Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Scott Cooper, and he is the managing
Speaker 1: partner and Andres and Horowitz, one of the most storied
Speaker 1: venture capital farms in Silicon Valley. Uh, you know all
Speaker 1: the companies they have invested in. You're not gonna I'm
Speaker 1: not gonna give you a list here. Scott is an
Speaker 1: unusual guy because not only did he go Stanford undergrad
Speaker 1: and law school, so he has that legal um background.
Speaker 1: He understands the both the deal side, the finance side,
Speaker 1: and the tech side. He's really a triple threat, and
Speaker 1: he discusses the things that any entrepreneur or theoretically anybody
Speaker 1: who wants to be a limited partner in a venture
Speaker 1: capital firm should know. If you are all interested in
Speaker 1: technology startups VC funding, you're going to find this conversation
Speaker 1: to be absolutely delightful. So, with no further ado, my
Speaker 1: convert station with Andrews and Harrowitz is Scott Cooper. This
Speaker 1: is Masters in Business with Barry Ridholtz on Bloomberg Radio.
Speaker 1: My special guest today is Scott Cooper. He graduated from
Speaker 1: Stanford undergrad and law school. He was employee number one
Speaker 1: at Andrews and Horowitz, the famed venture capital firm where
Speaker 1: he is currently managing partner. The fund runs seven billion
Speaker 1: dollars and has been early investors in such startups as Facebook,
Speaker 1: Group on Twitter, Airbnb, Slack, Stripe, Skype, and many others.
Speaker 1: His new book is The Secrets of sand Hill Road.
Speaker 1: Scott Cooper, Welcome to Bloomberg. Thank you for having me.
Speaker 1: So I've been looking forward to having this conversation. You
Speaker 1: are the third um Andrewson Harowitz, veteran willing to uh
Speaker 1: suffer my sons and Arrows. Um. Well, it says that
Speaker 1: you're pretty hip. You get podcasts and you understand having
Speaker 1: people ask you interesting questions and coming up with interesting answers.
Speaker 1: So let's start with a little bit about your background professionally.
Speaker 1: You were kind of born right into the bubble. That's
Speaker 1: how you describe yourself in the book You lead the
Speaker 1: I p O for opswere and oh one, what was
Speaker 1: it like going public right in the middle of the collapse?
Speaker 1: It was? It was. It was an amazing, amazing time.
Speaker 1: So you're right. I was actually an investment banker before
Speaker 1: I went to opsware and by the way, ops wars
Speaker 1: actually it was loud Cloud at that time, which was
Speaker 1: the predecessor in two thousand one. So just a little background,
Speaker 1: loud Cloud was set up to be the original cloud
Speaker 1: earlier and then at a certain point that pivoted to you.
Speaker 1: You have developed your own software, operational software, and that's
Speaker 1: said that the other companies are gonna need this. So
Speaker 1: you took an in house technology similar to Amazon is
Speaker 1: doing with loud Cloud with uh a WS, and you
Speaker 1: spun it out as a separate, full, fully separate entity.
Speaker 1: That's exactly right. So Loudcloud started in so it was
Speaker 1: you know, as perfect perfect timing, right, We raised a
Speaker 1: ton of money, we hired a bunch of people, uh
Speaker 1: and then of course the market turned in a different direction.
Speaker 1: So we took it public in two thousand one, actually
Speaker 1: for the very honest reason, which was that was the
Speaker 1: best source of capital at the time. So there was
Speaker 1: no other, you know, viable source or attractive source of capital.
Speaker 1: And I think we were one of actually two I
Speaker 1: p o s that happened that year, you know, one, yeah, not,
Speaker 1: what was that five hundred and two thousand, So there
Speaker 1: was about seven hundred and fifty years so between the
Speaker 1: two years and then basically I think there were two
Speaker 1: in two thousand one US in a company called Storage
Speaker 1: Networks I think was the other one that went out
Speaker 1: that year. So eventually, um, the company gets bought by
Speaker 1: LTD Packer and what was that? So the people who
Speaker 1: are still there as employees, what was that transition? Like?
Speaker 1: What was your role? You're an attorney, what was your
Speaker 1: role in the acquisition? It was fun? So, um, my
Speaker 1: main role was actually to run the integration between the
Speaker 1: two companies. So we kind of had I had there
Speaker 1: was an executive on our side who was me, and
Speaker 1: then there was an executive on the HP side, And
Speaker 1: basically our job was, Okay, we're doing this deal. What
Speaker 1: is this gonna look like as a combined entity. You know,
Speaker 1: who's gonna have jobs in what places? How do we
Speaker 1: get everything from my T systems integrated? How do we
Speaker 1: talk to customers? And it was fun, It was actually
Speaker 1: really fun opportunity and uh, you know, it was just
Speaker 1: a different It was just different from anything I'd ever
Speaker 1: been through, right, So, you know, I'd always been in
Speaker 1: the startup community and then we go into this behemoth
Speaker 1: HP and you know, they've got these playbooks basically about
Speaker 1: how you do this integration. Uh, and you know what
Speaker 1: we tried to help them understand was like, all that
Speaker 1: stuff is important. The most important thing, though, is what
Speaker 1: are you going to tell the employees about who has jobs,
Speaker 1: what those jobs are going to be, you know, where
Speaker 1: they're gonna show up on day one to go to work.
