E229: Inside Industry Ventures: The $8 Billion Firm Backing 650 Venture Funds

Summary

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"Inside Industry Ventures: The $8 Billion Firm Backing 650 Venture Funds"

Podcast: How I Invest with David Weisburd
Host: David Weisburd
Guest: "JR" — Senior Partner at Industry Ventures
Episode: 229
Date: October 22, 2025

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Episode Overview

This episode provides a deep dive into Industry Ventures, a pioneering $8 billion firm that invests across secondaries, co-investments, and fund-of-funds structures, with a focus on early- and mid-stage venture capital. The conversation explores the firm's investment philosophy, their diligence process, the manager evaluation framework, and broader trends in venture capital—especially regarding emerging managers and how to win deals against big names like Sequoia and Andreessen Horowitz.

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Key Topics & Insights

1. Industry Ventures Today and Evolution

• [01:09] JR shares that Industry Ventures is now at $8B AUM, split between secondary investments, co-investments, fund-of-funds, and a tech buyout component.
• The firm started in 2000, initially as a secondary firm, expanded into fund-of-funds in 2007 and co-investments in 2010, often stemming from “luck and faith” in early relationships with managers like Chris Sacca, connecting them with companies like Stripe and Uber.
  Quote:

  "We stumbled into the realization that all of these smaller fund managers are going to share a common problem: capital constrained as their companies grow...Through luck and faith in Chris, we invested in some great companies." — JR [01:30]

2. Direct Investing and Co-Investments Approach

• [02:56] Direct investments (co-investments) at Industry Ventures require a different, risk-tolerant mindset than later stage secondaries.
• There’s a key cultural and process difference between evaluating de-risked, late-stage assets and earlier, riskier deals.
  Quote:

  "The mindset of secondary is quite a bit different than the mindset of direct...We are taking a lot more risk." — JR [02:56]

Deal Flow Sources

• 250 are primary checks in seed/early-stage venture funds, 400 from their secondary LP stake purchases. All co-investment opportunities come through these manager networks.
  [03:54]

Life Cycle and Evaluation of Co-Investment Opportunities

• Managers often bring deals at later stages (A/B/C), not only at the initial seed where they entered.

• At later stages, Industry Ventures distinguishes between “great team and product” (early) vs. “great business” (growth/late).
  Quote:

  "When we look at a company at the Series A, B, C stages, we now have metrics. We have to evaluate the metrics and ask a different question—Is this a great business?" — JR [04:35]

• Referencing Warren Buffett’s airline example: Big markets aren’t always profitable businesses.
  [05:55]

3. Diligence Process and Assessing Manager "Believability"

• [07:54] Manager credibility is broken into two parts: proven track record and a repeatable process (Ray Dalio’s “believability”).
• Industry Ventures tracks how well managers transition from seed to later-stage investing and runs parallel diligence.
  Quote:

  "One way for us to assess that is to run diligence alongside them...Are they talking to customers? Are they interpreting it correctly?" — JR [09:22]

Avoiding Bias & the Need for Process

• Avoid over-valuing managers who are simply persuasive or passionate; tangible outcomes matter.

• Diligence often involves joining calls, reviewing data rooms, and ensuring managers ask the right questions for the company stage: e.g., customer stickiness, retention, margin protection, etc.
  [10:23]

• Only 20–25% of managers at later stages are considered highly credible; the rest either lack co-investment experience or haven’t proven process/returns yet.
  [12:04], [13:25]

Manager Integrity

• Integrity isn’t just honesty with others but with oneself—a recurring challenge, especially for optimistic seed investors transitioning to more quantitative later-stage analysis.
  Quote:

  "If you define integrity as, are they being honest with us? I’d like to say close to 100%. But being honest with yourself—some of them fail that test." — JR [13:55]

4. Ground Truth: Customer Validation

• [21:20] The most reliable indicator is always the customer. Industry Ventures emphasizes directly contacting customers (not just those provided by CEOs) to gauge real product traction, stickiness, and competitive edge.
  Quote:

  "The customer is the ground truth. Will the customer buy the product is a leading indicator." — David [24:40]
  "It shocks me how few people really do the customer calls and do it in a thoughtful way." — JR [25:10]

• They use independent networks, third-party platforms, and deep reference calls to triangulate the truth. High ratings from customers (9s or 10s) signal conviction; anything less is considered lukewarm.
  [25:44–25:58]

Triangulation & Asymmetry

• Looking for information asymmetries—“inside” knowledge that isn't obvious from the surface—is key to their edge in private markets.
  [17:15], [17:34]

5. Social Proof vs. Proprietary Diligence

• Top-tier social proof (Sequoia, Founders Fund) only gets a deal to the top of Industry Ventures’ funnel; after that, strict diligence is non-negotiable.

• Quote:

  "Social proof can be valuable...but it stops there—after it’s top of funnel, we have to run a proper diligence process." — JR [27:20]

• The rationale is efficiency/prioritization—resources get focused on deals already vetted by credible, trusted partners but are never invested in solely because of their backers. [27:46], [28:59]

6. Operator vs. Investor Backgrounds

• Strong operator experience (as in JR's case) can sharpen judgment around CEO/customer dynamics, especially in evaluating whether founders are deeply engaged in sales.

