← Uncapped with Jack Altman
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- [00:00]
A
I don't know the last time we've heard a founder pitching a traditional software business. Now, part of that is the meme that everyone's just everything's an AI company now. Everyone puts AI in their deck. I think the issue, as we all know, is if you can vibe code an app in a matter of minutes, and why do you need so many engineers? What's the value of the workflows that you've built? But what we're seeing on the application layer is people are going after systems of intelligence, they're going after systems of action. It's new types of spend, and we're going to continue to back those.
- [00:26]
B
All right, I'm really excited to be here with Kevin and Bennett from Astar. You guys, thanks for doing this with me. Thanks.
- [00:30]
A
Thanks for having us.
- [00:31]
C
Thank you.
- [00:31]
B
I want to start with just the quick history on a star, how the firm came to be, how you guys are working together. And then I want to kind of go into seed investing. But can you give us sort of like the quick backstory on aar?
- [00:41]
C
Well, we first met through ramp, and that was at. At the seed stage. Eric and the team were out raising, and I participated as an angel. This is pre aar, and Bennett was at cotu, and that's where we first interacted.
- [00:58]
A
And we started AAR five years ago now with our third partner, Gotham. And the idea was to build a new kind of venture capital firm that could focus on partnership with founders at the earliest stages and work closely with them as they continue to grow and mature. Five years in now, we just closed our third fund. We're at a billion of aum, and the idea is to, you know, bring something different to the early stage market.
- [01:17]
B
So a year ago, I started this podcast basically a year ago, and one of my first guests was Josh Koppelman, that was. And obviously, you know, founder of first round, amazing seed stage firm. One of the things he was talking about was the venture arrogance score that really stuck. And basically what he was saying was, you know, bigger funds are super arrogant to think that they can have big returns, directionally speaking, because, you know, you own X percent of a company, how big can the companies be? What returns are you getting? And so on. That argument really resonated. It's funny now to me, looking back, you know, 10, 11 months later, whatever, whatever it is, like, a lot has kind of happened. There are more of these, like, five to $15 billion funds than ever. The rounds are more expensive than ever. There's these like three plus huge looming IPOs which kind of gives credence to the big fund. You know, some of these big funds are doing really well actually. So anyway, there's this whole situation, I'd be curious, your guys take on sort of like the landscape and being a smallish seed focused firm relative to sort of, you know, this market moment.
- [02:12]
C
Well look, you always have to play the hand you're dealt and we live in this world of giants. Yes, it's true about anthropic SpaceX and OpenAI and these massive returning large capital necessity companies, but at the same time, you know, big funds, you know the thing that is right is big funds, big fees for those partnerships and you know, we stayed small so we can be agile. It's kind of like the equivalent of when you're the CEO of a new startup and you don't take a salary.
- [02:44]
B
Do you think if the fees were like instead of 2 and 20, if it was like capped and it couldn't go past a certain amount, like let's say like after a billion, there were no more Fees, you think VCs would behave way differently?
- [02:55]
C
Absolutely, without a doubt. I've, I've seen funds go from small to large in the behavior absolutely change. No names, no name drops here, but it, the incentives happens that way. And then you know, there's so much in this really exciting upswing of the market. LPs want to get in and they're not going to be, they're not able to negotiate those fees down.
- [03:19]
A
If you think about it, fees haven't changed as the asset classes change. Look at long only oriented funds in the public markets. They charge 1%, they charge 10%. Carryover a hurdle.
- [03:29]
C
Yeah.
- [03:30]
A
At this point these growth funds that are raising 5, 6, 7, 8, $9 billion, they're investing in would have been public companies a decade ago. And they're essentially indexing the asset class. Why should you make 2 and 20 for that? We built a star to be aligned with founders, which is that we want to partner early, we want to take risks, we want to work hand in hand with them. Yeah, it's a different craft. But our incentives are aligned. We only win as they win.
- [03:51]
B
Right.
- [03:51]
A
Which is different than I think the prevailing view is of the bigger firms.
- [03:55]
B
Yeah, I mean you do need to do well enough as a big firm. Like you need to like cross some threshold that you can like keep raising your funds.
- [04:02]
A
Yes.
- [04:02]
B
But you think about like a 5 or $10 billion fund and you think about them playing at seed. You know, I was joking with you before we started that like you know, your guys fund is like 450 or whatever. And you know, some of these funds, if they raised 8.3 versus 8.8, like none of us would kind of clock it, but that's like a whole extra A star and then they can use that going into seed rounds and their incentives there are different. So I'm curious like you know, well maybe could you walk out like what is their strategy? Like what is a $10 billion fund doing at seed and why are they doing it?