Speaker 1: And so there was kind of a human element of
Speaker 1: it that was, you know, a little bit underserved in
Speaker 1: the HP side. Not was saying the fact that they
Speaker 1: were really good at the systems integration piece. So, but
Speaker 1: the assumption is the opsware employees who may have seen
Speaker 1: their jobs cut, they still have pretty nice stock options.
Speaker 1: So it wasn't okay, I'm I'm cut loose. Now I
Speaker 1: could go do my next gig. That's right. And for
Speaker 1: most people, most people had a job opportunity to go
Speaker 1: to HP because HP was really buying this as a
Speaker 1: growth opportunity. It wasn't like an acquisition where you know,
Speaker 1: they're like, look, let's just chop fifty percent of the
Speaker 1: people and and you know and create some cash. So
Speaker 1: most people, you know, maybe there were probably some people
Speaker 1: in like organizations like finance, where obviously it's hard sometimes
Speaker 1: to have roles they are duplicate between organizations, but anybody
Speaker 1: who was in a product or engineering or sales facing role,
Speaker 1: all those people had the opportunity to stay, and most
Speaker 1: of them did. So you come from a legal background,
Speaker 1: you're running operations at a technology company. How did the
Speaker 1: transition to venture capital come about? Was it just lucky coincidence?
Speaker 1: Who were working with two guys name Andres and Harowitz? Well,
Speaker 1: there were certainly there was certainly an element of that
Speaker 1: for sure. So I've been working, you know with these
Speaker 1: guys now for almost ten years when we started the firm,
Speaker 1: because this year actually will be my year working with
Speaker 1: them really, which is you know, it probably just makes
Speaker 1: me a glutton for punishment. I'm not quite sure what
Speaker 1: to make of that. I've been to your office and
Speaker 1: I have to say that looks like a fun place
Speaker 1: to work. It is a fun place to work. Yet
Speaker 1: now it's been a great place, and uh, you know,
Speaker 1: we've grown it from literally there were literally three of
Speaker 1: us when we started ten years ago. We've now got
Speaker 1: a hundred and seventy employees. So it's been a fun place.
Speaker 1: But yeah, look, I think the answer to your questions, yeah,
Speaker 1: it was a little bit of Mark and Ben and
Speaker 1: I had always just as I had career discussions with
Speaker 1: them when we were at loud Cloud Nos where I'd
Speaker 1: always said, Hey, looks doing something like this someday would
Speaker 1: be fun. I I didn't think about us starting a firm,
Speaker 1: but I said, Gee, that's a kind of business that
Speaker 1: I think could be fun. And what happened was after
Speaker 1: we sold the business, the two of them started doing
Speaker 1: angel investing with their own money. So they were just
Speaker 1: investing out of their own checkbooks, meanings they there's a
Speaker 1: windfall when the company is sold. They weren't billionaires, but
Speaker 1: they certainly made you know, tons of money. Yeah, they were.
Speaker 1: And so the idea of taking I'm gonna pull fifty
Speaker 1: million dollars aside and find you know, a hundred companies
Speaker 1: that could use half a million dollars each. Yeah, it
Speaker 1: was Actually it was even smaller than that though. It
Speaker 1: was literally they were running fifty thousand, excuse me, a
Speaker 1: hundred thousand dollar checks um. So it was very it
Speaker 1: was very kind of small stuff. And you would, by
Speaker 1: the way, you as a lawyer and an operations guy,
Speaker 1: I could see you looking at this and gnashing your
Speaker 1: teeth and saying, where the capital controls how is the structured?
Speaker 1: Where's the paperwork? Like? I barely know you and I
Speaker 1: could tell that set up made you crazy. I feel
Speaker 1: like you're unfairly typecasting me. But am I right? Uh?
Speaker 1: A little bit, a little bit. They did the truth
Speaker 1: be told. Look, they did the angel investing on their own,
Speaker 1: you know. I I kind of came into the picture
Speaker 1: later as we started talking about the fund in the
Speaker 1: firm itself. But you know, I inherited a lot of
Speaker 1: that paperwork. Of course, why did you write this book
Speaker 1: and who is it for? Yeah, so as we talked
Speaker 1: about I've been doing tech stuff for about twenty five
Speaker 1: years now, I was a banker. Actually we never got
Speaker 1: to that, but I was a bank stuff. Is that
Speaker 1: a technical time? Exactly? Tech things in the tech industry? Sorry,
Speaker 1: maybe I can I can be more eloquent mu um
Speaker 1: and uh. But you know, now, having been in this
Speaker 1: business for ten years, I continue to get a series
Speaker 1: of questions from entrepreneurs all the time, same question, Yeah,
Speaker 1: most of which I thought were answered, you know kind
Speaker 1: of you know, stuff like look should I even a
Speaker 1: venture capital? Like how does the how does the business work?