• JR’s advice: founders should spend up to 25% of their time staying customer-facing, even post-raise and as the company scales.
  Quote:

  "A large part of their time—pick a number, 25%—needs to be customer facing." — JR [33:21]

• Hiring a VP of Sales too soon is a frequent mistake; founders need direct sales exposure, especially early on.
  [31:20], [32:01]

7. Advice to Emerging Managers

• Stand out against big firms by doing what’s unscalable: direct, time-intensive support (e.g., helping code, customer intros), providing value that Sequoia/Andreessen can’t.
• For founders: value is more than money—prioritize hands-on help, even if the check is smaller.
  Quote:

  "If it was scalable, Andreessen, Sequoia would do it. You have to do the only thing that they cannot scale. That's focus only on unscalable." — David [37:13]
  "Offer more value. Take mine [smaller check], we're going to help you code, help you pitch." — JR [36:30]

Emerging Manager Trends

• Larger funds entering seed rounds with "option checks" inflate valuations. Discipline on entry valuations is a must for smaller managers—don’t chase overpriced deals.
  [35:00–36:09]

8. On Valuation Discipline & the “N of 1” Trap

• The rare, truly exceptional (N of 1) company often looks "expensive" on a comp basis; don’t pass on these for that alone. Underwrite to exit value, not just comparables.
• Quote:

  "Don't miss companies you really believe are N of 1, are really special. N of 1 is obviously rare and you can't get too caught up on valuation." — JR [39:56]

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Notable Quotes and Memorable Moments

• On Information Asymmetry in Private Markets:

  "In the private markets, it’s legal to trade on insider information. In the public markets, it’s not." — JR [00:00]

• On the Art and Process of Investing:

  "Investing has an art aspect, but it’s over relied upon...All these things are a misuse of investing and a destruction of returns." — David [18:02]

• On Manager Integrity:

  "Are they being honest with themselves? There I think is where some of them fail the test. And I think that’s not a bad thing...you have to see the glass as half full." — JR [13:55]

• On Customer Validation:

  "The customer is the ground truth." — David [24:40]
  "It shocks me how few people really do the customer calls and do it in a thoughtful way." — JR [25:10]

• On What Makes Great Venture Investors:

  "It would be very difficult to be a highly cynical pre-seed investor." — David [14:32]
  "You have to be willing to bet against those people who've done the almost impossible at the earliest stages and then say yes." — JR [16:13]

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Important Timestamps

• AUM and Firm Evolution: [01:09–02:46]
• Co-Investment Pipeline and Evaluation: [03:54–05:54]
• Diligence Process & Believability: [07:54–10:23]
• Ground Truth & Customer Validation: [21:07–26:35]
• Social Proof & Due Diligence: [26:52–29:48]
• Operator Perspective in Investment: [30:35–33:21]
• Mistakes & Lessons as an Investor: [33:25–34:49]
• Trends for Emerging Managers: [35:00–37:13]
• Advice for Junior Self & N of 1: [39:56–41:03]
• Why Exit Values are Growing: [41:03–42:05]

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Summary Takeaways

• Diligence, Process, and Customer Calls Matter: Proprietary information, especially direct-from-customer insight, is a sustainable edge in venture investing.
• Believability and Integrity: Track record and a repeatable process separate lucky managers from truly skilled ones; self-honesty is a recurring challenge for early-stage managers.
• N of 1s Require Bravery: Don’t let comps or fear of overvaluation sway you from investing in truly exceptional, rare opportunities.
• The Value in Being Unscalable: Emerging, smaller managers succeed by rolling up their sleeves and doing the personalized, labor-intensive work big firms can’t scale.
• Tech’s Widening Reach: Exit valuations and opportunity sizes continue to scale with technology’s deepening impact across industries.

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This episode is a must-listen for anyone working in or with venture capital: it’s an unusually honest exploration of what distinguishes lasting success in fund investing, and how best practices are forged from both conviction and humility.

Transcript

[JR]

In the private markets it's legal to trade on insider information. In the public markets it's not.

[David]

The customer is the ground truth.

[JR]

You have to be willing to bet against those people who've done the almost impossible at the earliest stages and then say yes. But these other questions aren't being answered in the way I'd want them to be.

[David]

I think a lot of investors don't go to the customers as ground truth and don't see that as the leading indicator in whether the business will be successful.

[JR]

It shocks me how few people really do the customer calls and do it in a thoughtful way. To me the question is if you define integrity as are they being honest with us? I think I would like to say 100% very close to that. But there is a question of being honest with yourself. And there I think is where some of them failed the test. N of 1 is special. N of 1 is obviously rare and you can't get too caught up on valuation. Don't miss companies you really believe are n of 1 are really special. I think a lot of VCs make the mistake of passing on great opportunities because they see it as expensive relative to comparables that aren't really comparables because the comparables aren't the NF1.

[David]

So give me a sense for where Industry Ventures is today from an AUM standpoint and also in terms of number of funded investments.

[JR]

Yeah, so we just celebrated our 25th anniversary. Been around since 2000. We now have AUM of a little over $8 billion and is divided more or less equally between secondary, which is what we're originally known for, and co investment as well as a small fund to fund component and a tech buyout component.

[David]

Tell me a story of how Industry Ventures got into co Investments in late 2010.

[JR]

Industry Ventures started as a secondary firm in 2000. In 2007 with the introduction of Roland Reynolds, who I think you've talked to before, we introduced a pure fund to fund with this thesis that seed stage dedicated managers would outperform the larger bulge bracket cross sector funds. And what happened is by luck, with Chris Sacca being the sole institutional LP and that fund won, we stumbled into the realization that all of these smaller fund managers are going to share a common problem which is their capital constrained by the time their companies get to the Series A, if not certainly by the Series B. And Chris, through his own generosity and opportunity view, introduced us to great companies like Stripe and Uber, which we not through genius, but through luck and faith. In Chris we had the luck of investing in and then we expanded that opportunity across our all of our managers.

