him to tears. It was always my dream to be on the show. I was a world quiz champion. By the way, if you have British listeners as one of the few Americans to be in University Challenge, we won the World Championship when I was in law school. So it's just one of those weird things. By the way, there's no socially redeeming value to information recall. You can't make a living off of it, but if you have the skill, use it. And Jeopardy was honestly a disappointment, just the whole experience of it. What's nice is my friend Ken is now moderating because he's wonderful, kind person. But Alex, just not a very good person. And I'm glad to see it in better hands, honestly, because by comparison, Regis Philbin was the biggest sweetheart I was on who Wants to Be Millionaire but never made the hot seat. But he would spend time with every person going down the line. Tell me what your goals are, what you want to talk about. Oh, your mother's a fan. Here's my cell phone. Let's call your mother. We'll say hi to her together. Like, he was the biggest sweetie and the staff hated him because he took like 30 minutes to get through the intro line. And so he always held up taping. But you want a gentle soul and a kind person because kindness matters in this world. Going back, even just Silicon Valley, we have all these mythologies of what you should be. And we laud horrible people in toxic behavior because they make good Walter Isaacson books, they make good Aaron Sorkin screenplays. But that's not what 99% of leaders are. And most of the toxic leadership just destroys organizations and destroys talent and breeds its own competition when people leave because they can't stand being there. And it would be really wonderful. And we do this in our own companies to teach not just the entrepreneurship, but teach that kindness and connection and genuine leadership, which is your loyalty, your people, so they're loyal to you. I mean, obviously we care about performance. That matters at a deep human level and we've lost that.
- [41:50]
A
So great observation and maybe a great capstone to a very good conversation. So I did enjoy it very much. David, I appreciate Effie's introduction to you and hopefully we can and should do more going forward. So thank you for all of that and great to see it today.
- [42:05]
B
I will talk about this anytime. So I love innovation and it was my pleasure, truly.
- [42:10]
A
Thanks, David. Thank you for listening to Educational Alpha. I'm your host, Bill Kelly. Learn more about the Kaia association and subscribe to the show@kaia.org that's C A I A dot org. See you next time.