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- [00:00]
A
Greycroft today is $4.6 billion. You're both managing partner, but you also founded the firm. And last time you told me something interesting. Venture capital is not an asset class.
- [00:10]
B
That's right.
- [00:10]
A
What do you mean by that?
- [00:11]
B
So I think it's manager selection masquerading as an asset class. So let's say you do what everybody tells you to do. You go out. You're an lp, you go out, you evaluate the universe of managers out there. You say, hey, I've got my emerging managers to my experienced platform managers, I've got my specialists to my generals. I go pick firms across those bucke. You are almost certain to underperform because the asset class itself has a mean and median return that not only underperform the Nasdaq, but they're negative in most vintages. So diversification makes your returns worse. And that's just a statistic of the asset class in general. You have to pick not only top quartile managers, but really top decile managers in every vintage in order to outperform,
- [00:58]
A
just to push back on that. The median for venture is horrendous. It's like 6 to 8%. It'd be the worst asset class in the world. So you picked the average, the median fund. But the mean is actually quite good. It's in the high teens. It's a difficulty because it's so fat tailed. It is very difficult to get the mean.
- [01:14]
B
Let's look at statistics for a minute. So we all know that this is a power law industry where there's a few companies that drive the vast majority of the entire industry's returns. I think about that as roughly 20 companies a year that really matter. And there's a few firms that have access to those 20 companies in a meaningful way. So those firms themselves drive the vast majority of the entire industry's returns year after year. There's quite a lot of persistence in that group of firms. So it's a universe of thousands and thousands of managers. But when you distill it down, there's only a couple people on the margin who are really generating outperformance. And I think about outperformance a little bit differently. Like, you know, 5, 6, 7%. That's not interesting to me, nor should it be interesting to any LP that's listening to this podcast. They're thinking about, I have to sell the S&P 500 every single time I make a venture investment, right? The S&P 500. Today, like the 500 best companies ever built, these companies have experience Management, they're all audited, they're profitable, they're growing, they have huge moats. I've got to sell that group and invest in a manager that is going to build a portfolio of 10 or 20 startup companies. Like, how hard is that to do? Well, only a few people can do it, every single vintage. And that's why this industry is so skewed.
- [02:29]
A
So what does an LP do in that case?
- [02:31]
B
Well, they have to evaluate managers based upon criteria and they have to bet with conviction. The same thing that venture managers do. You know, I think there are really two businesses inside of venture today. And venture's changed a lot over the past 25 years since I started in the business. But today there's two, I'll call one business, the access business, which is basically taking the Russell 2000 and converting that into the private market. Okay. And these are companies that are 1, 2, $3 billion and up valuation businesses. They're really hard to get access to. Those companies, particularly the best ones that are growing at 100% a year because they're going to end up in the s and P500 someday. That's one business. It is scalable. It's super interesting. It's relatively new. And then there's the craft business of venture, which is the QSBS seed business. It is unsexy, it is very hard. And it's actually what I want to talk to you about today because I think it's the most interesting part of the entire venture business.
- [03:28]
A
So let's talk about that. So the seed business, what you call the craft business, although some people now have half a billion billion dollar seed funds. But regardless, talk to me about the art of seed investing. And presumably that's also not an asset class.
- [03:41]
B
It's not because it's not scalable. Right. So I think to be an asset class, you have to be able to deploy billions of dollars a year against something. And that business is just tens of billions a year, hundreds of billions a year. It just doesn't absorb that much capital. What's interesting about the seed business, and I'll think about seed as kind of within the confines of QSBS, which for your audience, you know, companies with $75 million or less of assets post investment. Right. First off, you've got structural alpha in that business. It's triple tax free. No state, no fed, no local, except for California, which has its own special.
- [04:19]
A
And New York is trying to.
- [04:20]
B
Trying, but it got thrown out thankfully. So you already start with this massive tax advantage. Second, if you can Pick well and you can provide value to those founders. You can make money on these investments. But it's really hard to do and you gotta. I've been doing it for 25 years. I didn't even know if I was good at it for at least a decade. Because you have to have so many shots on goal. You've got to live with these founders. You got to go through cycles. You're investing in companies today that you won't exit like until 2036. And how much the world's going to change in the next two years. Think about how much can change the next 10 years. So when you make these bets, you got to kind of figure out where the market's going to be, what your freedom to operate is. It's just a very tricky and challenging and I think really interesting place to play.