- [04:31]
C
I like any unit of measurement that is an A star, you know, unit of measurement maybe adopted as a practice.
- [04:37]
B
We should all talk about A stars going forward.
- [04:39]
A
I think there's two facets we used to joke at code to. There was like two ways to make a billion dollars and the one way was like the benchmark way. Like you find incredible series A, you, you partner, you have a generational public outcome and you earn your percentage of the company. That's hard and takes a long time.
- [04:52]
C
Or you put the A star away
- [04:54]
A
or the A star away in addition. Or you put a billion dollars into a company and you double your money as it goes public in three years and that also earns you a billion dollars to distribute. Carry one is a lot easier than the other and one are you more repeatable. So I think incentives have shifted in a way that reflects the market reality. Seed specifically. And we see this with a lot of our sort of friends at multi stage firms. It's option value when we build a basket of companies, certain amount of ownership and see what pops. And if it pops, I could double and triple and quadruple down. I don't think founders want to be thought of as an option as part of a basket.
- [05:27]
B
I obviously want to believe that too. But can I give you sort of like the counter there and I'm curious how you sort of manage it in the market. The counter is basically look, I also don't want to be thought of as an option. But 10 at 100 sounds a lot better than 3 at 30. And I have 7 million extra dollars to go hire a team, run my experiments, like see where I'm at. And that is kind of like the discrepancy that's been created. So like how do you navigate that as a seed specialist?
- [05:52]
C
You know we're a boutique firm so we, we can't be everywhere and we can't cover every scenario and we find enough founders that are looking for a great partner to, to work with and to go through this battle. And we've been through it before. I've been involved in founding a couple companies from inception all the way through IPO and beyond. You know, we, I guess, can't win them all. Yeah. I would also say that, you know, the challenge of this era, and maybe I'm biased by this, is just that, you know, the amount of capital out in the market does mean that you don't have as much kind of help and oversight. And I've seen more mistakes being rookie, mistakes being made in this environment that just shouldn't have happened.
- [06:38]
B
It's funny, there's like a class of thing that is very hard to sell in a fundraising process that are, you know, in the quadrant of like, true, false and like, easy to sell and hard to sell. There is this set of things like what you're talking about, like, help during the hard times, which I think is very hard. It's real. But it's very hard to communicate in a round process, in a market moment like this. I think when markets are hard, maybe that resonates more, but I think when markets are really frothy, like, you know, in many ways it is right now, it's just tough. So it just, it. It's an interesting time. I guess as a seed specialist, we've
- [07:10]
A
seen this before, though, in 2021, that was the era where Tiger was offering every software company the lowest dilution, highest valuation offer. Solo GPs were promising very little help, but they were hitting the highest price bids at Series A. Most of those companies and most of those outcomes did not.
- [07:25]
B
I mean, the pitch was, we'll be uninvolved. Like, it's like the sell was, we won't talk to you a hundred percent.
- [07:31]
A
And building a company is a marathon, not a sprint. I think a low dilution lead offer is relevant for founders. And we're. When we compete and when we win on deals, we're not trying to get a value deal. We are also offering what we think is like a low dilution competitive offer and support and partnership and things that founders, I think, should care about.
- [07:50]
B
You guys invest like, I know you start at seed, but you seed A and B. And so you're like very in tune with all of those market stages. What have you seen over the last six or 12 months in terms of how these rounds are happening in succession, where valuations are going, how dilution is happening across them? Like, what, what, what are the trends along those rounds?
- [08:10]
C
Well, I'd like to think that we're headed. We're not top ticking, we're not there yet, but we're Headed to the mother of all bubbles, you know, like a historic, you know, precedence. And you know, if you think of the 80s and the personal computer and what came out of that era, or the 90s and the Internet and the 2000s in mobile, well, AI and the platform and the boom that we're seeing right now is immensely exciting. We have such a global audience to reach and I think we're going to have a few years of this continuing to grow. But unfortunately, as in capitalism, it always ends badly. And I don't mean end. I mean we all know that after 2000, Amazon and Google and so on came out of the Internet bubble and now they're multi trillion dollar companies, Netflix and PayPal and so on. It's an exciting time. But yes, capitalism is like a pendulum. It's either too far one direction or too far the other.
