WEBVTT - Scott Kupor Discusses Technology Startups 0:00:02.279 --> 0:00:05.160 This week on the podcast, I have an extra special guest. 0:00:05.240 --> 0:00:08.480 His name is Scott Cooper, and he is the managing 0:00:08.520 --> 0:00:11.440 partner and Andres and Horowitz, one of the most storied 0:00:11.800 --> 0:00:16.320 venture capital farms in Silicon Valley. Uh, you know all 0:00:16.320 --> 0:00:18.480 the companies they have invested in. You're not gonna I'm 0:00:18.480 --> 0:00:21.079 not gonna give you a list here. Scott is an 0:00:21.160 --> 0:00:24.360 unusual guy because not only did he go Stanford undergrad 0:00:24.560 --> 0:00:30.600 and law school, so he has that legal um background. 0:00:31.000 --> 0:00:35.200 He understands the both the deal side, the finance side, 0:00:35.720 --> 0:00:38.680 and the tech side. He's really a triple threat, and 0:00:38.800 --> 0:00:45.080 he discusses the things that any entrepreneur or theoretically anybody 0:00:45.080 --> 0:00:46.880 who wants to be a limited partner in a venture 0:00:46.920 --> 0:00:50.919 capital firm should know. If you are all interested in 0:00:51.040 --> 0:00:55.600 technology startups VC funding, you're going to find this conversation 0:00:55.680 --> 0:00:59.440 to be absolutely delightful. So, with no further ado, my 0:00:59.640 --> 0:01:05.480 convert station with Andrews and Harrowitz is Scott Cooper. This 0:01:05.920 --> 0:01:10.000 is Masters in Business with Barry Ridholtz on Bloomberg Radio. 0:01:10.440 --> 0:01:14.360 My special guest today is Scott Cooper. He graduated from 0:01:14.400 --> 0:01:18.880 Stanford undergrad and law school. He was employee number one 0:01:19.480 --> 0:01:23.199 at Andrews and Horowitz, the famed venture capital firm where 0:01:23.200 --> 0:01:27.520 he is currently managing partner. The fund runs seven billion 0:01:27.560 --> 0:01:32.480 dollars and has been early investors in such startups as Facebook, 0:01:32.959 --> 0:01:40.640 Group on Twitter, Airbnb, Slack, Stripe, Skype, and many others. 0:01:40.720 --> 0:01:43.520 His new book is The Secrets of sand Hill Road. 0:01:44.000 --> 0:01:46.840 Scott Cooper, Welcome to Bloomberg. Thank you for having me. 0:01:47.240 --> 0:01:50.280 So I've been looking forward to having this conversation. You 0:01:50.360 --> 0:01:56.120 are the third um Andrewson Harowitz, veteran willing to uh 0:01:56.240 --> 0:02:00.520 suffer my sons and Arrows. Um. Well, it says that 0:02:00.560 --> 0:02:05.000 you're pretty hip. You get podcasts and you understand having 0:02:05.240 --> 0:02:09.000 people ask you interesting questions and coming up with interesting answers. 0:02:09.400 --> 0:02:14.120 So let's start with a little bit about your background professionally. 0:02:14.280 --> 0:02:16.919 You were kind of born right into the bubble. That's 0:02:16.919 --> 0:02:19.800 how you describe yourself in the book You lead the 0:02:19.880 --> 0:02:22.480 I p O for opswere and oh one, what was 0:02:22.520 --> 0:02:25.320 it like going public right in the middle of the collapse? 0:02:25.560 --> 0:02:27.839 It was? It was. It was an amazing, amazing time. 0:02:27.880 --> 0:02:30.400 So you're right. I was actually an investment banker before 0:02:30.400 --> 0:02:32.640 I went to opsware and by the way, ops wars 0:02:32.680 --> 0:02:34.520 actually it was loud Cloud at that time, which was 0:02:34.560 --> 0:02:37.440 the predecessor in two thousand one. So just a little background, 0:02:37.600 --> 0:02:42.520 loud Cloud was set up to be the original cloud 0:02:44.080 --> 0:02:48.720 earlier and then at a certain point that pivoted to you. 0:02:48.720 --> 0:02:53.639 You have developed your own software, operational software, and that's 0:02:54.120 --> 0:02:56.560 said that the other companies are gonna need this. So 0:02:56.919 --> 0:03:00.720 you took an in house technology similar to Amazon is 0:03:00.760 --> 0:03:04.639 doing with loud Cloud with uh a WS, and you 0:03:04.760 --> 0:03:07.280 spun it out as a separate, full, fully separate entity. 