[David]

So he came to you with opportunities, you saw the entire market and then you're like, this could be a thing, this could be its own standalone business.

[JR]

Exactly, exactly. And so that we started to do that, as you said, 2010. And then we, we built out a dedicated co Investment Fund for LPs who, who wanted just that component.

[David]

So these co investments in your context are called direct investments. So tell me what it means to be doing direct investing within a platform like industry ventures.

[JR]

That's a great question. We started off as a secondary firm, as I told you. And the mindset of secondary is quite a bit different than the mindset of direct, right. Where you are investing in great assets, but they're really de risked, they're much later stage assets. So to be on a direct investing team that is focused at an earlier stage is culturally different. We are taking a lot more risk there. And, and it works out I think at industry ventures because we have the humility to listen to each other and recognize that we're looking at things through a different lens. But it's been a, it's been, you know, really rewarding to introduce the mid stage and earlier stage part of venture to a firm that's been historically later stage.

[David]

So you have a co investment opportunity come to you. Is that exclusively from the 650 funds? And tell me about the lifecycle of that. How does an opportunity come to you.

[JR]

And what's the first steps quickly on the 650, 250 of that is our primary checks in seed stage focused venture managers, seed series A stage focused venture funds and the other 400 or so are through our secondary team buying LP stakes. So of those 250 seed stage focus series A stage focus managers, 100% of our deal flow is coming on the co investment side.

[David]

So you get a co investment. I'm sure every manager comes in and says, we like this, this is the best company, this is next Uber, this is the next stripe. What's the next step and how do you corroborate the opportunity and the information around the opportunity?

[JR]

It's an awesome question. I think the challenge that we have when we get a deal is assessing the manager's ability to, to evaluate a company at that stage. So typically we're looking at a company at the series A, B or C stages. Even where the manager's sweet spot has been the precede seed, maybe to some extent early A. I think that there's a different set of questions that they're asking than the questions that we're asking and the questions they should be and sometimes are asking when they're handing us that deal at that more evolved stage. Right, their stage, their original investment entry check stage, they're really just asking two questions to simplify it. It's is this a great team who can build a product that customers will want? So, great team. Can they do what they say they're going to do? Part A, part B is will customers want this thing? And when we look at a company at the Series A, B, C stages, we now have metrics around that and we have to evaluate the metrics and ask a different question, which is, is this a great business? Not as a great team who can build something people want, but is it a great business? And we go back to the Warren Buffett quote around, it's really important to distinguish something that can be huge from something that can make a lot of money.

[David]

What do you mean by that?

[JR]

So I would take the airline business as a good example where Warren Buffett's famous for saying, hey, look, if you invested in every single airline company, you would have lost an enormous amount of money. But it's an, it's an enormous, it's an enormous market, there's tons of customers for it and it's not going away. So if you were a seed stage investor, you'd probably have been very excited about the Wright brothers and what was to come for good reason, lots of demand. But as an investor at the growth stage of it, you have to ask the question, can I make money in this thing? And I think the answer in airlines is generally no.

[David]

Just to double click on that distinction. So in seed, it's highly power law driven. You could argue all of ventures power law driven, but the seed, extremely so. So if you get the team right and the customer demand, the expected value of the investment is astronomical versus at the late stage. You can't have 50% of your investments go to zero unless you really have a, you know, an open AI or you get extremely lucky. But if you're focused on building the right portfolio, you need to make sure that every one of those investments is also good business.

[JR]

I think you could have a 50% strikeout rate at the series Series B and still do very, very well. But definitely you want to have a lower strikeout rate than you're obviously in.

[David]

650 funds, secondary and primary. Are there really funds that have a 50% loss ratio at the Series B that returning 3, 4, 5x net funds?

[JR]

I'd have to Push that to our secondary team to ask. I evaluate those 250 managers more at the seed stage and those loss ratios are say between 50 and 85%. And it's not unusual to have a manager on the high end of that loss ratio range outperforming the basket.

[David]

So we last chatted about your portfolio of 250 primary funds, 400 secondary funds and one of the lenses that you look through that is whether the party bringing you the opportunity is credible. Break that down to me. What does it mean to be credible bringing you a co invest opportunity?

[JR]

Ray Dalio you mentioned and I think you're going to be interviewing, which is. I'm excited to watch that.

[David]

Thank you.

[JR]

I think he's been written some awesome stuff. I can't remember his term for this.

[David]

Believability.

[JR]

Believability, thank you. I think of that in two components. One is do they have a proven track record? I think this is how Ray Dalio would say it, probably be more articulate about it, but a proven track record. But also on top of that track record, a process which is repeatable. So when we get a deal from a manager we are going to want to know that they have a good track record around introducing us to companies at this stage, this series, call it late A, B, C stage and sometimes we'll pass until we get to see that, hey, we should have done a bunch of these. So we want to see their ability to invest well at, at that stage.

[David]

So you're not only. You start tracking them just like an LP would and you essentially come back. It's not fun too but it's a, it's a basket of co investments two years later and you're tracking how did that first vintage do? Which is the first couple of investments. So you're.

[JR]

Yeah, it's not to say we wouldn't do the first one they showed us, but if we miss it, it's very useful for us to track and of course we will track.