- [05:01]
A
I want to go back to 25 years ago when you first started Greycroft in 2001. First of all, talk about timing, but what was venture like back in the 2000s?
- [05:10]
B
So I started Greycroft in 06, in 01. I had graduated from MIT and I got my first venture job at a firm called Boston Millennia Partners in Boston through on campus recruiting in 2001. The party was over, but people didn't know it yet. So I recall the winter of 01 up in Boston we went to this huge holiday party. I'm trying to remember what the venue was, but it reminded me in hindsight of the scene out of Hogwarts where they all descend upon the Great hall and have dinner and there were banners and venture firms were flying their flag and you had all you can eat sushi. And that was the last of the great holiday parties in Boston because the
- [05:51]
A
market, market of course that was the first thing that.
- [05:53]
B
Yeah, the first thing that goes away is the multimillion dollar holiday party. So what happened in in 01? Couple things. The venture world thrives on large companies buying software from small companies. Right. It's an ecosystem. If you can't get, you know, your first 10 customers, you can't get your next 10 customers. And you never get fired for buying IBM back then at least. And so what happened where the big companies stopped buying from small companies because they were worried that the small companies were going to go out of business. And then that just accelerated the rate at which the small companies went.
- [06:25]
A
It became self fulfilling.
- [06:26]
B
It did two. All of the public companies of that era, they all traded way down. So all of these firms that had unrealized gains and weren't able to sell yet in the public market, their fund performance went way down. Most people allocated way too fast. And as a result, you know, fundraising dried up. Firms persisted on for some time. Most were not able to raise a follow on fund. I went to business school, that's the short story there. But after 36 months, it was brutal. I mean, we would take all of these meetings with founders and most of these companies just couldn't raise capital.
- [07:02]
A
And you came back from business school and you decided to double down, go
- [07:05]
B
back to venture again.
- [07:06]
A
Why?
- [07:08]
B
I went to business school to start a company and Columbia had this thing called the Lang Fund, which was attached to a greenhouse program. And I started this business, Strong Data, which was an encryption business. And I came out of school fundraising for that business. I said, I'm not going to go work somewhere, I want to be a founder. And when I was out fundraising, I met a venture capitalist named Alan Patricoff. And Alan is unbelievable. He was unbelievable then, he's unbelievable today, but he was, I think 72 when I met him. He had built a firm called Apax, Apax, which stands for Alan Patricoff Associates, Cross Border. And he retired. And then he decided to get back into venture again. And I had an opportunity to learn from Alan. I said, well, this is like a once in a lifetime thing. Alan's contemporaries are the founders of Sequoia, the founders of Greylock, the founders of Kleiner Perkins legendary venture firms. And he grew up with these people. He was on the board of Apple, he was on the board of aol. So on my second day of work, he called Steve Jobs because his ipod wasn't working. He was like an unbelievable person to learn from.
- [08:28]
A
Do you think the skill set of venture capital, is it a skill set or is it something like a founder that gets reinvented every five to 10 years?
- [08:39]
B
So I think all VCs live in a paradigm where there is a builder Persona and an investor Persona. And if we were more builder, we would be running a startup company. And if we were more investor, we would be running a hedge fund. But we're all somewhere in between. And where you sit in that paradigm ultimately determines what stage of investing you will gravitate towards. So if you want to do late stage, pre IPO investing, you are far more of an investor Persona. If you want to do pre seed and seed, you're far more of a builder Persona. And I think if you're in that builder Persona, you do have to reinvent yourself every three to five years because the stuff that you're interested in and focused on today is not going to be investable 36 months from now. It's going to be too old. The qualities that make somebody a good, let's say you're 80% builder, 20% investor, for the sake of argument, to be in that kind of, of very early stage bucket, I think you just have to be motivated because you're naturally curious about the way the world works. And I think that characteristic shines in the best people who are very early stage investors.