0:03:07.360 --> 0:03:10.760 That's exactly right. So Loudcloud started in so it was 0:03:10.800 --> 0:03:13.600 you know, as perfect perfect timing, right, We raised a 0:03:13.600 --> 0:03:15.880 ton of money, we hired a bunch of people, uh 0:03:15.919 --> 0:03:18.680 and then of course the market turned in a different direction. 0:03:18.800 --> 0:03:21.160 So we took it public in two thousand one, actually 0:03:21.200 --> 0:03:23.160 for the very honest reason, which was that was the 0:03:23.200 --> 0:03:25.680 best source of capital at the time. So there was 0:03:25.720 --> 0:03:28.880 no other, you know, viable source or attractive source of capital. 0:03:28.960 --> 0:03:30.799 And I think we were one of actually two I 0:03:30.880 --> 0:03:33.000 p o s that happened that year, you know, one, yeah, not, 0:03:33.160 --> 0:03:35.760 what was that five hundred and two thousand, So there 0:03:35.800 --> 0:03:38.400 was about seven hundred and fifty years so between the 0:03:38.440 --> 0:03:41.680 two years and then basically I think there were two 0:03:42.040 --> 0:03:44.200 in two thousand one US in a company called Storage 0:03:44.200 --> 0:03:45.760 Networks I think was the other one that went out 0:03:45.760 --> 0:03:50.240 that year. So eventually, um, the company gets bought by 0:03:50.600 --> 0:03:53.960 LTD Packer and what was that? So the people who 0:03:53.960 --> 0:03:57.720 are still there as employees, what was that transition? Like? 0:03:57.760 --> 0:03:59.520 What was your role? You're an attorney, what was your 0:03:59.600 --> 0:04:02.920 role in the acquisition? It was fun? So, um, my 0:04:03.040 --> 0:04:05.320 main role was actually to run the integration between the 0:04:05.360 --> 0:04:07.840 two companies. So we kind of had I had there 0:04:07.840 --> 0:04:09.320 was an executive on our side who was me, and 0:04:09.360 --> 0:04:11.640 then there was an executive on the HP side, And 0:04:11.720 --> 0:04:14.560 basically our job was, Okay, we're doing this deal. What 0:04:14.680 --> 0:04:16.680 is this gonna look like as a combined entity. You know, 0:04:16.680 --> 0:04:18.640 who's gonna have jobs in what places? How do we 0:04:18.680 --> 0:04:20.919 get everything from my T systems integrated? How do we 0:04:20.960 --> 0:04:22.840 talk to customers? And it was fun, It was actually 0:04:22.880 --> 0:04:25.120 really fun opportunity and uh, you know, it was just 0:04:25.160 --> 0:04:27.120 a different It was just different from anything I'd ever 0:04:27.160 --> 0:04:28.719 been through, right, So, you know, I'd always been in 0:04:28.720 --> 0:04:30.800 the startup community and then we go into this behemoth 0:04:31.240 --> 0:04:34.280 HP and you know, they've got these playbooks basically about 0:04:34.279 --> 0:04:36.560 how you do this integration. Uh, and you know what 0:04:36.560 --> 0:04:38.160 we tried to help them understand was like, all that 0:04:38.160 --> 0:04:40.520 stuff is important. The most important thing, though, is what 0:04:40.560 --> 0:04:42.720 are you going to tell the employees about who has jobs, 0:04:43.040 --> 0:04:44.880 what those jobs are going to be, you know, where 0:04:44.920 --> 0:04:46.560 they're gonna show up on day one to go to work. 0:04:46.600 --> 0:04:48.080 And so there was kind of a human element of 0:04:48.120 --> 0:04:50.400 it that was, you know, a little bit underserved in 0:04:50.400 --> 0:04:52.200 the HP side. Not was saying the fact that they 0:04:52.200 --> 0:04:54.480 were really good at the systems integration piece. So, but 0:04:54.520 --> 0:04:57.320 the assumption is the opsware employees who may have seen 0:04:57.440 --> 0:05:01.719 their jobs cut, they still have pretty nice stock options. 