[David]

And by doing that you're avoiding your own bias towards. Maybe the manager was overconfident, maybe they banged the table really hard. But that has nothing to do with returns. You're actually taking all that out, taking your own egotistical views on and you're like, what does the spreadsheet say? Are they good or not?

[JR]

Yes, yes. And again, it's not to say we wouldn't take risk with them before we have the spreadsheet data, but that spreadsheet data is really valuable to us. The second piece of this believ from Ray Dalio is okay, do they have a process here which is repeatable or were they lucky on the two or three pieces of data that we have here? And one really valuable way for us to assess that is to run diligence alongside them to see how they think. Are they talking to customers? Are they hearing, you know, are they interpreting it correctly? I think one of the biggest risks with a seed stage manager investing at the mid stage of the market is that they, they're, they're really excited about this house. Genuinely. I don't think it's a lack of integrity to hand us stuff. I think they're genuinely excited about it. And sometimes that's drinking the Kool Aid can happen and you can be, you know, you can be obscured from the facts from the data set. And we want to see them run diligence process which, you know, is really mindful of the actual data.

[David]

Double click on that. So you're literally on the diligence calls with them. You're in their data room. How are you assessing their process? Break that down.

[JR]

Are they talking to customers? Do they understand the difference between a pilot, whether it's called a pilot or not, and something that is that customer is truly locked in and excited about? Are they looking at things like gross retention versus net dollar retention to really understand is this super sticky? And are they asking questions about scalability, profitability, margin protection over time? So it might have a really attractive gross margin but do they understand what's happen happening in the competitive environment? Have they talked to the, to the customers using the competitor product, things like that.

[David]

So what a typical series A, B and C investor would do, are they essentially doing that kind of diligence, not the seed diligence? A lot of people think it's absurd. The best investors of precede to do things like figure out the market size of those things. At Mike Maples and he looks, he looked back at his entire portfolio and he found that the companies that actually did the very best were creating new industries were more movements than companies. If you took that lens to series B, Series C, you might have an issue.

[JR]

Yeah, I mean I think Facebook's a really good example of this. If I understand where you're going, where we definitely would have missed it, right. There was no market.

[David]

It's not in the spreadsheet, there's no revenue.

[JR]

Yeah, exactly. And this one I think great, great seed investors can, can see around the corner I think at the mid stage, I think by the time I'm guessing here, but I would imagine by the time Facebook got to the Series A or B there was just enormous user demand.

[David]

Right.

[JR]

And there's something to trade on there. But I from a as a mid stage investor person focused the message. I'm pretty certain I would not have done Facebook at the preset. I would have missed that. There's no data to support that.

[David]

When we last chatted you said that you find 20 to 25% of your managers at a later stage are highly credible. Which is another way of saying 70 to 70 to which is another way of saying 75 to 80 are not. But it's not an integrity thing. That's only one side. Now there's a lot of money at stake so I'm sure there is a non zero integrity factor on those 650 managers. You don't have to nod your head. But on top of that we talked about this. Do you are you able to assess the good, good investment at the Series A? Series B I would argue very different skill set than on the seed level. That's probably the main component. Is there anything else that you're looking for in the managers outside of you know, do they have high integrity? Are they able to assess. Is there a third thing in terms.

[JR]

Of like would we do in a co investment with them at the mid stage?

[David]

Yeah, I guess like if you think about the investment as two components, the actual investment and the manager's believability, is there anything else that would fit in that manager's believability bucket?

[JR]

I think you summed it up. I think it's. Do they I like that believability quote from Ray Dalio there. I just correct you on the 25% that's A. In large part it's small because we haven't done co investments with the rest. So I don't, I want to.

[David]

So there's only 25% that have gone through the process that get the stamp of approval they know how to do later stage. There's 75% that have not yet gotten the stamp.

[JR]

Yeah, yeah, exactly. They, they, you know we haven't done a lot of co investment with them or if we have it hasn't worked out that well.

[David]

I have to ask what percentage have integrity issues when they send you SVVs, is that a real thing? And if not why not? Because the dollars, the dollars at stake are real. These is life changing money. It's essentially lottery tickets, a Series A. Any one investment could, could buy your second home in, in Florida. So there are real stakes at the table. If we're honest, what percentage of your managers don't have that integrity layer or may not even be aware that they don't have the integrity layer.

[JR]

But yeah, I would say, you know, I haven't seen any managers send us a deal that they don't believe in. To me, the question is if you define integrity as are they being. Are they being honest with us? I think I would like to say 100%, very close to that. But there is a question of being honest with yourself. And there I think is where some of them failed the test. And I think that's not a bad thing. If you're a seed investor, you have to see the glasses half full. You believe in this team and you might well be right. The team is great and the product market fit may be there, but those set of questions don't necessarily make it a great investment for us.

[David]

Said another way, it would be very difficult to be a highly cynical pre seed investor.

[JR]

I think so. Yeah, exactly. I think that's a really good way to put it. You're generally positive, you're generally leaning in and you have to make a mind shift, which is I think really hard for people to do. Between the questions you're asking at that seat and the questions you're asking later, you're going from a qualitative assessment for the most part. Is this a great team and will the dog want to eat the dog food sometimes in a market which doesn't really even exist yet, to a more quantitative approach. And if they did part those answers, those first two questions, that's pretty amazing. That's great. And it's hard to then say no, right? It's hard to.

[David]

It's a high cognitive dissonance to be extremely interested in something at the pre seed and not interested at the Series.

[JR]

A. Yeah, I think it's really hard.

[David]

Especially as they keep on raising and bringing in more capital. That's a hard, conflicting kind of dichotomy to keep.