- [09:49]
A
And today you have AI native founders. Everybody's waiting for this one person unicorn. There's been reported at least several companies that accomplished that. Are founders looking for something fundamentally different today than they were even two years ago? Or is it still the same mentor and partner and that has capital?
- [10:06]
B
Founders are becoming far more educated about what they get, and I think that's a good thing. One of my friends runs a big brand consultancy and she said to me, look, Ian, if you think of the world as a two by two matrix, everything that's known and unknown, good and bad, the Internet's so good at taking the bad unknown and making it known. And so if you're a founder today and you want to learn a lot about Ian Sigolow, you can go learn a lot about Ian Sigolow. Like you can listen to this podcast, but you can go out and research me. That was not available to people 10 years ago.
- [10:42]
A
Information asymmetry.
- [10:43]
B
Yeah. And I actually encourage everybody I work with, you should reference me because this is a harder relationship to get out of than a marriage once you pick me and I pick you and we decide to work together. So I think that information asymmetry is significantly narrowing and may even advantage the founders today versus the VCs. And I think that's a good thing. And I think the best founders really do their homework.
- [11:11]
A
You operate in a market, you don't operate in a vacuum. You're competing against some of the top firms in the world, the Sequoias, the Andreessens, the benchmarks. How do you compete with them, given that sometimes you're writing $10 million checks?
- [11:22]
B
At the end of the day, when founders make a decision to work with a firm, they are making a decision to work with first a partner and then a firm. The way we compete is we go head to head with those firms on a partner by partner basis. You want to work with me, you want to work with my partner? Dana, you want to work with my partner? Marcy, Dylan, Pete, Mark. Sometimes you want to work with a principal because they've figured out A way to create a great bond with that CEO. Then the firm comes behind and you leverage the teamwork and the culture and the resources of the firm. But it is really a personal bond between the lead investor on one side and the founder on the other. We're in a talent business. The startups we invest in are in a talent business. And those founders have to have that sort of relationship with their lead investor. It is particularly important the earlier you go. So if you start at seed they, they really look at you like this person is going to be my partner for the next 10 years. Or almost like a co founder. If it's pre ipo, they're probably linking more about credentialing, maybe some additional resources you can bring to bear on helping them draft the S1. But that doesn't get you pricing power. At the pre IPO round, the seed round, you can get certain pricing power.
- [12:42]
A
That may be the case with the founder. They want the best thought partner, but they also have to think about how do you recruit, how do you get the early cost customers? We talked about the first 10 customers and how do you compete against the Sequoia where every engineer in the world wants to work for a Sequoia backed company.
- [12:58]
B
Our approach to this is highly customized for every company. There are three things that all companies need help with. One is recruiting. I generally don't recruit rank and file staff engineers. That's not where I spend my time. But if you're building kind of your first 10 person team or 20 person team, you should be able to count on your venture partner to help you recruit the VP and C level executives that are going to help you build that business. And the best VCs are expert at
- [13:27]
A
this and we that's the highest leverage,
- [13:29]
B
very high leverage because those people recruit your staff engineers to the extent you even need them in the age of AI anyway. Which is a second question. The second is you need design partners, proof of concept partners. We help you do that. So we will walk you into the C suite at Fortune 500 companies all the time and that enables you to close those pilot deals and it gets you your first customers, which of course gets you your first couple million of revenue, which gets you your next financing and then the third thing, and the third thing is a little bit flexible but we help you think about strategy, like how do you position the company, what's coming around the corner, how do you price this, what should be in the product and that is the creative part. And I think the best early stage investors are expert at that and tell
- [14:17]
A
me about your latest fund and what is your strategy.
- [14:20]
B
So the last funds we closed were partners 4 and Greycroft 7, an early stage fund and a growth fund. We raised a billion dollars, final close in 2023. That strategy spans the very first check, the couple million dollar pre seed all the way up to the pre IPO strategy. As I mentioned in the beginning, I think venture is this craft business and this access business. And I think that in order to compete in 2026 as well as 2023, you need to do both of those things really well. Because the access business credentials the firm and the craft business, we credential the startup. And there's a flywheel that exists around those two things.