0:05:02.880 --> 0:05:06.400 So it wasn't okay, I'm I'm cut loose. Now I 0:05:06.440 --> 0:05:08.240 could go do my next gig. That's right. And for 0:05:08.279 --> 0:05:10.480 most people, most people had a job opportunity to go 0:05:10.520 --> 0:05:12.520 to HP because HP was really buying this as a 0:05:12.520 --> 0:05:15.040 growth opportunity. It wasn't like an acquisition where you know, 0:05:15.040 --> 0:05:16.800 they're like, look, let's just chop fifty percent of the 0:05:16.800 --> 0:05:19.720 people and and you know and create some cash. So 0:05:19.960 --> 0:05:21.800 most people, you know, maybe there were probably some people 0:05:21.800 --> 0:05:24.520 in like organizations like finance, where obviously it's hard sometimes 0:05:24.560 --> 0:05:27.599 to have roles they are duplicate between organizations, but anybody 0:05:27.600 --> 0:05:30.120 who was in a product or engineering or sales facing role, 0:05:30.360 --> 0:05:32.279 all those people had the opportunity to stay, and most 0:05:32.320 --> 0:05:35.120 of them did. So you come from a legal background, 0:05:35.240 --> 0:05:39.640 you're running operations at a technology company. How did the 0:05:39.680 --> 0:05:44.040 transition to venture capital come about? Was it just lucky coincidence? 0:05:44.080 --> 0:05:46.880 Who were working with two guys name Andres and Harowitz? Well, 0:05:46.880 --> 0:05:48.599 there were certainly there was certainly an element of that 0:05:48.640 --> 0:05:50.880 for sure. So I've been working, you know with these 0:05:50.880 --> 0:05:53.479 guys now for almost ten years when we started the firm, 0:05:53.480 --> 0:05:56.000 because this year actually will be my year working with 0:05:56.040 --> 0:05:58.240 them really, which is you know, it probably just makes 0:05:58.240 --> 0:05:59.880 me a glutton for punishment. I'm not quite sure what 0:06:00.040 --> 0:06:02.960 to make of that. I've been to your office and 0:06:03.000 --> 0:06:05.159 I have to say that looks like a fun place 0:06:05.160 --> 0:06:06.520 to work. It is a fun place to work. Yet 0:06:06.560 --> 0:06:08.279 now it's been a great place, and uh, you know, 0:06:08.279 --> 0:06:10.279 we've grown it from literally there were literally three of 0:06:10.320 --> 0:06:12.440 us when we started ten years ago. We've now got 0:06:12.480 --> 0:06:14.880 a hundred and seventy employees. So it's been a fun place. 0:06:14.880 --> 0:06:16.599 But yeah, look, I think the answer to your questions, yeah, 0:06:16.600 --> 0:06:18.640 it was a little bit of Mark and Ben and 0:06:18.640 --> 0:06:20.720 I had always just as I had career discussions with 0:06:20.760 --> 0:06:22.880 them when we were at loud Cloud Nos where I'd 0:06:22.880 --> 0:06:25.360 always said, Hey, looks doing something like this someday would 0:06:25.360 --> 0:06:27.279 be fun. I I didn't think about us starting a firm, 0:06:27.279 --> 0:06:28.760 but I said, Gee, that's a kind of business that 0:06:28.800 --> 0:06:31.240 I think could be fun. And what happened was after 0:06:31.240 --> 0:06:33.520 we sold the business, the two of them started doing 0:06:33.560 --> 0:06:35.479 angel investing with their own money. So they were just 0:06:35.520 --> 0:06:38.680 investing out of their own checkbooks, meanings they there's a 0:06:38.720 --> 0:06:41.599 windfall when the company is sold. They weren't billionaires, but 0:06:41.640 --> 0:06:44.520 they certainly made you know, tons of money. Yeah, they were. 0:06:45.520 --> 0:06:47.480 And so the idea of taking I'm gonna pull fifty 0:06:47.520 --> 0:06:51.320 million dollars aside and find you know, a hundred companies 0:06:51.360 --> 0:06:53.320 that could use half a million dollars each. Yeah, it 0:06:53.360 --> 0:06:55.440 was Actually it was even smaller than that though. It 0:06:55.480 --> 0:06:57.400 was literally they were running fifty thousand, excuse me, a 0:06:57.480 --> 0:07:00.040 hundred thousand dollar checks um. So it was very it 0:07:00.200 --> 0:07:02.320 was very kind of small stuff. And you would, by 0:07:02.320 --> 0:07:05.479 the way, you as a lawyer and an operations guy, 0:07:05.640 --> 0:07:07.600 I could see you looking at this and gnashing your 0:07:07.600 --> 0:07:11.160 teeth and saying, where the capital controls how is the structured? 