- [09:08]
B
It's funny, on the bubble topic, I have a friend at a, at a growth stage firm and he and I kind of keep track of like all of the signs that we might be in a bubble. And it's things like how quickly are the rounds, you know, coming in rapid succession. Like what are sort of the, like degenerate gambling behaviors we're seeing from people in and out of venture. You know, what's happening with SPVs, like, and you kind of go through this list and you're like, a lot of the signs are there. The counter and you know, which is a strong counter is there's like a lot of extremely interesting companies and there's a lot of companies getting to 100 million of revenue with like happy customers and crazy new technology faster than ever. I'm guessing that you're probably feeling a mix of like, whoa, this looks like a bubble. But these companies look so interesting.
- [09:46]
A
I mean, look, we're optimists by nature. That's why we were venture capitalists. And I think like in any platform shift, you're going to have some incredible companies that come out of this vintage and in fact, they're probably going to be larger than anything we've ever seen. But you're also going to have a lot of companies that aren't going to go the distance. And I think we all see it in our portfolios. Who's building durable revenue streams, who's building moats around their business versus what the labs are offering. And if we're doing our jobs correctly, we're going to find these handful of companies that matter and that have relevance, but there's going to be carnage in their wake. And not every company is going to make it. And that's, I think, true in every prior cycle. I think the other thing I would say is what's changed since we started. Astar Seeds used to be 20 to 30 posts. They're now 40 to 50. A great Series A used to be 100 posts. Now they're happening at 250 Series B's used to happen with real traction. At a few hundred million dollars valuation, they're 500 million a billion. Everything has changed, particularly as large funds have gone earlier. And this will end absolutely fine for the best companies that will continue to grow and mature. But it will also be more challenging for founders that struggle to raise above their pref stack and don't go the distance.
- [10:47]
B
So you guys are investing at like the earliest stages where, like you're basically just looking at teams. I mean, there's like an idea, but there's probably not much of a product. The idea is probably squishy. And you've got this backdrop where you're like, this is both like the most exciting time ever. And it's kind of like a scary time in certain ways. As an investor. So what are like the founder attributes that you look for right now? And maybe if there's any contrast to what you looked at in like the pre AI cycle, I'd be interested in hearing that too.
- [11:12]
C
There's a curious movement around age, as in founders are getting younger. I guess they're not aging in reverse, but they're.
- [11:21]
B
No, it's wild.
- [11:22]
C
They're getting into.
- [11:22]
B
And you just look at it like a YC batch. Here's a ton of people in their teens.
- [11:25]
C
I bet they have great data on.
- [11:27]
B
On like it's going young.
- [11:29]
C
Yeah, for sure it's going young. And it's interesting because I see it as like in the, I guess in the 70s when late 70s when Steve Jobs founded Apple and Bill Gates founded Microsoft, they were 19 and. And then you kind of fast forward and there's some other examples along the way. Then you had Zuckerberg and then you really had this accelerate. You had Peter Thiel and Luke Nosek devise thiel fellows in 2010.
- [11:57]
B
That was very prescient, which has been incredibly successful.
- [12:00]
C
Yes. And it's a nonprofit, Fellows.
- [12:02]
B
It was unbelievable.
- [12:02]
C
Yeah, it was very prescient of what was coming. And that is like this lowering of the age and dropping out.
- [12:08]
B
But it wasn't quite like this right before AI.
- [12:11]
A
It was never like this before. I mean, there always were young founders building incredible businesses. But you and I have spoken about this. I Mean, in this paradigm shift, who cares if you know how to to build a SaaS product or sell a SaaS product or hire a traditional enterprise go to market team. This is new for everyone. We're all rewriting the rules as we build these companies in real time. And young founders are situated very well because they're the first adopters of this technology. So it's why you're seeing very large companies built by people under the age of 25 or 30 at an unprecedented rate. And for us in practice, that means more and more of our founders are skewing younger and younger.
- [12:44]
C
Just the other day I was speaking to a founder going over some documents and he said he would run things by his lawyer. And I said like, isn't your lawyer your mother? And he cut his sheepishly said he's a teenage founder. He's like, yes, she's a good lawyer by the way.
- [13:00]
B
Yeah, that's good. What else besides age? You know, we're talking about durability and the world is changing. What other attributes aside from just young founders have certain advantages?
- [13:09]
A
Now we generally map talent, not markets. I think to be a seed stage investor you have to be founder centric, but also you have to be recognize what's happening around do. The labs are not just infrastructure companies now. They are legitimate competitors at the application layer, which happens to be where most seed stage companies are building because that's where you raise a traditional round and you launch a business. And obviously there's Cogen, which is like the central battleground, but it's going to proliferate to every part of knowledge work in every part of the enterprise. We do try to think about where is there white space to build or where can you have enough of a Runway to finally build Differentiation. Yeah, nobody is differentiated seed. I think this whole idea is like, what makes this different. Why couldn't your competitor do this? Every seed stage company could obviously be disrupt disrupted or built by incumbent, but we need to figure out where there's at least enough white space, enough of a Runway you can start to achieve liftoff.