- [15:04]
A
Kind of like an arbitrage.
- [15:06]
B
Kind of like an arbitrage. But you want to have a well branded firm and a well branded firm helps you get access to great companies and it helps great companies. I guess it makes it such that great companies want to approach you for their funding. To your point, you mentioned Sequoia unprompted. They're a well branded firm, they've been around for decades. We started the firm 20 years ago and to get from far left field into the infield was a real exercise in how to build a great venture brand. And venture brands, no matter what I say, a venture brand is created by what other people say about you. So you've got to go out so
- [15:41]
A
people stay behind your back exactly when
- [15:42]
B
you're not in the room. So that you only get through repetition and through a lot of cultural work.
- [15:49]
C
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- [17:36]
A
You've obviously evolved over 20 years. What's the process for evolving your firm, evolving your brand? And how do you make sure that you know exactly what people are saying behind your back?
- [17:45]
B
I don't think anybody knows exactly what people are saying behind their back. We go out every day and we do our very best and we hire people with a specific ethos. And that's where you start when you build a company, because you think about every employee as doing their day job, but also being a brand manager for the firm. This is something I learned over decades. But you have to be actively building the culture of your company. It's not something that just happens in a vacuum. So if people aren't a good cultural fit, we have to fire those people. We have to find new people, and you have to move quickly on those things.
- [18:22]
A
Perhaps a dumb question, but how do you build your culture?
- [18:24]
B
First off, every company should have a set of values.
- [18:28]
A
And, and these have to have inherent trade offs, of course.
- [18:33]
B
I'll give you one example.
- [18:33]
A
One of those values isn't make the best investments. That sounds good.
- [18:38]
B
That's an outcome. Yeah, that's an outcome. Raise the most money, make the best. Like these are outcomes.
- [18:44]
A
Find power loss.
- [18:45]
B
Exactly. Compound a little every single day and get incrementally better times a thousand. You know, like that sort of thing. But I'll you an example. One of our values is teamwork, okay? And you can go very fast alone, but you can go very far together. And they say also if you have children, you go neither fast nor far. But that's a side note. But you know, as you think about going far together, there are definite trade offs because some people want to operate as like a solo gp, so they wouldn't be a good fit for our culture. Because our culture, we have to share everything you're working on, what you're thinking about because we believe that the collective kind of hive mind of Greycroft leads to better decision making and a whole bunch of other good things.
- [19:31]
A
What's your philosophy around making decisions by consensus versus individual?
- [19:37]
B
I think conviction trumps consensus.
- [19:41]
A
So if one person is really keen on making investment but governance allows for that.
- [19:46]
B
Absolutely, if that person is a partner.
- [19:49]
A
You're known for incubating companies. How does that work within the structure of a large fund and what have you learned from this process?
- [19:58]
B
We really started this activity maybe 15 years ago and incubated is a strong word. They didn't work in my office. So it was like we were the first capital. Sometimes we brought the team together, sometimes it's our idea, sometimes it's somebody else's idea. Often we are the only money. And that was the case for a company like Hidden Road. Also the case for public.com, it was the case for branch insurance, handful of other businesses. Some work, some didn't work. The way we approach this first off is you have to structure these like a normal seed round so we don't look to get super economics. I want the things that we're germinating at Greycroft to be and look like independent startup companies in the future. Other people have to come into those companies, companies later and provide follow on capital. Second is you need real founder CEOs so not people that we go hire to do that job. These are people who you would feel fortunate to work for. And when you find those people, you're really betting on them to breathe life into this idea. Because ideas at the end of the day are free and cheap. It's the execution of that idea that really creates the value.
- [21:14]
A
When does it go from just a good idea to something that has tangible value?