0:07:11.600 --> 0:07:14.680 Where's the paperwork? Like? I barely know you and I 0:07:14.720 --> 0:07:17.520 could tell that set up made you crazy. I feel 0:07:17.520 --> 0:07:21.280 like you're unfairly typecasting me. But am I right? Uh? 0:07:21.840 --> 0:07:24.080 A little bit, a little bit. They did the truth 0:07:24.120 --> 0:07:25.880 be told. Look, they did the angel investing on their own, 0:07:25.920 --> 0:07:27.600 you know. I I kind of came into the picture 0:07:27.680 --> 0:07:29.480 later as we started talking about the fund in the 0:07:29.480 --> 0:07:32.680 firm itself. But you know, I inherited a lot of 0:07:32.680 --> 0:07:35.240 that paperwork. Of course, why did you write this book 0:07:35.760 --> 0:07:37.800 and who is it for? Yeah, so as we talked 0:07:37.800 --> 0:07:39.800 about I've been doing tech stuff for about twenty five 0:07:39.880 --> 0:07:42.080 years now, I was a banker. Actually we never got 0:07:42.120 --> 0:07:43.840 to that, but I was a bank stuff. Is that 0:07:43.880 --> 0:07:46.840 a technical time? Exactly? Tech things in the tech industry? Sorry, 0:07:46.840 --> 0:07:49.760 maybe I can I can be more eloquent mu um 0:07:49.840 --> 0:07:51.440 and uh. But you know, now, having been in this 0:07:51.480 --> 0:07:54.080 business for ten years, I continue to get a series 0:07:54.120 --> 0:07:56.960 of questions from entrepreneurs all the time, same question, Yeah, 0:07:56.960 --> 0:07:58.480 most of which I thought were answered, you know kind 0:07:58.480 --> 0:08:00.040 of you know, stuff like look should I even a 0:08:00.160 --> 0:08:02.400 venture capital? Like how does the how does the business work? 0:08:02.440 --> 0:08:04.120 And a lot of them have this undertone of you 0:08:04.160 --> 0:08:05.720 know to a certain set, how do I avoid getting 0:08:05.720 --> 0:08:07.440 screwed by the caps? I mean, I hate to say 0:08:07.440 --> 0:08:09.120 it that way, but that's kind of that's kind of 0:08:09.120 --> 0:08:11.120 the way it was, as you implying your breath or 0:08:11.120 --> 0:08:14.080 no rapacious out there is that? Is that the implication? No, 0:08:14.240 --> 0:08:17.040 I think the implication is there's just not a level 0:08:17.080 --> 0:08:19.600 playing field from an information perspective, right, So deformation a 0:08:19.760 --> 0:08:22.000 symmetry is a problem, that's right. So look, we'll do 0:08:22.120 --> 0:08:23.720 you know what, We've been doing this for ten years. 0:08:24.000 --> 0:08:26.000 You know, we've done thousands of deals, you know, and 0:08:26.160 --> 0:08:29.360 repeat entrepreneur maybe does this five, six, seven times over 0:08:29.400 --> 0:08:31.080 the course their life. And so there's just stuff that 0:08:31.120 --> 0:08:32.600 we know and we see because we see it an 0:08:32.640 --> 0:08:34.760 everyday basis. And so the purpose of the book in 0:08:34.800 --> 0:08:36.679 my mind was, look, if we could demystify that and 0:08:36.720 --> 0:08:39.600 hopefully level of playing field, then maybe it helps have 0:08:39.679 --> 0:08:42.000 a better relationship between entrepreneurs and vcs and and maybe 0:08:42.040 --> 0:08:44.320 it even helps people who wouldn't have otherwise thought about 0:08:44.400 --> 0:08:47.640 entrepreneurship coming to the business. Interesting, and I have to 0:08:47.679 --> 0:08:51.960 ask for the uninitiated, what is santill road. I've I've 0:08:52.000 --> 0:08:56.560 been there. I understand it as a concept. Yeah, the 0:08:56.600 --> 0:08:58.920 concept is the concept at a high level is like 0:08:59.000 --> 0:09:01.320 you know what Wall Street is to financial services or 0:09:01.360 --> 0:09:04.440 what you know Music Road is to Nashville country music. Right. Uh, 0:09:04.480 --> 0:09:07.720 it's basically it literally is a road. It is a street. Uh. 0:09:07.760 --> 0:09:10.800 It is very unexciting as you've probably seen what you've 0:09:10.840 --> 0:09:12.120 been there as a bunch of kind of you know, 0:09:12.200 --> 0:09:15.040 fairly drabbed two story buildings. You have a very nice 0:09:15.080 --> 0:09:18.640 waterfall that we do have that we are building, so 0:09:18.679 --> 0:09:20.559 we are lucky to have kind of water effect outside 0:09:20.559 --> 0:09:23.240 our building. But but you know, it just happens to 0:09:23.280 --> 0:09:25.240 be the locust where all the venture capitalists have have 0:09:25.679 --> 0:09:28.040 you know, established themselves. And