- [13:56]
B
When you say you map talent, what does that look like in practice? Like what is like a day look like? You know, is it just sort of reaching out to interesting people in certain networks? Are you tracking people that you've already known? Like, what does it actually tactically mean to map talent?
- [14:10]
C
You know, it's a lot like, you know, mining, you know, where you are in a vein of like golden. You've found, you know, an area, but that exhausts and you've got to find new talent in new areas. I don't know if that's a good analogy mining but you know, like things are, are constantly switching but you know, the founders are always the same. They're always, you know, those that have had to overcome some kind of obstacles and still achieve at a very young age and be able to recognize the signs, you know, in, in the talents. You know, we've gone through this big phase of IOI and all the coding competitions and things of that nature as a, you know, as a measurement for, you know, like teens that are achieving on that side.
- [14:57]
B
Yeah.
- [14:57]
C
So you're looking for, you know, these types of, you know, these types of attributes.
- [15:03]
B
But the reality, like Jane Street, I feel like has been like another good one. Recently there's been more interest from Exchange three people to be in startups and obviously it's a very talented group and
- [15:11]
A
this is in like some unique insight, but high quality people want to hang out with high quality people. So when you go to the top universities, when you go to the accelerator programs, when you go to companies, like the most talent dense nodes work very closely together. So as you start to work with founders in those nodes, you naturally meet their friends who go on to start great companies. I also think as you see people leave companies, you see certain patterns, certain companies breed better founders than others. Airbnb, Stripe, there's so many of these companies are magical businesses. They worked. And not to say there wasn't a hardship in the early days, but they took off, they really took off. So it doesn't necessarily breed as many founders that like run through walls to start companies. Palantir is an example. Everyone's a mini CEO. Everyone had to build and launch a product and find product market fit. It's why I think Palantir has the highest like per capita rate of unicorn founders of any company. And part of what we need to do is continue to find those areas where the next founders come out of.
- [15:59]
C
Yeah, I mean we love those Palantir founders. I mean they're like, you can't get enough, like they're so good, like whatever. Where they feed them over there, where they feed them over there is like really working.
- [16:08]
B
I also think probably with Palantir there's a certain non consensus mindset implied simply by wanting to work at Palantir. And at least that was true at a certain time. You know, now it's maybe become a bit more. But I think people who worked at Palantir and Anduril at a time before it was popular and you know, on the contrary even it was sort of something that you had to like defend and that takes a certain mindset that is like kind of related to being a founder.
- [16:31]
A
One thing we didn't talk about, there's a whole new crop of founders that never existed, at least in my time of doing venture. It's the researchers, it's folks that are leaving labs or PhD programs that are raising massive quantum which by the way
- [16:42]
B
used to be a big anti pattern of like researchers.
- [16:44]
C
You know, that's hard. You're totally right. Researchers tend to be to have high intellect. But academic, not commercial as commercial.
- [16:51]
B
But now obviously there's all these counter examples for like maybe the first time. I'm sure there were examples in the past but that's a whole new thing that people have to grapple with. It's very hard.
- [16:59]
C
It is. You know, I, I think that's where when you're spending time with the founder and getting to know them, if they can really articulate what they're doing, you know, you have to listen so carefully because every word like a great founder will have every word very much meaning, you know, have great meaning and an intention about what they're going to build.
- [17:20]
B
You're saying like there can be cues with the language someone's using of like where their heads at.
- [17:25]
C
Yes. And in how they prepare and how they're thinking about the business. And that is much. Sequoia had backed my previous two companies and they were always sticklers on, you know, your presentation, how you presented and how you showed up at the same time.
- [17:44]
B
Do you guys find that meeting founders in a round versus getting to know them before their fundraising is some huge difference? Do you have good examples of success with each? Do you prefer one over the other?
- [17:54]
A
So I think the Decagon team is a great example. I mean, you know, Kevin, why don't you talk about history with Ashwin? But I think the prior history informed how we thought about this company.
- [18:03]
C
I had been an angel in a company that Ashwin had founded called Helia. Russell Kaplan and Daniel Barrios were in that too. Russell's now the president of Cognition and Daniel's over at Meta. Yeah, but you know, that company didn't make it, but stayed close and was always a big fan of that trio. And when Ashwin went off to and met up with Jesse to start Decagon, it was kind of a no brainer to get involved in the seed round there.