[JR]

And some of them are amazing at it. I mean, I think Founders Fund is a great example of a firm. Khosla's done this well too. Keith Raboy has done as an individual investor in both firms. There are people, I think, but benchmark in this category, Sequoia has done it really well. Who will invest at the seed and the midstate and are those firms or people are there? I think.

[David]

Are there both?

[JR]

Like at Andreessen? I think it's more people like. Right. Because you'll have an earlier stage team and then they have to make a handoff. So they might be a different person, but I think at firms like Khosla and I'm not sure about Sequoia, but I believe it's Sequoia too. It's the same manager making those early say bets. Who's able to go and be honest.

[David]

What makes them able to do these seemingly contradictory investments?

[JR]

I think it's really you have to, you have to be willing to bet against those people who've done the almost impossible at the earliest stages by being a great team who can build this thing. It's really hard to build and get some product market fit and then say yes, but these other questions aren't being answered in the way I'd want them to be. Yeah.

[David]

And I think the least sexiest thing in capital markets investment is process. And yet it is one of the most sustainable points of alpha. There's many different processes and even due diligence itself, the length of your due diligence, the way you reference all these things are extremely correlated with good investment, good investing and extremely correlated with good sustainable returns.

[JR]

Yeah.

[David]

So not all co investments are equal in your mind when you see them. What are the two best, most low hanging fruit? When manager comes to you, you get excited. This could be something we want to do.

[JR]

Has to answer the question of what's special about this deal? What's special about the deal? For us we have to believe we have some asymmetry, asymmetric information. We have to believe that the board member who gave it to us, typically our managers are board members or they're, or they're deeply engaged.

[David]

And that's because then the quality of the information.

[JR]

Exactly. That they have some inside scoop on it. I mean I guess one way I'd put it is that in the private markets it's legal to trade on insider information. In the public markets it's not. We have to believe we have some insider information here. We have to believe that there's an inflection point happening in this company. It may or may not be shown out from a quantitative perspective, but qualitatively, if we start talking to customers, which we will do, we would start to see the proof what the manager is telling us.

[David]

So the way that I put it is that investing has an art aspect but it's over relied upon. So let's say you have investment, two processes, one does three references and one does 20. The person that did three references is just handicapping their return. It's not because they're an artist, it's not because they have intuition. All these things are A misuse of investing and a destruction of returns.

[JR]

I agree with that. I think the way we think about it is we have to triangulate on the, that that board information we got by talking to other board members. Right. But we all. And we also have to get customer information. So by getting all that information from customers or prospective customers and from other people very close to that management team across and Maybe it's not 20 data points but quite a few. The more the better. That's good. So we can kind of. It's not that the manager, back to your integrity thing. It's not the managers intentionally, you know, they may not have all the.

[David]

You know what, you know what a great gauge of managers believability is. It's what money. What, what is your GP commit. I found that as a way to create integrity in myself, which is. I'm super excited about this investment. Great. How much am I putting? 1%. Why? Why aren't you putting 10 right? Oh, that's a good question. Let me think about that. Why? Maybe I'm not as excited. Maybe I'm hyping myself up. Yeah, yeah. It's a great way to be honest with yourself. The GP commit and asking yourself questions why and why not? And that you know, that's, that's obviously. And I do think there are people unfortunately that do see these as, see relationships as short term, see these as lottery tickets. And I would argue that some don't have integrity. Maybe you guys weed that out in the diligence process before you invest. But there's certainly there's high stakes at play and there's certainly people that are pushing investments that they don't believe in.

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[JR]

I'm sure that. I'm sure that that's true.

[David]

Yeah. So I think your process is really fascinating. Again, not the sexiest thing, but I think it's really cool. So a seed manager comes to you. Let's say it's a series B investment. You're on the call, but you're also starting to essentially like an FBI informant, you're starting to triangulate information about the company. Tell me about that.

[JR]

Yeah, how we triangulate it.

[David]

How do you get to what I would call ground truth, which I want to talk about what that even means. But how do you get to your version of ground truth?

[JR]

It's an awesome question and I think it's an asymptote. I don't think you can get to ground. There's always going to be a lack of information at the end of the day. So we have to be comfortable with that to get as close as we can. We will triangulate with other managers because typical that we'll have overlap in a deal. So we can talk to multiple managers, multiple people.

[David]

650 managers is a significant market share in the entire ecosystem.

[JR]

Yeah. We're going to find multiple points of information around the quality of the team in a company. We're going to talk to customers or prospective customers, depending on their stage and try to understand will the dog really eat the dog food and who else are they talking to? And if these customers are really valuable to us. If they ran, which is interesting with customers, if you just ask the CEO to give you a list of the customers, obviously they can't give you the best ones. You've got to get your own customer base. You want to talk to customers who ran a great process, looked at all the competitors, all their options and really did their homework. And you can assess that on a call with a customer. Well, who would you talk to? What was your process? Did you talk to companies B, C, D and E? Or is it just A, because they're your buddy, you got to sort through all that and when you get.

[David]

Because that's not scalable. You could only have so many buddies that.

[JR]

Yeah, yeah, but we do see that all the time. By the way. There's a bunch of.

[David]

And it's a completely legitimate zero to one strategy. It's just not going to turn into a $10 billion company.