I think it's really the 0:09:28.120 --> 0:09:29.960 really the answer for that is because of its proximity 0:09:29.960 --> 0:09:32.240 of Stanford. So the more important part of sand Hill 0:09:32.320 --> 0:09:34.439 Road is when you go down Sandhill Road east, you 0:09:34.480 --> 0:09:35.880 know about a mile and a half you end up 0:09:35.880 --> 0:09:37.920 on the Stanford campus. And it really does, I think 0:09:38.000 --> 0:09:41.120 illustrate the kind of tight connectedness that's always happened between 0:09:41.160 --> 0:09:43.840 Stanford and the venture in the startup communities. Right. You 0:09:43.880 --> 0:09:48.040 see it in Boston between M I T. And you 0:09:48.120 --> 0:09:49.760 got a kind of square and Cambridge the same kind 0:09:49.760 --> 0:09:52.520 of thing, right, A really interesting concept. So one of 0:09:52.559 --> 0:09:56.600 your chapters is titled the Art of the Pitch. Explain 0:09:56.679 --> 0:09:59.760 what that is? Yeah, so we see lots of pitches, 0:10:00.320 --> 0:10:04.719 as you can imagine, probably about two year Yeah, it's 0:10:04.720 --> 0:10:06.760 a lot. Yeah. So the art of the pitch is 0:10:06.800 --> 0:10:09.240 really about kind of making sure the pitch resonates, is 0:10:09.240 --> 0:10:11.079 going to resonate with the audience. And I think key 0:10:11.120 --> 0:10:13.679 to that is to understanding what is it that venture 0:10:13.679 --> 0:10:15.880 capitalists care about? What is it that they are incentive 0:10:15.880 --> 0:10:17.800 to do, and therefore, how are they going to evaluate you? 0:10:18.240 --> 0:10:20.000 And so I think the first thing to think about 0:10:20.200 --> 0:10:22.280 is the most important thing to think about in this 0:10:22.320 --> 0:10:25.080 business is we are wrong more often than they're we're right, 0:10:25.120 --> 0:10:27.280 which I know is a terrible thing to say. And 0:10:27.320 --> 0:10:29.960 if your kids came home and got you know, on 0:10:30.000 --> 0:10:32.320 their test, you'd be pretty unhappy. If you're doing that 0:10:32.360 --> 0:10:34.640 in venture capital, you're you're still in the game at least. 0:10:35.240 --> 0:10:38.079 And as as long as you bring up um that 0:10:38.120 --> 0:10:42.880 batting average, why does the hit miss ratio not matter 0:10:42.960 --> 0:10:46.360 as much in venture capital as it does elsewhere? Because 0:10:47.000 --> 0:10:49.040 if we do it right, then the reason doesn't matter 0:10:49.080 --> 0:10:51.480 is because ten to twenty percent of the companies. Hopefully 0:10:51.480 --> 0:10:54.800 if we do it right, you're gonna earn hundred times 0:10:54.840 --> 0:10:57.120 your money. And so basically think of it as you know, 0:10:57.160 --> 0:11:00.520 the the significant winners will basically make up for you know, 0:11:00.600 --> 0:11:02.520 kind of that fifty percent of things where you won't 0:11:02.559 --> 0:11:05.280 get your money back and then probably where you get 0:11:05.320 --> 0:11:06.840 a little bit of money back but not enough to 0:11:06.840 --> 0:11:09.080 make the math work. And so if you think about that, 0:11:09.120 --> 0:11:11.280 then what that means is, if I'm going to invest 0:11:11.320 --> 0:11:13.120 in a company today, I've got to at least believe 0:11:13.120 --> 0:11:14.679 it has a chance to be one of those ten 0:11:14.760 --> 0:11:17.640 or winners. Now, you know, we wish we were smart 0:11:17.720 --> 0:11:19.280 enough to know exactly which ones they were, and of 0:11:19.280 --> 0:11:22.080 course we were just invest in those companies, but we 0:11:22.120 --> 0:11:24.680 have to at least believe that the kind of the 0:11:24.720 --> 0:11:27.880 ground rules and the opportunity exists and if and so 0:11:28.000 --> 0:11:29.480 that really kind of leads into the art of the 0:11:29.520 --> 0:11:31.320 pitch about how to frame the pitch in that context. 