Speaker 1: And a lot of them have this undertone of you
Speaker 1: know to a certain set, how do I avoid getting
Speaker 1: screwed by the caps? I mean, I hate to say
Speaker 1: it that way, but that's kind of that's kind of
Speaker 1: the way it was, as you implying your breath or
Speaker 1: no rapacious out there is that? Is that the implication? No,
Speaker 1: I think the implication is there's just not a level
Speaker 1: playing field from an information perspective, right, So deformation a
Speaker 1: symmetry is a problem, that's right. So look, we'll do
Speaker 1: you know what, We've been doing this for ten years.
Speaker 1: You know, we've done thousands of deals, you know, and
Speaker 1: repeat entrepreneur maybe does this five, six, seven times over
Speaker 1: the course their life. And so there's just stuff that
Speaker 1: we know and we see because we see it an
Speaker 1: everyday basis. And so the purpose of the book in
Speaker 1: my mind was, look, if we could demystify that and
Speaker 1: hopefully level of playing field, then maybe it helps have
Speaker 1: a better relationship between entrepreneurs and vcs and and maybe
Speaker 1: it even helps people who wouldn't have otherwise thought about
Speaker 1: entrepreneurship coming to the business. Interesting, and I have to
Speaker 1: ask for the uninitiated, what is santill road. I've I've
Speaker 1: been there. I understand it as a concept. Yeah, the
Speaker 1: concept is the concept at a high level is like
Speaker 1: you know what Wall Street is to financial services or
Speaker 1: what you know Music Road is to Nashville country music. Right. Uh,
Speaker 1: it's basically it literally is a road. It is a street. Uh.
Speaker 1: It is very unexciting as you've probably seen what you've
Speaker 1: been there as a bunch of kind of you know,
Speaker 1: fairly drabbed two story buildings. You have a very nice
Speaker 1: waterfall that we do have that we are building, so
Speaker 1: we are lucky to have kind of water effect outside
Speaker 1: our building. But but you know, it just happens to
Speaker 1: be the locust where all the venture capitalists have have
Speaker 1: you know, established themselves. And I think it's really the
Speaker 1: really the answer for that is because of its proximity
Speaker 1: of Stanford. So the more important part of sand Hill
Speaker 1: Road is when you go down Sandhill Road east, you
Speaker 1: know about a mile and a half you end up
Speaker 1: on the Stanford campus. And it really does, I think
Speaker 1: illustrate the kind of tight connectedness that's always happened between
Speaker 1: Stanford and the venture in the startup communities. Right. You
Speaker 1: see it in Boston between M I T. And you
Speaker 1: got a kind of square and Cambridge the same kind
Speaker 1: of thing, right, A really interesting concept. So one of
Speaker 1: your chapters is titled the Art of the Pitch. Explain
Speaker 1: what that is? Yeah, so we see lots of pitches,
Speaker 1: as you can imagine, probably about two year Yeah, it's
Speaker 1: a lot. Yeah. So the art of the pitch is
Speaker 1: really about kind of making sure the pitch resonates, is
Speaker 1: going to resonate with the audience. And I think key
Speaker 1: to that is to understanding what is it that venture
Speaker 1: capitalists care about? What is it that they are incentive
Speaker 1: to do, and therefore, how are they going to evaluate you?
Speaker 1: And so I think the first thing to think about
Speaker 1: is the most important thing to think about in this
Speaker 1: business is we are wrong more often than they're we're right,
Speaker 1: which I know is a terrible thing to say. And
Speaker 1: if your kids came home and got you know, on
Speaker 1: their test, you'd be pretty unhappy. If you're doing that
Speaker 1: in venture capital, you're you're still in the game at least.
Speaker 1: And as as long as you bring up um that
Speaker 1: batting average, why does the hit miss ratio not matter
Speaker 1: as much in venture capital as it does elsewhere? Because
Speaker 1: if we do it right, then the reason doesn't matter
Speaker 1: is because ten to twenty percent of the companies. Hopefully
Speaker 1: if we do it right, you're gonna earn hundred times
Speaker 1: your money. And so basically think of it as you know,
Speaker 1: the the significant winners will basically make up for you know,
Speaker 1: kind of that fifty percent of things where you won't
Speaker 1: get your money back and then probably where you get
Speaker 1: a little bit of money back but not enough to
Speaker 1: make the math work. And so if you think about that,
Speaker 1: then what that means is, if I'm going to invest
Speaker 1: in a company today, I've got to at least believe
Speaker 1: it has a chance to be one of those ten
Speaker 1: or winners. Now, you know, we wish we were smart
Speaker 1: enough to know exactly which ones they were, and of
Speaker 1: course we were just invest in those companies, but we
Speaker 1: have to at least believe that the kind of the
Speaker 1: ground rules and the opportunity exists and if and so
Speaker 1: that really kind of leads into the art of the
Speaker 1: pitch about how to frame the pitch in that context.