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A
The funny thing about Decagon, there wasn't really an idea, you know, they had this insight.
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B
But you knew the team was great.
- [18:39]
A
We knew the team was great. We knew there was white space and building on top of the foundational models in a moment in time when no one had really commercialized different enterprise applications. And you had the history of the team to say wait a second, we understand why their prior companies were a modest success, but why one plus one equaled more than two in this situation. And that's an easier bet to take in some ways when you have that history. The flip side is, you know, there are founders we meet during, during a process where we, you know, we try and build as much of rapport and relationship as we can. We try and understand that as people. We try and understand the opportunity and those have worked for us well. But you. It's a shotgun marriage totally. And you need to move faster many times with less, especially in a market
- [19:17]
B
like right now that can you. Sometimes you meet them, you have three days or something like that or less three days.
- [19:21]
A
So you know, I would say at a. More than half of our seeds have been pseudo proprietary in nature. And that doesn't mean no other funds around it. That doesn't mean they're not meeting other things.
- [19:29]
B
It just means you didn't start cold during the process.
- [19:31]
A
Exactly. We maybe were first to reach out to them. We had some informed knowledge, we had a dinner with them in the past. There was some relationship of relevance and some insight we had going in around their, you know, who they were as a founder, what they wanted to do.
- [19:43]
B
Is it obvious to you off the cuff which half of your investments are better?
- [19:48]
A
Yes, the, the half that we had some prior relationship or somewhat proprietary have disproportionately generated returns though. We have, well, as with some of these shotgun marriages, but there's a, I would say higher volatility.
- [19:59]
B
One of the things that I think is sort of interesting in seed is there aren't that many firms that stick around seed for a long time and are very successful. You know, I gave the example of first round. You guys are obviously doing great. There's a couple others that have been around for long periods of time. But a lot of times people either leave seed or you know, they kind of stop doing what they're doing entirely or something else happens. Why is it that it's a less persistent sort of part of the market than multi stage in your guys view?
- [20:29]
C
Well, I mean seed is just incredibly hard. It's so challenging. It's investing in, you know, just people and no product and no, you know, hardly even a roadmap or anything else. And so you just have a great deal of uncertainty day in and day out and then compound that with the current environment where we've had, you know, the multi stages come in and want to get a toehold and in seed and so do you know, spray money in.
- [20:57]
B
When you say seed is hard, do you mean hard in the sense of high effort or hard in the sense of difficult to get a good result?
- [21:03]
A
Both. You work incredibly hard to build relationships with founders and earn the right to invest 2, 3, 4, $5 million in a company that by all odds will likely not work. Because most companies do not become billion dollar plus companies. And if it's not a billion dollar plus company, it has almost no relevance to the performance of your fund. It is genuinely hard to find these founders. It is genuinely a lot of work to convince them to partner with you and it's even more work afterwards to support them in building a company. So I think what you have is two facets of this. You have historically seed firms that have been successful, they maybe do not continue to adapt to the environment, they don't refresh their networks, they don't continue to be aggressive as new types of founders and new technologies emerge and they tend to fall by the wayside. And that's a crop of seed type funds and others that have been successful, that have found that one or two or three amazing companies are the years they grow up, they graduate, they raise opportunity funds and growth funds and what's left is a relatively small group of firms that still specialize at seed and look to work with the best founders and don't try and find value deals or diamonds in the rough, but compete to be the partner for the next generation of winners. And if you can't do that, seed is a bad asset class.
- [22:12]
C
Just to emphasize venture capitalists should be much better managers of people too. You know, the generational change, handing things off. You know, very, very few firms kind of make it, make it on from there. They usually like die with their original gp.
- [22:28]
B
What do you think is like the big source of difficulty in generational transition? Do you think it's finding talent? Is it older partners letting go? Like where do you think most people get it wrong?
- [22:36]
C
I mean my perception has always been finding talent, but I'm sure maybe older founders or older GPs are holding on a bit long, but it is. You've got to find that needle in the haystack out there of somebody that's going to be able to identify the next Google.
- [22:54]
B
It's also interesting because as Funds grow and you start, you guys could very easily make a lot of investments in your seed companies that are performing well and start putting huge amounts of capital behind them. And then one day you could wake up and your growth fund was bigger than your seed fund. And now the incentives are to make right by as many of your dollars as possible. I think that sort of explains where the focus goes.
- [23:15]
C
Are you inviting us into this to do Series A's now?