- [21:18]
B
There's a moment where things start working in a company and it's kind of like a magical moment. It can take a long time, it can take a short time, but you know, we'll have a really good board meeting and the CEO will be bouncing. One of my CEOs called me, she was like over the moon excited about three things that happened in short succession. And you get this feeling like this is now an independent business. They don't need my help anymore, they'll get it, but they don't need my help because the flywheel is turning. They figured out how to package and sell a product to a company that's going to pay them a whole lot of money. And if they continue to execute, they will build a winner take all business in a category and you can See, kind of like the dominoes start moving. And it's fun to watch because there's like a point where you know a secret that no one else in the whole world knows. Except for the CEO of this company. Because we figured something out.
- [22:15]
C
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C
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- [25:05]
A
And how long does it take before the market realizes that it's good? What's that gap?
- [25:12]
B
It can be as short as a couple weeks and it can be as long as like six to 12 months. My very favorite. So Mike Lazaro, CEO of Buddy Media, his business started working in 09 and he canceled, I think he canceled two consecutive board meetings. He just said, guys, I'm sorry, but I need to be selling. And the numbers were stacking up. I'm like, he was closing a million a month and 2 million a month and 3 million. These were like ACVs booked per month.
- [25:49]
A
And you know when the AI numbers pre AI.
- [25:52]
B
Yes, yes. And you know, when the fish are jumping in the boat, you know you've got something.
- [25:57]
A
What changes in the AI era in terms of founders?
- [26:01]
B
What exactly are you looking for at the seed stage? Three things. First, I call it the Master of two domains. This is my new thesis, by the way, for seed investing. Master of two domains for me is product slash engineering excellence. You know, how to build software at the frontier. Combined with the second domain, which is you can sell me stuff.
- [26:26]
A
Same person.
- [26:26]
B
Same person. That's a really, really rare profile. I find a lot of people who can sell me stuff and I find a lot of people who can build software, but I don't find a ton of people who can do both.
- [26:37]
A
Why do you need it to be one person?
- [26:39]
B
Because the biggest companies are built by one person that can do both. Mark Zuckerberg, Elon Musk, Larry and Sergey both. Jeff Bezos like really big generational founders, Steve Jobs, they could do both.
- [26:53]
A
It kind of wraps up to what we were talking before. It may not be the medium company, but when you're looking for that power law, that exceptional company, that is one person, one person.
- [27:01]
B
So that's number one. And I work with a lot of first time founders, so I will take some risk on those two things. I generally don't take a lot of risk today on the technical product expertise. I will take some risk on the sales expertise because I feel like I can teach people that. So anyway, that's one of the three things. The second thing I look for is something I call an earned secret. And an earned secret means that if you figure something out about a market or a product that if you execute really well, it's going to turn into a winner take all business. Okay. And these are really scarce too. And when you hear them and when a founder like articulates their earned secret for me at least it's like, oh my God, that's an unbelievable observation about the way the world works. The third thing I look for is if you're successful, you can get this thing to a billion in revenue within 10 years. It's also really hard to do, but I think like a billion in 10 years. I raise a 10 year fund, it's got a couple one year extensions attached to it. That gives you a shot at being a public company. Those are the three things I look for.
- [28:07]
A
So you're going to have this focus on the solo founder. Is this just a founder that has both attributes? Are you really focused on solo entrepreneurs?
- [28:16]
B
I almost never fund one person companies. Part of being this master of two domains person is that you are already recruiting people because they want to follow you wherever you go. Right. So I will go and meet with the small number of people that constitute that early stage team. And you know, a people generally recruit other a people. When I find those people, I'm always impressed at the quality of the people they're able to get to come work for them, usually for free.
- [28:45]
A
Is a recruiting game fundamentally different. Now post AI and post these kind
- [28:51]
B
of crazy valuations, the executives who are in really high demand. So the n of one engineer product person, they are getting professional athletes compensation even in startups. No, they are getting professional athlete compensation at OpenAI at Microsoft and Amazon and you know, wherever else. And they are making a determination of leaving that job to go work at a startup.
- [29:17]
A
And what's the most compelling pitch to get somebody earning tens of millions of dollars to leave their position.