0:11:31.400 --> 0:11:35.240 So from your perspective, what becomes more important to cast 0:11:35.280 --> 0:11:38.000 a wide net or to be able to do a 0:11:38.080 --> 0:11:41.320 deeper dive into a narrower niche where you feel like 0:11:41.320 --> 0:11:44.600 you have some expertise and some ability to separate the 0:11:44.679 --> 0:11:47.120 good from the great. Yeah, I think it's it's probably 0:11:47.200 --> 0:11:49.680 somewhere in between, which is, you've got to have some 0:11:50.000 --> 0:11:52.440 number of deals just because you're building a portfolio. So 0:11:52.520 --> 0:11:54.880 unless you think you're, you know, gonna bet that bat 0:11:54.920 --> 0:11:57.000 a much higher batting average, you can at least have 0:11:57.160 --> 0:12:00.080 needs some diversification. But that diversigation needs to be in 0:12:00.120 --> 0:12:01.960 domains that you understand. So the way we run our 0:12:02.000 --> 0:12:04.760 business is we've got vertical domains. So we've got kind 0:12:04.800 --> 0:12:09.000 of consumer enterprise, financial services, life sciences. We've got a 0:12:09.000 --> 0:12:11.120 bunch of domains, and we staff them with people who 0:12:11.160 --> 0:12:14.080 are super deep in those domains and so within those areas, 0:12:14.160 --> 0:12:16.440 you know they will go very deep. But then collectively, 0:12:16.480 --> 0:12:19.040 as part of a portfolio, you get the diversification associated 0:12:19.040 --> 0:12:22.640 with uh, you know, the multidimensions. So here's a data 0:12:22.720 --> 0:12:25.960 point from the book that blew my mind. Quote, venture 0:12:26.040 --> 0:12:30.160 capital is not an especially good investment. As of seventeen 0:12:30.960 --> 0:12:34.640 ten year returns pro vincial capital as an in the aggregate, 0:12:34.720 --> 0:12:37.680 not specific funds, but in the aggregate was a hundred 0:12:37.720 --> 0:12:41.120 and sixty basis points below the NASDAC. So for eight bucks, 0:12:41.120 --> 0:12:42.719 I could have gone out and bought the q q 0:12:42.920 --> 0:12:47.560 q s and outperformed the average event vcs. That's amazing. 0:12:47.600 --> 0:12:50.040 It is amazing, and it's it's a weird asset class 0:12:50.040 --> 0:12:53.120 in that regard, which is the variance between good performance 0:12:53.200 --> 0:12:55.439 and bad performance is really high, like sometimes as much 0:12:55.480 --> 0:12:58.600 as you know, almost thirty five four thousand basis points right, 0:12:58.800 --> 0:13:02.040 thirty five to forty return difference. And I think it's 0:13:02.040 --> 0:13:04.320 a function of the fact that most of this business 0:13:04.480 --> 0:13:07.679 is largely a zero sum game. In each round of financing. 0:13:07.679 --> 0:13:09.200 And what I mean by that is if we do 0:13:09.280 --> 0:13:11.120 the A round, which is kind of the first institution 0:13:11.120 --> 0:13:13.600 of around for a deal, generally, that means, you know, 0:13:13.720 --> 0:13:15.679 we're the only ones who do that. There might be 0:13:15.720 --> 0:13:18.040 some other people, but usually one venture firm will be 0:13:18.040 --> 0:13:21.600 the major, major investor there, and once that opportunity is done, 0:13:21.640 --> 0:13:24.679 there will never be another A round in Facebook, for example, right, 0:13:24.720 --> 0:13:27.120 so you know, Excel, who's you know, very good firm 0:13:27.280 --> 0:13:30.080 invest in the A round of Facebook. The next opportunity 0:13:30.120 --> 0:13:32.640 that somebody had to invest was that some multiple evaluations 0:13:32.640 --> 0:13:34.520 to hired in that. So those still turned out to 0:13:34.520 --> 0:13:37.040 be obviously very good investments. But there is this kind 0:13:37.040 --> 0:13:40.280 of nature that you know when a round happens. It 0:13:40.320 --> 0:13:43.079 often accrues to one individual or one firm, and then 0:13:43.160 --> 0:13:45.400 you know kind of things. You know, fundraise every eighteen 0:13:45.480 --> 0:13:47.600 or twenty four months, and so the next investor obviously 0:13:47.600 --> 0:13:49.280 always comes in at a higher price. So when I 0:13:49.360 --> 0:13:52.400 look at the world of stocks for mutual funds, it's 0:13:52.440 --> 0:13:56.240 a sort of Gaussian Bell curve distribution where you know 0:13:56.360 --> 0:13:59.319 the extremes on either and get rid of them, there's 0:13:59.320 --> 0:14:03.000 a big