Speaker 1: So from your perspective, what becomes more important to cast
Speaker 1: a wide net or to be able to do a
Speaker 1: deeper dive into a narrower niche where you feel like
Speaker 1: you have some expertise and some ability to separate the
Speaker 1: good from the great. Yeah, I think it's it's probably
Speaker 1: somewhere in between, which is, you've got to have some
Speaker 1: number of deals just because you're building a portfolio. So
Speaker 1: unless you think you're, you know, gonna bet that bat
Speaker 1: a much higher batting average, you can at least have
Speaker 1: needs some diversification. But that diversigation needs to be in
Speaker 1: domains that you understand. So the way we run our
Speaker 1: business is we've got vertical domains. So we've got kind
Speaker 1: of consumer enterprise, financial services, life sciences. We've got a
Speaker 1: bunch of domains, and we staff them with people who
Speaker 1: are super deep in those domains and so within those areas,
Speaker 1: you know they will go very deep. But then collectively,
Speaker 1: as part of a portfolio, you get the diversification associated
Speaker 1: with uh, you know, the multidimensions. So here's a data
Speaker 1: point from the book that blew my mind. Quote, venture
Speaker 1: capital is not an especially good investment. As of seventeen
Speaker 1: ten year returns pro vincial capital as an in the aggregate,
Speaker 1: not specific funds, but in the aggregate was a hundred
Speaker 1: and sixty basis points below the NASDAC. So for eight bucks,
Speaker 1: I could have gone out and bought the q q
Speaker 1: q s and outperformed the average event vcs. That's amazing.
Speaker 1: It is amazing, and it's it's a weird asset class
Speaker 1: in that regard, which is the variance between good performance
Speaker 1: and bad performance is really high, like sometimes as much
Speaker 1: as you know, almost thirty five four thousand basis points right,
Speaker 1: thirty five to forty return difference. And I think it's
Speaker 1: a function of the fact that most of this business
Speaker 1: is largely a zero sum game. In each round of financing.
Speaker 1: And what I mean by that is if we do
Speaker 1: the A round, which is kind of the first institution
Speaker 1: of around for a deal, generally, that means, you know,
Speaker 1: we're the only ones who do that. There might be
Speaker 1: some other people, but usually one venture firm will be
Speaker 1: the major, major investor there, and once that opportunity is done,
Speaker 1: there will never be another A round in Facebook, for example, right,
Speaker 1: so you know, Excel, who's you know, very good firm
Speaker 1: invest in the A round of Facebook. The next opportunity
Speaker 1: that somebody had to invest was that some multiple evaluations
Speaker 1: to hired in that. So those still turned out to
Speaker 1: be obviously very good investments. But there is this kind
Speaker 1: of nature that you know when a round happens. It
Speaker 1: often accrues to one individual or one firm, and then
Speaker 1: you know kind of things. You know, fundraise every eighteen
Speaker 1: or twenty four months, and so the next investor obviously
Speaker 1: always comes in at a higher price. So when I
Speaker 1: look at the world of stocks for mutual funds, it's
Speaker 1: a sort of Gaussian Bell curve distribution where you know
Speaker 1: the extremes on either and get rid of them, there's
Speaker 1: a big distribution in the middle. What you're describing doesn't
Speaker 1: sound like that, that's exactly right. So you know, the
Speaker 1: term that you may hear people use is kind of
Speaker 1: called a power lock cerve, right, And what a power
Speaker 1: lock cerve is is you've got a very small number
Speaker 1: of that headlong that's exactly right. You've got a few
Speaker 1: things that drive all the return that You've got this
Speaker 1: long tail of a bunch of stuff that quite frankly
Speaker 1: doesn't amount to much from a returns perspective. And we
Speaker 1: see the same thing in private equity and hedge funds
Speaker 1: as well. It is funny though, actually, you know, you
Speaker 1: mentioned kind of the public markets. It's actually interesting. There's
Speaker 1: been a bunch of studies though, have laid on the
Speaker 1: public markets, which is it turns out they actually are
Speaker 1: more power law than I think people understand. I think
Speaker 1: the number is four percent of stocks drive pretty much.
Speaker 1: I think that's exactly the returns out there. It's so
Speaker 1: good luck picking those four if you have a time machine,
Speaker 1: it's really exactly right. Yeah, let's talk a little bit
Speaker 1: about some of the changes that you've witnessed in the industry.
Speaker 1: In the book, you talk about why Combinator and why
Speaker 1: that was so influential and really changed the game for
Speaker 1: um the VC world. Explain into the lay person what
Speaker 1: why combinator is and why why did it matter so much? Yeah, So,
Speaker 1: why combinator is what we call an incubator, which means
Speaker 1: they basically kind of take usually a cohort of companies
Speaker 1: that can be anywhere from thirty fifty sometimes as big
Speaker 1: as a hundred companies, and they kind of they basically
Speaker 1: start their business inside of y combinator. They go that's
Speaker 1: where they go to the work. They work on a project,
Speaker 1: they build, they build a product, they get tutorials and
Speaker 1: kind of you know, kind of tutelage from other people,
Speaker 1: and then they kind of pop out the other end
Speaker 1: and hopefully they're ready to go raise you know, money
Speaker 1: as a result of that. So it's kind of, you know,
Speaker 1: almost a finishing school to a certain extent to kind
Speaker 1: of get this startups ready to kind of be into
Speaker 1: the regular financing world now. Now, and Reeson was an
Speaker 1: investor in White Combinator, or an investor in White Combinator's
Speaker 1: funds in White Commaters companies directly. Actually, so a couple
Speaker 1: of years ago when we first started kind of I
Speaker 1: think from two thousand ten to two thousand twelve, when
Speaker 1: companies would go into Y Combinator, they would get some money.