- [23:18]
B
100%. Okay, A, B, C, whatever.
- [23:20]
C
Do it all, do it all.
- [23:22]
A
I do think, and we're a little different than traditional seed fund. We do have a reserve heavy model. We do have more capital available for fall and seed. I think if all you're writing is the first check in seed, it's exceptionally hard to drive returns. I mean, for our best companies, we've piled in every single round. And out of a portfolio of 40 seed investments, we might have three, four, five companies that have the lion's share of our capital. It's concentration. But different than the way that a traditional growth fund would talk about it.
- [23:48]
B
Yes. You're saying seeds hit so infrequently that if you don't double down on the few that work, it's very hard to get good returns as a basket.
- [23:55]
A
I think that's absolutely true. And I don't think your fund is going to return the multiples. And we look at other of our peers who look at pro rata and say, what's peanut butter? Pro rata everywhere. You always want to support your founders. But as you look at the series A, the B, the C, the D, that those fall on, decisions are actually in many cases more important than your initial investment.
- [24:12]
B
Well, what's interesting is I would argue that, you know, from a basket of seeds, I would guess that most of the time it's actually very difficult to tell by the series A where you should be concentrating. But a lot of funds just do their pro rata in the next round and that's that. But that really looks kind of just like, you know, a peanut butter across all of it. I would think it's much easier to know where to put huge amounts of money, like a stage or two, even later than that.
- [24:33]
A
Agree.
- [24:34]
C
I think in our case we, we do agree to support our companies in the A.
- [24:40]
A
Yes.
- [24:40]
C
And so we'll always do the pro rata in that round.
- [24:43]
B
Yeah.
- [24:43]
C
And then watch. But you're right, like that inflection.
- [24:46]
B
But there's a different pool of concentration. Like let's say you had, you know, a fund that was $140 of it's going into initial seeds, and then there's 20 for those pro ratas. I would think for the last chunk. That's probably like a. I would. I would guess, done right. You're probably doing just, you know, 10% of the fund into a few companies, each kind of thing. Is it that concentrated or.
- [25:06]
C
You know, this is interesting because Brian, see, Ingerman is. Is creating this LP fund to find new managers to be able to concentrate and help them, like, go all in. And. And that's. I. You know, I think since 2005, that's what founders Fund kind of pioneered, was like breaking the old venture rules and putting this inordinate amount of money. Like when they sold all their Spotify off at a 9 billion valuation and rolled it into Airbnb.
- [25:33]
B
Right.
- [25:33]
C
That. That was pretty monumental, which is interesting
- [25:36]
B
because that's more of a trader mindset, which you don't normally see in venture, but I mean, Spotify did well, but I guess that was a good trade because Airbnb was at what, two or something like that?
- [25:44]
C
Yes, yes. Two and a half.
- [25:45]
B
Yeah, two and a half. So instead of getting a 5x, you got a 50x. Great.
- [25:48]
A
I think you need to know what great looks like to be successful. So for us, we have $450 million fund. More than 50% of the dollars come after seed. Most growth investors look at seed companies. They think they're like, completely uninteresting. It's a founder, it's a product, it's raw. Most seed investors look at growth companies and they say, these are all amazing. Oh, my God. They have product, market, market fit and revenue and scale. And the founder can actually string together two sentences. And that's historically why people create separate early and growth stage teams. I think to be really great as an early investor and to follow your founders as they mature, you need to know what great looks like at every level. And to your point, the series 8 may be a hard stage to do that. Obviously, you as a practice now are picking that stage too, but it should get easier over time. But as things become more consensus, as you know, they get more expensive, it's harder to buy of ownership. So it's always that pendulum on where you want to be on the risk curve.
- [26:35]
C
The other side is like when you do back the truck up and, you know, really go for it, you know, ensuring that it is the money round. Like I kind of think of in like 06 or 7, we used to sit on the floor and project SpaceX launches over like that were going off, you know they launched them in the, in the South Pacific somewhere and they would blow up every time and you know like that was the sucker's bet is to actually invest in those rounds as these things were blowing up. But as soon as you know they got one into orbit and that landed the contracts and that put forth the sequence of events then you know that's that next phase of putting money in. And then certainly Starlink was the big unlock more recently.