[JR]

Exactly. So we want to know that you have customers who ran the process. They believe that you have a sustainable advantage over the current, current nature of the competitive landscape. And you, you, you are sticky in some way. And you know, we can assess that relatively easily. There is now the question of what are you hearing on these calls? Which we found really interesting. I found really interesting. You might be on the same call with, with somebody else on our team and come to a different conclusion from that, from that customer or other board member.

[David]

So that's next level. So not only do you have the same, you have multiple points of information on the customers you're in this case, you're on the same exact call. Two people at industry, two highly educated people on the call, highly experienced as well. And they hear a different thing on the call. Yeah. A, what does that even mean? And B, what do you do?

[JR]

Was that customer really excited or. Because there's this conflict of interest when you're on with a customer, for the most part they want to make sure this company gets funded because they're a customer. They want to make sure this startup doesn't run out of cash. So there's some, some subtlety sometimes to the way the question is asked and to what they're giving you and you might come up with, you know, if you're, if you're just on a phone call and you're not getting the body language from it, that can be tricky. But you can be on a call with a customer and believe that you know, they're super excited and, but the other person not, not pick that up. So that's tricky. And I think the best answer to that is to have more calls. Right. So you keep adding more data points to it. But that, that will happen of course.

[David]

Just like references, oftentimes it's what they're not saying.

[JR]

Then the follow up question though is well, okay, I happen to know, you know, you have these other five managers. I name the names now, force rank them for me because otherwise you're, they're all going to be the best.

[David]

I love that. And also it allows you to maintain confidentiality because you're not isolating the manager or isolating the opportunity. At the risk of saying something extremely obvious, your version, when I asked you about ground truth, you went to the customers. The customer is the ground truth. Will the customer buy the product is a leading indicator. I realize that's extremely obvious, but I think it's important because I think a lot of investors don't go to the customers as ground truth and don't see that as the leading indicator in whether the business will be successful.

[JR]

Totally agree with you. It shocks me. It shocks me how few people do really do the customer calls and do it in a thoughtful way. You can't just take the basket of customers the CEO gave you. For all the reasons I mentioned before, you got to go and find your own customer base. You know, then there's a great third party services, Gerson Lehman Group, Tegus and all these others that will do that for you. There's many. So you've got to do that hard work and you have to make sure they ran a quality process because at the end of the day I think the customer is going to speak. Right. That's the best.

[David]

What do they say on a reference? A 7 is like a 2, an 8 is like a 4. So you need a 9 or 10, I think basically for it to, for.

[JR]

It to be a good reference from a customer.

[David]

Yeah, customer, anybody, any reference. And 8 is a very low signal and a very negative signal.

[JR]

An 8. Yeah. And I always sort of take it to, well, how much money are you going to spend with them? What's between now and actually making the decision to write that check? What has to happen. Get very specific with them, with that customer. Okay. What remains on the product roadmap before you write that check? What will get you to not re engage with that customer, to drop that customer? You know, which other competitors are you talking to? If they offered you a B and C. Right. And start getting. And rather than have them do a 1 to 10, they're usually going to give you a 9 or 10. Get into what has to happen to sign up, what has to happen to resign, what has to happen to drop. Get as specific as you can.

[David]

And there are some obvious investments that you make. I'll use that term. I don't know if you would, but super oversubscribed pro rata, where you know the lead, let's just call it Sequoia or Founders Fund in their right strike zone. How much diligence do you do there? On or off the record?

[JR]

Yeah, yeah.

[David]

And just tell me about those opportunities and how do you, what lens do you go through those opportunities?

[JR]

Yeah, it's an awesome question. So you sort of, to rephrase it, like how much weight does social proof carry and how much lighter a diligence process will you run if you run into a very high social proof situation? We've learned, and maybe this is our own mistakes, we've made money with Sequoia investments, we've lost money with investments. The same across the board.

[David]

No one's 100%.

[JR]

Yeah, no one's 100%. By the way, I think they're amazing. But I think we're pretty good about social proof. May be a good indicator as to whether it should make the top of our funnel and we should start a process on it. We have limited resources, we have to find a way to kill things quickly. So social proof can be valuable there, but it stops there. After it's top of funnel we have to run a proper diligence process.

[David]

It's so interesting you say that because one of the most underappreciated for gps raising from LPs is there's essentially two main drivers that are driving whether they invest. One is, is this one of the 10 out of a thousand funds that they're going to take a deep dive in? Are they going to due diligence on which is what you're talking about. Sequoia Co Invest. You're probably going to do diligence on it, I'm going to guess. And then there's. Are they going to make the decision to invest? Now both are extremely important but the first one is extremely underrated and people assume that whether it's LPs or secondary funds that it's essentially meritocratic, for lack of a better word or it's an AI that's unemotional, that's relationship doesn't matter, all these things and yet those things matter. And I would actually add those are highly rational things. Why going back to your thing, which is if you have 20 to 25% of your managers that are really good in this series A, series B, series C, Lane, you want to. If you have a scarce amount of time, which everybody does, you need to prioritize. And what are you going to prioritize around? Yeah, other than their track record, how they've been a partner with you, whether they brought you good deals. So there's a. It's not purely kind of this social proof or like superficial process. There's a lot of logic to it.

[JR]

There is. And beyond like take a Sequoia as an example. They're very, they run a great diligence process, they've got a great Rolodex, they're backing some of the best people. Right. So they probably believe both the team and the market and they've done work on it. But it also Sequoia also brings more engagement from customers. Customers also will take it a little more serious. So it gives them an edge. It's beyond self fulfilling, it's a little self fulfilling, gives them an edge and it's nice to have a really strong deep pocketed syndicate and the company if they hit some tough times, you now have pockets at the table which will, you know, can and will support.