Speaker 1: We were one of a few firms that used to
Speaker 1: give them some money. So we would invest small amounts dollars,
Speaker 1: but in lots of out we just gotta we didn't
Speaker 1: have discretion at that point in time. It's like, look,
Speaker 1: everybody who comes in, you're entitled to take this money
Speaker 1: if you want it. And then obviously, look if we
Speaker 1: you know, if we really were interested in the company,
Speaker 1: we could put more money in later in a normal
Speaker 1: financing round. So so why did they change the entire
Speaker 1: what did that set of you mentioned earlier? There's an
Speaker 1: information asymmetry between the seasoned vcs and the young kids
Speaker 1: running these startups. How did this level the playing field?
Speaker 1: They just kind of learned the ropes. It's really interesting
Speaker 1: what happened. So I think the way to think about
Speaker 1: VC is the first thirty five forty years a VC
Speaker 1: called it kind of early nineteen seventies to about two
Speaker 1: thousand five, which is when YE kinda started. You know,
Speaker 1: you can think about it as capital was a scarce resource.
Speaker 1: The vcs had it, and there therefore, if you looked
Speaker 1: at the power dynamic, kind of the VC has had
Speaker 1: the power and the entrepreneur's had less. With the gatekeeper
Speaker 1: if the money, you had to go to Sandhill Road
Speaker 1: and you had to go get the money, right, And
Speaker 1: two big things happened. One is y C, which will
Speaker 1: come back. Sorry, that's short for Ye Combinator. Uh. And
Speaker 1: then the second is the amount of money that it
Speaker 1: required to start a business continue to fall pretty precipitously,
Speaker 1: starting in kind of late nineties, and you know, still
Speaker 1: continuing to today. Right. So, so fiber optics, cloud all
Speaker 1: that stuff meant with storage, you didn't need a whole
Speaker 1: team and a joint server farm. You needed two guys
Speaker 1: in a laptop pretty much. And you can go to
Speaker 1: now you can go to Amazon Web Services, of course,
Speaker 1: and get stuff that used to cost you five or
Speaker 1: ten million dollars of capital expenditures years ago. I mean
Speaker 1: when we were in Loudcloud. That's basically what we did.
Speaker 1: We raised money from the venture capitalists and we basically
Speaker 1: then handed it over to companies that nobody remembers any more.
Speaker 1: Sun Microsystems, we misovers from you know, Oracle Databases. Uh,
Speaker 1: you know all that stuff. Now you basically get in
Speaker 1: a box on demand from Amazon for you know, ten
Speaker 1: dollars like yig or whatever the price. So what happened
Speaker 1: was right, that started to happen, which meant you could
Speaker 1: now start companies for a lot less money. And therefore
Speaker 1: a lot of these seed firms that we're now seeing
Speaker 1: kind of came into the mix. So we've seen a
Speaker 1: lot of new seeds. In fact, something like five hundred
Speaker 1: new firms over the last ten years have come into
Speaker 1: the seed market as companies seating startups exactly right, Yes,
Speaker 1: so kind of firms like US firms like Entries and Horrowits,
Speaker 1: but just kind of smaller versions of it. Right, So
Speaker 1: a hundred million dollar funds instead of seven hundred billion
Speaker 1: dollar funds. So you have kind of that phenomenon, right,
Speaker 1: which is the amount of capital goes down. And then
Speaker 1: you have the second phenomenon, which is why Combinator comes
Speaker 1: along and says, hey, we're gonna try to actually really
Speaker 1: quite frankly educate a lot of entrepreneurs about the whole
Speaker 1: startup process. And so take a little bit what was
Speaker 1: a very black box process and hopefully, you know, open
Speaker 1: the kimono a little bit and uh, and that changed
Speaker 1: that information and start to change that information symmetry. And
Speaker 1: so that really changed the competitive dynamics in this business
Speaker 1: because it used to be that if you were a
Speaker 1: traditional two D and fifty million dollar venture capital firm
Speaker 1: in this business, you were the first money in, right,
Speaker 1: so you kind of controlled access to that. Now you're
Speaker 1: living in an environment where capital is plentiful. You know,
Speaker 1: you're no longer the gatekeeper capital. And oh, by the way,
Speaker 1: there's these five hundred new firms that are being started
Speaker 1: that are kind of upstream of you, right, they're building
Speaker 1: a relationship with the entrepreneur before you. And then there's
Speaker 1: this kind of behemoth called Why Combinator that's also kind
Speaker 1: of effectively now becoming a gatekeeper, right, because they are
Speaker 1: kind of a funnel through which a lot of these
Speaker 1: companies flow. And so the net of both of those
Speaker 1: is it really just started to dramatically change the environment
Speaker 1: for venture capital. And that was the opportunity that we
Speaker 1: saw when we started Injurasing Horowitz in two thousand nine,
Speaker 1: was to take advantage of that kind of changing of
Speaker 1: the guard. So are are these seed funds and and
Speaker 1: and y c. Is this changing the quantity of new startups?