- [27:19]
B
I mean Founders Fund SpaceX concentration is extremely impressive to do it over and over into that company. I guess the key is you got to have a SpaceX in the portfolio that's worth concentrating into for 15 years but it's still pretty impressive to do it. A lot of people you know, wouldn't have the stomach for it. I'm curious about some of your guys opinions on AI. Obviously I know you spend most of your time trafficking in founders and talent but I also know you guys have strong opinions about the market and where it's going and I'd be curious to hear some of those. Bennett, maybe starting with you, we had, we had talked a little bit about like you know, roll ups and sort of buying businesses that are sort of, you know, older established companies and applying AI to them. Now you've you know, got a background doing growth as well so you kind of have some more familiarity with this. Like what, what's your view here?
- [28:01]
A
There are few things that are me worse than for incumbent businesses and the venture capitalists that are participating. These then work buying and transforming and dealing with the culture and the process changes. Like everyone thinks it's as easy as buying a business, deploying AI, improving free cash flow margins and earning a return. I mean private equity firms have been doing roll ups forever. It's incredibly, incredibly challenging to turn around an existing business. I think this is actually a great business for founders. It used to be that you have to raise capital. You had to buy an asset and you'd improve the asset and you would keep 20% of the profits. Now a founder can go and raise venture capital dollars dilute 20% so keep 80% of the profits and go buy a business. It is phenomenal for them. I think it's an exceptionally tough asset class that allows venture capitalists to raise lots of money. But I think it will be very hard to achieve real profits.
- [28:48]
B
Doing by the way on that point as the venture capitalist, don't you need the thing to appreciate a lot just to get back to even?
- [28:55]
A
Yes.
- [28:55]
B
If you gave somebody a Billion dollars. And then they went and they bought an asset for a billion dollars. And you only own 20% of that thing. Don't you now kind of have $200 million?
- [29:04]
A
So that's.
- [29:05]
B
Am I not thinking right?
- [29:06]
A
No, it's the ironic element of this is like the founder can't lose. The founder has literally bought into a business with embedded asset value that they now own a large percentage of. But unless these companies appreciate dramatically in value, the venture capitalist owns a relatively small percentage. Now people are doing convoluted structures where there's a Holdco and an opco and there's carry and there's waterfalls, but no one has actually proven a way that you can monetize this in any way that resembles ven venture like returns.
- [29:33]
B
Yeah.
- [29:33]
C
The other dimension of it, you know, in this like private venture capital, private equity play is simply that like venture capitalists are very good at watching the top line. Like they want things to like blast off and they're not so precise. And you know, this is all about the top line but the bottom line more importantly. And you know, venture capitalists don't pay as much attention to that, you know, with, with their companies. So I, it just doesn't feel like the, the right culture fit for this sort of stuff.
- [30:03]
B
Are there any forms of roll ups or structures that you are bullish on? Like when you look around the different types that are happening, is there any form where you're like, all right, if I had to buy one, that's the one I'd buy?
- [30:11]
A
I think there is something to be said for looking at his services oriented professions that have largely recurring, if not truly recurring revenue sources and looking at how you can replace people with technology. Because if AI has been very good at one thing, it's looking at traditional pockets of labor spend and automating. So I think there's a reason why, I think accounting roll ups are interesting for people. There's a reason why HOA roll ups are interesting for people. I think ITSM as well for that reason. It all deals with tickets and deflection and replacing call center people. That feels like a very interesting area. But I would argue 90% of the value created is gonna be buying the asset for the right multiple, which once again venture capitalists are historically very bad at.
- [30:51]
B
So you're not gonna be doing any roll ups.
- [30:52]
A
We will not be doing any rollups at a star.
- [30:53]
C
I mean the other side, there are always great teams where they're exceptional teams in using tech technology and bending spoons comes to mind as we just sold Eventbrite to bending spoons and that's an incredible operation of how they integrate all these assets and what they're doing in Milan is remarkable.
- [31:15]
B
What about within AI? What are you guys most excited about? Where are you anxious? Maybe to frame up a common meme right now that like software is extremely difficult because the labs are sort of just expanding and everything's being, you know, workflows are being replaced by agents and the workflows I need that are important the labs are going to own.
- [31:34]
C
And so, you know, we can't take that position. I mean we have to, you know, we want to back these independent companies and the labs like they need to, you know, they need to have a very audacious appetite and keep the growth up. But we'll still keep backing the application layer all around where we see the right barriers, the right teams and so on.