[David]

So upside goes up, downside goes down.

[JR]

Yeah, I like the way you put it self fulfilling to an extent. If you have a really strong syndicate, it's not just we believe they did their homework but they can add real value to de risk the business.

[David]

There's this never ending debate about who makes the best venture investor operators versus investors. The only reason by the way there's this debate is because some of the best venture investors in history have not had.

[JR]

I think there's some folks that benchmark.

[David]

That have not had any folks have benchmark. Bill Gurley obviously most famous.

[JR]

Great example. Yeah.

[David]

And, and this is especially pronounced in the later stage where it's more about the spreadsheet than the founders what we've been talking about. But yeah, being a direct investor as a secondary fund, which I don't, which I define as you're taking a look at opportunity, you're essentially investing as a non lead investor in the round is how I would frame it. How does being an operator background you've been doing this for nearly a decade. How does that help you and how does that hurt you?

[JR]

Yeah, great question. We do lead sometimes by the way, probably about a quarter of the time.

[David]

You lead, you lead the manager.

[JR]

So we'll lead the round.

[David]

You'll lead the round.

[JR]

We'll lead an A or a B or even a C. But it's not, it's not our norm. But we do. It's a great question. I think so. I was mostly an operator. I've only been back in venture now for almost nine years now at industry but most of my career was, was as an operator. I think probably where it gives me an advantage probably is in it really by looking at my own mistakes. What did I do badly? When I assess a CEO I get a pretty good sense for me one of the critical things in a CEO and you touched on this a little bit customers, are they deeply engaged not just with the product but with those customers. Are they part of the sales process?

[David]

Are they.

[JR]

I hate it when a CEO will hire a VP of sales early in a company's life cycle. Go be the VP of sales because you need to understand what that customer wants and you've got to capture that customer voice back in the product. So I love CEOs who are both very product oriented and very sales customer oriented. I think that's my, that's my bias learning from my own mistakes when I wasn't paying enough attention to customers and more product focused. I learned that. I mean I think intellectually anybody can understand how that's important, but I see a lot of VCs make that mistake. I think being an operator probably gives.

[David]

It'S the founder mode for sales. It's your company, you go sell it, you talk to customers. You can't disintermediate yourself from the customers.

[JR]

Exactly. And I frankly think you should never disintermediate yourself. You might not be the head of sales anymore, but you have to be.

[David]

So operationalize that. So I've now raised $100 million from Sequoia Industry was in the round or industry co led and now I'm growing an organization. As a founder, what should I be doing?

[JR]

I mean I think a lot of your value is hiring amazing people. Right. So you're you, you should be probably spending a quarter of your time hiring, right. Just finding the best people you can find across all dimensions of the business. But I also think you should be spending. I'm making up numbers here, but another quarter of your time engaging with your customer base, talking to those customers, getting on the airplane with your sales people. Right. I think for the the biggest difference, when I started Inventure back with Battery ventures in the mid-90s, you cross the chasm, you get to Main street and it can last 10 years. Main street can last, I don't know, six months now. It's really short because there's such a dynamic market. There's so much things pop along and alternatives come up for customers. So I think therefore the CEO needs to stay engaged, always with the customer and be iterating product as a result, constantly. Therefore a large part of their time. Pick a number. 25% needs to be customer facing.

[David]

What are some other mistakes that you've made recently that you've changed your mind on?

[JR]

As a venture capitalist, I think I, you know, when I came into industry ventures, I had no experience with fund to fund investing, no experience investing in seed stage managers. I probably drank the Kool Aid from managers who had not run a fund before. And I backed a few of those that were mistakes. I didn't follow the Ray Dalio believability like what's the track record here? I think I didn't put enough emphasis on the track record. The metrics speak loudly. A story is a story and it's great. But at industry Ventures, I think the one thing I've learned from Roland and others who've just taught me this and they gave me some rope to Hang myself with. And I managed to hang myself. They didn't kill me.

[David]

Hopefully not too much rope.

[JR]

Yeah, not too much rope. But I think what I learned is that the track record really does matter and make sure they have a track record that's consistent with the strategy they're going to play. I mean, it's easy enough to have an Angellist track record with writing $50,000 checks. That's a bit different from leading. If your fund one is going to go lead rounds with a million dollar check, that's a. That's a different thing. And you need to diligence that. Call all those CEOs where they wrote a $50,000 check and ask them, would you have taken a lead check from this manager? Might lie to you, but if you ask enough of them, you're probably going to get a good sense of that.

[David]

You have one of the most interesting vantage points in the seed stage in the world. What's going on with emerging managers? What's your pronunciation over the next couple of years and where do you see the industry going?

[JR]

That's a really good question. I think that there is a lot of risk for managers right now at the seed stage. That's coming by capital being put into the seed stage by these larger funds who are writing, you know, opportunity. They're writing option option checks to be able to write a check. So they may overpay for that.

[David]

It's like cac. Their customer acquisition cost is a C check.

[JR]

Yeah, very good way to put it. So I think that that's a risk and I think the smart ones are just not going to play in that, you know, write a check into those overpriced seed rounds and they got to navigate a frothy market and maintain some discipline around their entry check valuation, because that is their big check. It's not like. And Andreessen might. And I think it's not. Andreessen and Skoye and others aren't being stupid and paying 3x the bulk of their capital is going to come later. But maybe the only check for our seed stage manager. And so that value, they do have to be very valuation aware.