Speaker 1: Is it impacting the quality? Are we deluding the talent
Speaker 1: or is it just Nope, it's a fire hose and
Speaker 1: the more the merrier. Yeah, it's so I think for
Speaker 1: right now it's a fire hose and the more the merrier.
Speaker 1: So what it does mean is you can have a
Speaker 1: lot of experimentation happening for very little amounts of money.
Speaker 1: And look, I think that's a great thing. It's a
Speaker 1: great thing for entrepreneurship, it's a great thing for the industry.
Speaker 1: What's interesting, though, is the funnel does narrow, which is
Speaker 1: if you look at kind of seed deals, right we're
Speaker 1: talking about there's been there's a lot of those the moneys,
Speaker 1: you know, there's a lot of money there the number
Speaker 1: of deals has grown a lot. I don't know what
Speaker 1: the exact numbers are, if something something like four or
Speaker 1: five times over the last you know, ten years, in
Speaker 1: terms of kind of you looked at it from point
Speaker 1: A to point B. So there's this vision of VCS
Speaker 1: is kind of a glamorous lifestyle. Uh, you know when
Speaker 1: when we watch movies like The Social Network or my
Speaker 1: favorite show on HBO, Silicon Valley, which full disclosure, one
Speaker 1: of your partners was consulting with them early on. Um,
Speaker 1: there's a certain degree of glamour, wealth riches and just
Speaker 1: cutting edge technology and making decisions that affects how technology develops.
Speaker 1: I get the sense from your book it's a little
Speaker 1: grittier than that. It's a little more hard work and
Speaker 1: long days and late nights and not all fun and games.
Speaker 1: Well look, I think like any job, it's not all
Speaker 1: fun and games. And and let me make sure it'll
Speaker 1: be very clear though, which is nobody should take out
Speaker 1: their little violence for the venture capitalists. Okay, right, I
Speaker 1: mean you know all their kids, you know, have shoes,
Speaker 1: they all go to school, they all get fed, right,
Speaker 1: they do have shoes, you know. It is I certainly
Speaker 1: even if it's not as glamorous has depicted on TV.
Speaker 1: We should be very it's still it's still a pretty
Speaker 1: good place to be. I mean, look, the reality is
Speaker 1: the real heavy lifting gets done on the entrepreneur side, right,
Speaker 1: So we shouldn't kid ourselves in our business, and we
Speaker 1: certainly try not to, which is as much as we
Speaker 1: want to be you know, kind of finance partners and
Speaker 1: then hopefully add value in other ways to these companies.
Speaker 1: The heavy lifting is all being done by the entrepreneurs.
Speaker 1: I think the part maybe that you're talking about, that's,
Speaker 1: you know, the less glamor part is look like any
Speaker 1: other job, it's competitive, right, and you've got to go
Speaker 1: work hard. It's a question of the real question at
Speaker 1: the end of the day is why is an entrepreneur
Speaker 1: gonna pick you versus any of the other firms that
Speaker 1: they can pick And and that's a big sea change
Speaker 1: in the in the business that just didn't exist in
Speaker 1: the same way in the first thirty thirty five years.
Speaker 1: You know, when the vcs had all the capital, they
Speaker 1: had a lot more control and a lot more power.
Speaker 1: And you know, now we're dealing with you know what
Speaker 1: I think is a very healthy kind of you know,
Speaker 1: changing of the garden some respects. But you know, vcs
Speaker 1: don't control boards anymore like they used to, which you know,
Speaker 1: we've you still get a seat on the board if
Speaker 1: you're if you're gonna do an a round and make
Speaker 1: a special investment, I would imagine you want some input
Speaker 1: into the management and some ability to watch how the
Speaker 1: money is being spent. That's exactly right. So yeah, typically
Speaker 1: we will have a board seat, um, and then typically
Speaker 1: we will have kind of a set of rights that
Speaker 1: go along with our stock that says, hey, if you're
Speaker 1: going to raise money, you have to let us vote
Speaker 1: to say yea or a. Or if you're gonna sell
Speaker 1: the company, we have some ability to kind of have
Speaker 1: a say. Uh in the you know, in the old
Speaker 1: days and I was doing air quotes there. Um, you know,
Speaker 1: the venture capitalists in addition to that, used to kind
Speaker 1: of control the board, meaning that there used to be
Speaker 1: more venture capital board seats on the board than there
Speaker 1: were founder seats. And you know that's in some ways
Speaker 1: why I think, you know, some of the reputation that
Speaker 1: the industry had was, hey, some of these guys can
Speaker 1: get trigger happy sometimes on kicking CEOs out of the
Speaker 1: business and kicking founders out. That dynamic has really dramatically
Speaker 1: changed over the last ten years, and we see more
Speaker 1: and more boards where the founders kind of control them
Speaker 1: in the sense that they have more board seats, and
Speaker 1: it does change the dynamic of the working relationship between them.