- [29:25]
B
Everybody is motivated by different things. So let's take somebody who's made 50 million bucks at Microsoft or Google wherever over the course of the last 10 to 20 years. They are already really post economic. Like they, they never really have to work again. They probably have anxiety about that, but they never really have to work again. The right profile of person who wants to leave that job at Google and take that startup job, they're very interested in learning at the frontier. They're very interested about the quality of the people they'll get to work with. They're very interested in moonshots, right? Like if this works, what can it become? Can I be employee 10 at the next Google? They start to think about their legacy at some point. Like what have I built? What's my name on? When I'm having those conversations with people, that's how I know that we've got them at least interested. And then they have to pick that company to work with and the founder. This is why having a founder who can sell is so important because the founder is the person that ultimately convinces that person to leave and take a very large cash pay cut in exchange for what could be life changing amount of equity. But you have to really build a big company for that math to pay out.
- [30:37]
A
The founder. Sales skill. Is it about truly believing in your product or is it about almost this pathological ability to sell?
- [30:46]
B
I think authenticity is really required to be a good salesperson. So if you don't believe in what you're selling, you're not going to fool people.
- [30:58]
A
Do you find that the ability to sell is really, is it just a confidence thing in that if you get somebody to really believe they're going to be a good salesperson or is there's actually skill there that goes beyond just having a lot of confidence?
- [31:15]
B
I think part of this is learning how to listen. The best sellers I know ask a lot of questions like cause paradoxically. Paradoxically. Yeah. It's like, well, before I tell you anything about what I'm doing, I want to know everything about you. Everything that I can't figure out in advance of that call. I want to know what you're looking for. I want to know how decisions are made. I want to know what your biggest pain points are. I want to know everything you will tell me. And then when it comes time for me to sell, I'm just connecting dots and teaching people how to do that. If you're really smart, I'm pretty sure I can teach anybody who's really smart how to do that. It doesn't come naturally to people. I grew up in a house. My dad was a trial lawyer. My mom was a child psychologist. I feel like I got it from both sides at the kitchen, dining room table. But, you know, you do learn how to listen, different forms of listening. If you're a trial lawyer versus you're a psychologist, but you learn how to listen. And I think that's just such an important skill set, both for founders and for investors.
- [32:21]
A
What's something that you've changed your mind on the last 12 to 24 months that dramatically changes how you go about being a vc?
- [32:29]
B
A founder said to me about, this was four weeks ago at a dinner. He said, ian. And this was a totally new way of thinking about AI. Everybody says that if my engineers become 5x or 10x more productive, I'll need fewer. He's like, I want to hire a lot more. I said, oh, tell me more. And he said, look, the thing that keeps my business from growing, if you think about my ideas as an iceberg, I have all of these underwater ideas and I bring them to my team and I'm always hearing back, we don't have time. We don't have capacity. It's too risky. And I think about this from the perspective of my business as a vc. I talk to my partners, we don't have time. It's too risky. All focus, need to focus. And if we are entering a paradigm where all humans are going to be 10 times more productive, I think I may hire more people because I think, like, the number of ideas that I have on a weekly basis, like, unlimited, so many cool things we can try to do. And the ROI in hiring those incremental people is going to be so much higher because they can do so much more work.
- [33:58]
A
Implicit in this idea of cost cutting and lowering engineer count is that you're maximizing on reducing costs instead of maximizing on profit, which is what
- [34:10]
B
growth. Right. I think people exist in a mindset that's way too constrained. What do you mean by that? I mean that, like, I can only grow this fast. I have to deal with the reality of my situation is whatever. I make the reality of my situation
- [34:26]
A
to be these arbitrary speed bumps.
- [34:29]
B
Arbitrary speed bumps. And I'll give you another example. I am asked all the time. I'm a dad. Other dads ask me which I recommend my kids study. Okay. It is the hardest question. It's the hardest question because depending on how old your kid is, their career path may be jobs that just don't exist today. In fact, Highly likely to be jobs that don't exist today. And how do you prepare people for an economy of the future that's going to look so different? And I mean, how long will it be before we have some sort of a space colony or asteroid mining or all of our data centers are in outer space, like whatever it is. And you need to understand all sorts of physics and math and biology that we haven't really thought about as a species in our history. I don't know what to tell people to study. You know, like, you gotta study something for a job that doesn't exist right now, but it will exist 10 years from now or 20 years from now. And the rate of change is increasing so fast on a day to day basis. It's just very hard to grapple with this.