[David]

Let's say you're emerging manager and you're in your office and you're about to meet with the next OpenAI. And you know, this is one of the top companies of this generation, or you believe that to be the case. You're competing against Sequoia and Andreessen. I know all these narratives, people say, all these positioning. What exactly do you consult that emerging manager to say and to differentiate against the large firms.

[JR]

What I would try to do. And we have a couple managers pop up. I mean Pebblebet is a great example. They offer so much value that a Sequoia and Andreessen simply can't offer from a time management perspective. They're gonna roll up their sleeves and they're gonna help them code, go pitch that CEO to take a check. Relatively small, therefore not super dilutive. A third of what Sequoia might be offering you if you have a term sheet already in from Sequoia. Because we're going to go add real value to your business, you know, and, and, and then we have managers who can add value on the customer side and really roll up their sleeves and get engaged. So pitch them not to be super valuation sensitive right now, but to take value beyond the, you know, greenback dollar from us and pitch that value proposition to them. Or not just money.

[David]

So two things there. One is you're basically essentially joining their team so your services and cash for equity. The other aspect that I want to underline what you're, what you're saying is because what you basically your answer to my question was do the unscalable. Because if it was scalable, Andreessen, Sequoia would do it. If it was like bring in PR agents. You can't do that. You have to do the only thing that they cannot scale. Yeah. That's focus only on unscalable.

[JR]

That's a great way to put it. That's a really great way to put it. Yeah. And earn your carry and unscalable is yourselves.

[David]

Right. Yourselves. You're a focus of a very high quality thinker and experienced yourself.

[JR]

Your role at X might be a little bit special. Right. Versus you know, and that, that often happens when our managers are sector focused. They have real value there. They have specific customers they can make warm introductions to. Right. They have team members who you know, they know would love this, this particular company.

[David]

So I also want to double click on what you're saying and seem to imply you have some of your top pre seed, seed managers writing a check and shortly after they bring in money from the large multi stage managers. Is this like some kind of process? Is this like a double close? Like just break down, break down what you meant by that.

[JR]

So we were lucky enough to be an early investor in Pear. Pear, they've just done a fantastic job. Now Pear has become, over time, you know, they've just proven out the ability to be a disproportionately good investor. At seed, relatively high success to failure rate and some really huge breakout winners. And Sequoia's caught onto that. So you know, Sequoia will.

[David]

So they're partnering with them.

[JR]

They partnered with them very closely. They will, you know, be tracking those investments and may within a few months write a follow on check so you can start to earn real credibility and have quick follow ons with and that's one of the pitches that you asked earlier. What advice would you give? I guess if they're sitting in a room with a CEO who has a term sheet from Square already, it is hard. You've got to say you've got more value, offer more value. Take mine. If they don't yet have that term sheet, your pitch might be, hey, I've earned a lot of credibility and you will now have introductions to all these brand names you want.

[David]

I think if you take out a dictionary and you go to alpha and you look at the definition, I think the definition is Sequoia will write a check after me three months later at a higher valuation.

[JR]

That's great.

[David]

I've never heard of a better definition of what is your right to win and what is your alpha. Yeah, going back, you've, you've now been in the industry and doing direct investing, co investing for almost a decade. What is one piece of advice that you'd give Junior almost a decade ago when you just started that would either help you accelerate your career or help you avoid costly mistakes?

[JR]

I think the biggest thing I've learned from one of our teammates, don't miss companies you really believe are N of 1 are really special. Don't get caught up. This is going to be a little contradictory to my advice earlier to avoid valuation froth. But n of 1 is special, n of 1 is obviously rare and you can't get too caught up on valuation too. I always looked at valuation from the perspective of what kind of multiple am I paying relative to comps. And I think that's a big mistake. I think a much better way to look at it and it takes a lot of work and there's a lot of guesswork in it, you have to just be comfortable with is instead of taking that approach back into evaluation based on where you believe this thing can exit, what you think the opportunity is here and then then come up with evaluation where you underwrite it to whatever you do, a 3x, a 10x. Think about it that way. I think a lot of, a lot of managers make the mistake. VCs make the mistake of passing on great opportunities because they see it as expensive relative to comparables that aren't really comparables because the comparables aren't the n of 1. Does that make sense?

[David]

That makes perfect sense. And at risk of asking a very question, a decade ago you were underwriting your winners probably to 1 to $10 billion valuation. Now it could be 10 to 100 billion. Why is that happening? Is it just that tech is amassing more network effects and more profit margins? Why has exit valuations grown by 10x? And then it's not just because startups are going staying private longer because you have the tech companies now worth 3,4 trillion. So why is that happening?

[JR]

I mean, I think it's as simple as that Marc Andreessen quote. And I think somebody's taking it over for AI. But software is eating the world. AI is eating the world. Right. And I can't remember who said that, but that is, that is what's happening. I mean these market, market size opportunities are getting bigger and bigger. I mean we're. And I can't think of an industry that isn't now being impacted right by technology. Think of what robotics are now doing in industrial settings, for example.

[David]

Things that are like tech is everything. It's becoming more widespread and deeper. So they're getting more of spend within every company. And they're not only servicing tech companies, they're servicing everybody, including consumers. Broader and deeper.

[JR]

Yeah.

[David]

Well, J.R. this has been an absolute masterclass. Thanks for, thanks for coming. Shout out to HF0 who who hosted us for this beautiful podcast and look forward to keeping in touch.

[JR]

Yeah, thanks so much, David.

[David]

Thanks.

[JR]

I appreciate it.

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[David]

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