Speaker 1: So you mentioned that pital used to be scarce and
Speaker 1: now it seems pretty plentiful. So I wanna explore that
Speaker 1: and try and figure out how that has impacted UM
Speaker 1: markets and and startups. What are there now about five
Speaker 1: hundred unicorns private companies that are a billion dollar valuation?
Speaker 1: Is that reflecting plentiful capital. Some people have called it
Speaker 1: a bubble. I'm not sure that's the right description. We
Speaker 1: have not, by the way, So we've been we've been,
Speaker 1: you know, on record at this that I do think
Speaker 1: if you're talking about this compared to the bubble, it's
Speaker 1: very different. You know, you and I were talking about
Speaker 1: this before we started, So give you a perspective. Right,
Speaker 1: seven hundred plus I p o s in the tech
Speaker 1: industry in those two years. The median revenue, which I
Speaker 1: didn't realize until I looked this up to confirm it,
Speaker 1: seventeen million dollars, right, you're talking about companies going public
Speaker 1: seventeen million dollars of revenue right now, you know we
Speaker 1: haven't We haven't done seven hundred. We haven't even done
Speaker 1: four hundred I p o s over the last ten
Speaker 1: years in the last decade, right, I mean, we been
Speaker 1: doing about thirty maybe fifty a year, so we had
Speaker 1: a long way to go. And we look look at
Speaker 1: the revenue it we Works or Uber, it's pretty media number.
Speaker 1: I think the last I look for the last ten
Speaker 1: years is about a hundred and seventy million. But X, yeah,
Speaker 1: it's sent X right. But I think that even really
Speaker 1: understates it, right. I mean you've got companies right like
Speaker 1: Lift and Uber and others right that are you know,
Speaker 1: they're going public with billions of dollars of revenue. So
Speaker 1: it's a very very different world. Um. But to your
Speaker 1: question though about kind of you know, how much capitals
Speaker 1: out there? Uh, it is true. There's a lot of capital. Uh.
Speaker 1: And it's kind of a little bit of a tail
Speaker 1: of two cities, which is you have a lot of
Speaker 1: capital at the seed stage, right, And we talked about
Speaker 1: that a little bit. Now it's it's not a lot
Speaker 1: in the total scheme of things in the sense that
Speaker 1: it's about six five six percent of capital total in
Speaker 1: the venture capital world of seeds. So it's grown a
Speaker 1: lot over the years, but it's not you know, we're
Speaker 1: not talking of the capital. And then you have kind
Speaker 1: of the A and the B rounds have kind of
Speaker 1: not moved that much. They've moved a little bit, but
Speaker 1: there's a little bit more capital. And then you have
Speaker 1: this big influx of capital in the kind of call
Speaker 1: at the C plus rounds like late stage pre I
Speaker 1: p O rounds that maybe twenty years ago would have
Speaker 1: been public instead of a private That's exactly right. So
Speaker 1: the best way to see this is it used to
Speaker 1: be the case that from founding of a company to
Speaker 1: I PO it was about six six and a half
Speaker 1: years is typically what it used to be. Today that's
Speaker 1: about ten to twelve years. So you've pretty much basically
Speaker 1: doubled in the last decade the time it's taking for
Speaker 1: companies go public. And you're exactly right. So what's happening
Speaker 1: is you've got all this capital that used to be
Speaker 1: in the public markets that's now saying, hey, we want
Speaker 1: some of that growth, right, we want these growth companies
Speaker 1: because we're not getting in the public markets, and that
Speaker 1: capital now is coming into the private markets, and that's
Speaker 1: what's driving these very very large rounds you see in
Speaker 1: the private markets. So here's another interesting stat from the book.
Speaker 1: I thought it was fascinating. Fifteen of the biggest twenty
Speaker 1: five I p o s in we're from companies that
Speaker 1: had no profits. So how should we be thinking about
Speaker 1: young companies that basically, you know, are are losing a
Speaker 1: little money. The joke is Uber Ludes loses a little
Speaker 1: money on each ride, but they make it up in right,
Speaker 1: So how do we think about these companies that are
Speaker 1: growing rapidly and have nice revenue but are far away
Speaker 1: from profitability. So I think the way you have to
Speaker 1: think about it and look the way you have if
Speaker 1: you're if you're getting comfortable investing in them. The way
Speaker 1: you have to think about it is you have to
Speaker 1: look at kind of what we call the unit economics, right,
Speaker 1: So in other words, show me kind of at a
Speaker 1: at a unit level, so at a geographic market level
Speaker 1: or at kind of a per ride level, does the
Speaker 1: business work and are we losing money? And aggregate because
Speaker 1: we are now focused on growth in other markets, and
Speaker 1: when those markets are at a level maturity, you know,
Speaker 1: you will see profitability. So, you know, we're a shareholder
Speaker 1: and left right and so competitive competitive move right. So
Speaker 1: and if you look at left right, you know, my
Speaker 1: impression is when they went out on the road, what
Speaker 1: they probably did is they said, hey, look at our
Speaker 1: mature markets. Look at San Francisco or look at you know,
Speaker 1: Boston or whatever that might be. These are markets that
Speaker 1: are mature, and we can demonstibly show you kind of
Speaker 1: the profits that we actually make in those mature markets.