- [35:34]
A
So what's the answer to that question?
- [35:36]
B
What I always default to is like, what are your kids good at and what do they really like to do? And push them to do things that they're really good at. Because mastery of stuff is always valuable.
- [35:48]
A
And it goes back to your framework, which is you want to be good at multiple domains.
- [35:51]
B
That's right.
- [35:52]
A
If you could learn two different skills, paradoxically, the more different they are from each other, the more valuable they are.
- [35:57]
B
That's right. And I think at the intersection of two domains is where all the great idea babies are formed. And the more variant those two things are, oftentimes the better and bigger the
- [36:06]
A
idea is you need to learn grit, perseverance.
- [36:10]
B
That too.
- [36:10]
A
How do you learn that as a kid?
- [36:12]
B
Be born in Ohio. I was born in Akron. You know, the Wright Brothers autobiography starts with some great quote around, like, if I had a wish for any young man today be two loving parents and the great fortune to be born in the state of Ohio. And I was born outside of Akron, raised outside of Akron, went to public school, same kids, K through 12. And it was an unbelievable experience. What you learn growing up in Ohio one is Ohio is. It's like a great. You have this great sense of like, what's going to work in America? Because if it works in Ohio, it kind of works everywhere. And it's true for commercials. Like my, my mall growing up used to pull us in and pay us 20 bucks, which was a lot of money in the 90s, to go watch commercials and rate them. And they knew if, like, if it passed the Ohio test, it would work in America also. Why politics are kind of important in Ohio too.
- [37:15]
A
Purple state.
- [37:16]
B
It's a purple state depending upon what your ambition is and what you're trying to achieve. Coming from an environment where you see kind of America and you understand where you stand and you understand what you have to accomplish to get to where you want to go, I found that to be really empowering. Going up there prepared me so well for what came afterwards. I had the very best chemistry teacher in high school. My public high school chemistry. It was unbelievable. And he wrote me this great letter of recommendation. I ended up getting into MIT in large part because of his recommendation. And it was a great setup. I think there were four kids from Ohio who went to MIT that year.
- [38:03]
A
You mentioned at Greycroft, you have so many ideas, you're starting to implement them. What are you most excited about as a firm?
- [38:10]
B
I think Venture is both an art and a science. And I like how AI is enabling us to implement the science part at accelerated speed and scale. So I'll give you a couple examples. There is a. There's a website called Archive A R X I V. I'm the first person to talk about Arxiv on this podcast, but it's owned by Cornell University. It's like the Wikipedia of computer science. And Arxiv gets on a weekly basis thousands of research papers from all over the world. And these are like 50100 page academic papers about transformer models and model distillation and the LORA adapter and all sorts of bits. A human cannot read Arxiv. Like you can read pages of it, but you can't read the whole thing. A machine can read the whole thing. So we partnered with Cornell year and a half ago and we started machine reading the entire corpus of Arxiv, including all of the new papers that come out every single week. And we built this research atlas today if we wanted to have it. I had to prepare for it. I didn't prepare for like an attention mechanism conversation or a harness conversation about what's going to happen with Claude code now that the code base is out. But if I want to be prepared for that, I can literally sit down and in like five hours I can read virtually everything there is to be known about, you know, all of this gradient free recursion, whatever it is. And then I could sit down with the founder. It's like I've read all of your research and I got five questions and like, oh my God, how did you read all of my research? Well, we just did. Anyway, I think that's super interesting because as you know, I'm constantly looking for kind of these frontier ideas. Second is you can start to track people who've been attributed and cited on these various papers. And those people like Noam, who was one of the inventors of the transformer, they end up building really big, important businesses like character AI. And then Google buys them, and then Noam ends up coming back to run the Gemini team. So you can see those people emerge in the academic literature, oftentimes years before they're leaving to start a company. And it's a great basis to start our hunt for kind of the next great founder.
- [40:35]
A
Oftentimes, these academics need the most help to business.
- [40:38]
B
They do.