- [31:59]
A
And there's a distinction obviously between application layer AI companies and more traditional incumbent software. I don't know the last time we've heard a founder pitching a traditional software business. Now part of that is the meme that everyone's just an everything's an AI company now. Everyone puts AI in their deck. But I think systems of records are still very sticky for a reason. I think the issue as we all know is if you can vibe code app in a matter of minutes and why do you need so many engineers, what's the value of the workflows that you've built? But what we're seeing on the application layers, people are going after systems of intelligence, they're going after systems of action. It's new types of spend and we're going to continue to back those. I would say in terms of the public markets, I mean there is a reason software is having significant drawdowns but the best companies should be able to navigate this. Kevin mentioned early on that like we were investors in Ramp, I would say they are a great example of an incumbent pre chatgpt company that has now become an AI business and agents are driving top line and margins. The best teams are going to adapt. So I think you're fine if you're in an incumbent software business as long as you have a team that is going to re architect everything from the ground up.
- [33:02]
B
What about hardware and hard tech? I know you've, you know, been incubating a company that is sort of like software enabled hardware I think, and I assume you guys have been investing it, but how do you guys think about like non software, potentially even non AI, but at least sort of like hard tech hardware companies.
- [33:16]
C
It's again like we want to go where the talent is and we're being drawn to these, you know, various hardware companies for reason of, you know, there being, you know, really, really impressive people. It's happening kind of across the board. There's a revolution there. You know, we certainly don't want to get caught in the same traps that have been difficult for hardware in the past. But yeah, hardware gives you, you know, it puts you out in the real world like before in software, you know, we were like kind of trapped like a brain inside of a jar. And hardware and robotics and so on is an exciting new world for us.
- [33:56]
B
There is some good defense. If you have some like sensors and things out in the world, at least someone can't just come along and vibe code that.
- [34:02]
A
I think that's exactly true. I think we just haven't hit the ChatGPT moment for robotics. So I think, I mean, AI for the physical world should be as large, if not larger than what we've seen for the knowledge world. The challenge is right now we haven't seen as much of the commercial applications. We don't care receipt investors. We're backing robotics companies, we're backing companies working on sensors and edge AI. But we do think about a number of robotics companies have raised at huge valuations with very little commercial promise. So we think a lot of this is still to come.
- [34:27]
B
Are there types of companies that you are excited about but given your fund size, you just like can't engage in, you know, I'm thinking of like NEO labs or, you know, heavy robotics projects or things like that that don't, you know, start with it's five to $10 million seed round.
- [34:41]
C
You know, alas, those are tough to see and have them go by us. But with that said, we've been able to invest in a lot of scrappy verticalized robots. We're in a company, Watney Robotics. It's data center cabling. In robotics that is a very specific task. That's very high value and that differs from going after a full horizontal market
- [35:12]
A
or we backed a research team out of Stanford called Simway, which is focused on market research, which went on to raise 100 million after the seed round, but at the time only needed a little bit of money to prove out and commercialize their research. Those are the rare exceptions, as you know, right.
- [35:25]
B
The normal is they skip that little seed round.
- [35:27]
A
They skip the little seed round despite how hard we try to convince them of the value of it. And they raised 1050 $100 million. And by the way, that is where a lot of the multi stage dollars are going. Definitely seed. And that we can't really do those rounds.
- [35:39]
B
Yep, Makes sense. So you guys have this new fund now. Any change is coming for a star overall or it's just more of the same, Bigger, better, faster.
- [35:46]
A
I think it's more of the same. I mean, there's, as you notice, there's inflation, round size. There's a larger volume of founders that are flocking to start companies than ever. And I think we just need to be playing the game in the field. We need to be meeting founders where they are moving quickly and leading seed rounds. And hopefully we could be a bigger and better partner over time as our fund size has grown modestly. But we started a star with a $300 million fund five years ago. Our new fund is not that much larger. Like, I think we look to a lot of our peers who've stayed focused, who've become experts at their craft, and that's what we look to emulate and what we'll continue to do.
- [36:18]
C
And we can also, I mean, extend out. I mean, we've shown to be very patient and we're not just trying to put capital to work. And we kind of wait patiently for those right companies, even if it takes a little longer to deploy.
- [36:34]
B
And you guys are moving into this building, right?
- [36:36]
C
We are, we are.
- [36:37]
A
We want our founders to keep moving up the floor when they raise their future.
- [36:40]
B
You guys fund them, send them over here. It's beautiful.
- [36:42]
C
Yeah, we could put a fire pole.
- [36:44]
B
Like, I love that. I think we dig a little hole somewhere. I don't know if you're above or
- [36:47]
C
below, but we're of course below.
- [36:49]
B
Okay. Doesn't have to.
- [36:50]
C
It's a seed thing.
- [36:51]
B
Yeah, exactly. That's right. All right, well, thank you guys. This is super fun. I appreciate you both making time for it.
- [36:55]
C
Thank you.
- [36:55]
A
Thank you.