distribution in the middle. What you're describing doesn't 0:14:03.040 --> 0:14:04.920 sound like that, that's exactly right. So you know, the 0:14:05.040 --> 0:14:06.600 term that you may hear people use is kind of 0:14:06.640 --> 0:14:08.480 called a power lock cerve, right, And what a power 0:14:08.480 --> 0:14:11.000 lock cerve is is you've got a very small number 0:14:11.040 --> 0:14:13.400 of that headlong that's exactly right. You've got a few 0:14:13.400 --> 0:14:15.040 things that drive all the return that You've got this 0:14:15.080 --> 0:14:17.240 long tail of a bunch of stuff that quite frankly 0:14:17.240 --> 0:14:19.680 doesn't amount to much from a returns perspective. And we 0:14:19.760 --> 0:14:22.640 see the same thing in private equity and hedge funds 0:14:22.680 --> 0:14:24.280 as well. It is funny though, actually, you know, you 0:14:24.280 --> 0:14:26.240 mentioned kind of the public markets. It's actually interesting. There's 0:14:26.240 --> 0:14:27.600 been a bunch of studies though, have laid on the 0:14:27.640 --> 0:14:29.680 public markets, which is it turns out they actually are 0:14:29.760 --> 0:14:32.280 more power law than I think people understand. I think 0:14:32.320 --> 0:14:35.880 the number is four percent of stocks drive pretty much. 0:14:35.920 --> 0:14:39.480 I think that's exactly the returns out there. It's so 0:14:39.520 --> 0:14:42.200 good luck picking those four if you have a time machine, 0:14:42.200 --> 0:14:45.480 it's really exactly right. Yeah, let's talk a little bit 0:14:45.520 --> 0:14:50.200 about some of the changes that you've witnessed in the industry. 0:14:50.280 --> 0:14:53.040 In the book, you talk about why Combinator and why 0:14:53.120 --> 0:14:57.160 that was so influential and really changed the game for 0:14:57.800 --> 0:15:01.240 um the VC world. Explain into the lay person what 0:15:01.320 --> 0:15:05.440 why combinator is and why why did it matter so much? Yeah, So, 0:15:05.440 --> 0:15:08.160 why combinator is what we call an incubator, which means 0:15:08.200 --> 0:15:11.040 they basically kind of take usually a cohort of companies 0:15:11.080 --> 0:15:13.520 that can be anywhere from thirty fifty sometimes as big 0:15:13.520 --> 0:15:16.240 as a hundred companies, and they kind of they basically 0:15:16.280 --> 0:15:18.680 start their business inside of y combinator. They go that's 0:15:18.680 --> 0:15:21.120 where they go to the work. They work on a project, 0:15:21.200 --> 0:15:24.080 they build, they build a product, they get tutorials and 0:15:24.160 --> 0:15:26.000 kind of you know, kind of tutelage from other people, 0:15:26.160 --> 0:15:28.160 and then they kind of pop out the other end 0:15:28.160 --> 0:15:30.280 and hopefully they're ready to go raise you know, money 0:15:30.320 --> 0:15:31.800 as a result of that. So it's kind of, you know, 0:15:32.240 --> 0:15:34.320 almost a finishing school to a certain extent to kind 0:15:34.320 --> 0:15:36.600 of get this startups ready to kind of be into 0:15:36.600 --> 0:15:39.520 the regular financing world now. Now, and Reeson was an 0:15:39.560 --> 0:15:43.080 investor in White Combinator, or an investor in White Combinator's 0:15:43.160 --> 0:15:46.000 funds in White Commaters companies directly. Actually, so a couple 0:15:46.040 --> 0:15:47.880 of years ago when we first started kind of I 0:15:47.880 --> 0:15:50.400 think from two thousand ten to two thousand twelve, when 0:15:50.440 --> 0:15:52.960 companies would go into Y Combinator, they would get some money. 0:15:53.000 --> 0:15:54.560 We were one of a few firms that used to 0:15:54.560 --> 0:15:58.520 give them some money. So we would invest small amounts dollars, 0:15:58.880 --> 0:16:01.040 but in lots of out we just gotta we didn't 0:16:01.040 --> 0:16:02.760 have discretion at that point in time. It's like, look, 0:16:03.000 --> 0:16:05.080 everybody who comes in, you're entitled to take this money 0:16:05.120 --> 0:16:07.160 if you want it. And then obviously, look if we 0:16:07.240 --> 0:16:08.600 you know, if we really were interested in the company, 0:16:08.600 --> 0:16:10.320 we could put more money in later in a normal 0:16:10.360 --> 0:16:14.040 financing round. So so why did they change the entire 0:16:14.400 --> 0:16:17.240 what did that set of you mentioned earlier? There's an 0:16:17.240 --> 0:16:22.320 information asymmetry between the seasoned vcs and the young kids 0:16:22.400 --> 0:16:26.120 running these startups. How did this level the playing field? 