- [40:39]
A
Learning the sales skills, those things that we discuss.
- [40:41]
B
Yep.
- [40:43]
A
Do you think AI is going to replace VCs?
- [40:47]
B
Well, if they get to AGI, which I think is a moving target and unlikely in the near term and probably unlikely in my career, if they get to AGI, then yes, because AGI technically should be able to do my job. Without AGI, I think there will still be room for specialists like us.
- [41:10]
A
I know you've listened to a lot of the podcasts. First of all, thank you. I've only asked this one other guest ever, Alex Hormozi. What questions do you have for me?
- [41:18]
B
Let's say you put yourself in the seat of a CIO today of a modest size endowment, 3 billion, 5 billion, whatever. And they say, perfect size, perfect size. And your board says to you,
- [41:34]
A
look,
- [41:34]
B
we have an alt target of 30% and we want it in a third of inventure. So you get to allocate a couple hundred million bucks to venture. What would you do?
- [41:44]
A
I think about this a lot. As you can imagine, venture is difficult. And also the CIO's job is difficult. There's two, two different difficult areas. One is if you ask 50 top CIOs of endowments, probably 90% of them would want more access to, quote, unquote, top quartile ventures. Why? You alluded to it earlier. There's persistence. University of Chicago Professor Steve Kaplan previous guest Absolutely.
- [42:14]
B
Yeah.
- [42:14]
A
52% of top quartile founds stay top quartile. It's more persistent than any other asset class, any other large asset class. So one is you want to access top quartile, but it's difficult, if not impossible, if you're not already in top quartile. So then the intuition for a lot of them is, well, what do I do? Do I do second quartile, which some of them implicitly or explicitly make a decision to go into second quartile. The problem, I think, with second quartile venture is the returns are very similar to what you would get in lower middle market, but without the volatility.
- [42:48]
B
Yeah, it's a bad Sharpe.
- [42:49]
A
It's a bad Sharpe ratio. And then you could go the emerging manager route, which is the third intuition. And the issue with emerging managers is several fold. One is it's difficult to build a business where they're investing in emerging managers. There's literally thousands of them. So it takes a large team and every LP that I've ever met. So one, consistency is everybody's understaffed. Two is, and perhaps this is one of the dirty secrets in venture capital. There's no data set that I'm aware of that shows that on average emerging managers outperform.
- [43:23]
B
No, they underperform.
- [43:24]
A
They underperform. So then you have this whole issue of if I don't know who the very top emerging managers are, AKA if I don't build out an entire team to manage them, how do I access them? Of course you could use a fund of fund, but that comes with its own issues. So more questions than answers. But that's how the CIOs look at it. On top of that, there's principal agent issues, specifically in venture, or more pronounced in venture than any other asset class. Why is that? Because of what we talked about in the beginning. If the VC doesn't know until year 10 whether he or she is good, the LP doesn't know at least till year 10, probably longer. There's probably some lag between when the VC realizes holy crap, I got into the wrong career.
- [44:05]
B
Yeah.
- [44:05]
A
So there's this whole issue of by the time that the CIO is credited with the decision, he or she is most likely in another seat. The average CIO tenure in pension funds is six years. I think the fool's errand is trying to wait in line to the access constraint managers. I think that's very time consuming and extremely difficult. Unless you're maybe a Yale or Harvard or that type of elite.
- [44:30]
B
Aren't you already in those managers? If you're a Yale and a Harvard?
- [44:33]
A
Anyway, there are some top LPs that for whatever reason have not built out their venture books. There's not that many, but there are. And they're just top, top LPs. But to your point, most of the reasons why they became elite CIOs and elite LPs is because they were inventured, because they did the Swenson model.
- [44:49]
B
So what do you do?
- [44:52]
A
There's a question of what do you do and what is done.
- [44:54]
B
I want to know what you would do.
- [44:56]
A
What I would do is I would try to find alpha in emerging managers in some emerging managers. And then I would also try to find access to co invest alongside the top deals as well. Well, thank you Ian for jumping on and sharing your wisdom and looking forward to doing this again soon.
- [45:15]
B
Thank you very much.