0:16:26.160 --> 0:16:28.840 They just kind of learned the ropes. It's really interesting 0:16:28.840 --> 0:16:30.120 what happened. So I think the way to think about 0:16:30.200 --> 0:16:33.280 VC is the first thirty five forty years a VC 0:16:33.320 --> 0:16:35.640 called it kind of early nineteen seventies to about two 0:16:35.680 --> 0:16:38.240 thousand five, which is when YE kinda started. You know, 0:16:38.360 --> 0:16:41.520 you can think about it as capital was a scarce resource. 0:16:42.080 --> 0:16:44.200 The vcs had it, and there therefore, if you looked 0:16:44.200 --> 0:16:45.960 at the power dynamic, kind of the VC has had 0:16:45.960 --> 0:16:48.160 the power and the entrepreneur's had less. With the gatekeeper 0:16:48.200 --> 0:16:51.080 if the money, you had to go to Sandhill Road 0:16:51.080 --> 0:16:52.760 and you had to go get the money, right, And 0:16:52.880 --> 0:16:55.600 two big things happened. One is y C, which will 0:16:55.640 --> 0:16:58.040 come back. Sorry, that's short for Ye Combinator. Uh. And 0:16:58.080 --> 0:17:00.440 then the second is the amount of money that it 0:17:00.520 --> 0:17:03.800 required to start a business continue to fall pretty precipitously, 0:17:03.840 --> 0:17:05.840 starting in kind of late nineties, and you know, still 0:17:05.840 --> 0:17:09.680 continuing to today. Right. So, so fiber optics, cloud all 0:17:09.680 --> 0:17:13.080 that stuff meant with storage, you didn't need a whole 0:17:13.080 --> 0:17:15.560 team and a joint server farm. You needed two guys 0:17:15.560 --> 0:17:17.440 in a laptop pretty much. And you can go to 0:17:17.680 --> 0:17:19.360 now you can go to Amazon Web Services, of course, 0:17:19.400 --> 0:17:21.000 and get stuff that used to cost you five or 0:17:21.040 --> 0:17:23.359 ten million dollars of capital expenditures years ago. I mean 0:17:23.400 --> 0:17:25.480 when we were in Loudcloud. That's basically what we did. 0:17:25.480 --> 0:17:28.080 We raised money from the venture capitalists and we basically 0:17:28.119 --> 0:17:30.840 then handed it over to companies that nobody remembers any more. 0:17:30.880 --> 0:17:34.399 Sun Microsystems, we misovers from you know, Oracle Databases. Uh, 0:17:34.480 --> 0:17:36.119 you know all that stuff. Now you basically get in 0:17:36.160 --> 0:17:39.160 a box on demand from Amazon for you know, ten 0:17:39.160 --> 0:17:42.919 dollars like yig or whatever the price. So what happened 0:17:42.960 --> 0:17:45.320 was right, that started to happen, which meant you could 0:17:45.359 --> 0:17:47.800 now start companies for a lot less money. And therefore 0:17:47.960 --> 0:17:49.800 a lot of these seed firms that we're now seeing 0:17:49.880 --> 0:17:51.720 kind of came into the mix. So we've seen a 0:17:51.760 --> 0:17:54.320 lot of new seeds. In fact, something like five hundred 0:17:54.320 --> 0:17:56.160 new firms over the last ten years have come into 0:17:56.160 --> 0:18:00.359 the seed market as companies seating startups exactly right, Yes, 0:18:00.400 --> 0:18:02.600 so kind of firms like US firms like Entries and Horrowits, 0:18:02.600 --> 0:18:04.280 but just kind of smaller versions of it. Right, So 0:18:04.320 --> 0:18:07.160 a hundred million dollar funds instead of seven hundred billion 0:18:07.240 --> 0:18:10.040 dollar funds. So you have kind of that phenomenon, right, 0:18:10.080 --> 0:18:12.520 which is the amount of capital goes down. And then 0:18:12.560 --> 0:18:14.880 you have the second phenomenon, which is why Combinator comes 0:18:14.880 --> 0:18:17.560 along and says, hey, we're gonna try to actually really 0:18:17.680 --> 0:18:20.480 quite frankly educate a lot of entrepreneurs about the whole 0:18:20.480 --> 0:18:22.800