Speaker 1: And oh, by the way, we've got a bunch of
Speaker 1: these immature markets. But if you believe the story right,
Speaker 1: then those immature markets over time will get to the
Speaker 1: same levels of profitability, and then therefore the companies themselves
Speaker 1: are profitable. I think that's the way to think about it,
Speaker 1: and that's what the investors are trying to do. You know,
Speaker 1: it will be incoming obviously upon these companies to actually
Speaker 1: prove that and demonstrate that, you know, kind of the
Speaker 1: story actually matches reality. Here's the question. So we have
Speaker 1: these big, fast, growing, well funded companies that aren't profitable.
Speaker 1: What what happens in the next down cycle? Yeah, well, look,
Speaker 1: I think that's a real question, and I think this
Speaker 1: is why Actually you see in the I p O
Speaker 1: market right now that the I p O s of
Speaker 1: companies are trading differently, I think based upon kind of
Speaker 1: whether they are profitable and or how much cash ultimately
Speaker 1: they are consuming. So if you look at kind of
Speaker 1: the companies that are performed the best, they tend to
Speaker 1: be enterprise software companies like a Zoom for example, or
Speaker 1: you know, we saw lots of sale, right, so they've
Speaker 1: got you know, they're growing fast. They're also profitable businesses,
Speaker 1: and so look in a downturn, you can say, look,
Speaker 1: maybe they don't grow as fast, but they're not. They're
Speaker 1: just not an essential threat to that business, right, so
Speaker 1: people are if you're a CrowdStrike investor, look, people are
Speaker 1: gonna buy security software at some point in time, even
Speaker 1: on turn and so if it slows a little bit
Speaker 1: or if they lose a little bit of money, that's okay,
Speaker 1: not a big deal. And then you know, you do
Speaker 1: see like the Ubers of the world where people say, hey, look,
Speaker 1: you know you're telling us profitability in two thousand twenty three,
Speaker 1: which means you know, you may be reliant on the
Speaker 1: capital markets to raise more capital over that time period.
Speaker 1: I think that's why you tend to see more volatility
Speaker 1: in those kinds of stocks that have this big cash consumption.
Speaker 1: So so we keep I keep coming back to the
Speaker 1: issue of how much capital is slashing around. Let's talk
Speaker 1: a little bit about the Vision funds. What's the Vision
Speaker 1: funds and how is this impacting the landscape out there? Yeah,
Speaker 1: so the Vision Fund is a fund that was raised
Speaker 1: by soft Bank, which is obviously a big Japanese conglomerate,
Speaker 1: and it's huge. It's huge. It's a hundred billion dollars, right,
Speaker 1: and it's it's as far as I know, at least,
Speaker 1: it's certainly the biggest fund that I've heard of that's,
Speaker 1: you know, effectively a fund structure investing in you know,
Speaker 1: private equity and adventure backed companies. Now, I know you
Speaker 1: probably don't want to bash a competitor in your space,
Speaker 1: but I imagine that much money in the hands of
Speaker 1: humans and they're just dolling it out willy nilly and
Speaker 1: over paying for stuff and saying, hey, I got a
Speaker 1: hundred billion dollars to deploy, go out and find some
Speaker 1: more companies. I'm exaggerating a little bit, but is there
Speaker 1: any truth to that. Well, it's interesting. So a couple
Speaker 1: of years ago, SoftBank was kind of a class of one,
Speaker 1: right they were. They were the eight hundred pound guerrilla, right.
Speaker 1: There was nobody else of that scale. And look they
Speaker 1: had they had. You know, look, people people do what
Speaker 1: their incentives are, right, which is so if you worked
Speaker 1: at the SoftBank Vision Fund, clearly your your incentive was
Speaker 1: to go invest money. Now, whether they were overpaying or
Speaker 1: to only an outlook, I mean, time will tell, obviously,
Speaker 1: and you know they did. They do have a different
Speaker 1: kind of cost of capital, right, In other words, they're
Speaker 1: not trying to necessarily get a three x or a
Speaker 1: five x return on a company. Uh, they have a
Speaker 1: lower kind of return hurdle. So in theory, they could
Speaker 1: afford to pay more than maybe somebody like us could
Speaker 1: pay for the same business. Because we have to deliver
Speaker 1: a higher rate of return. You have to be more efficient.
Speaker 1: They have the luxury of not I'm not caring about that.
Speaker 1: It's not that we have to be more efficient, it's
Speaker 1: that we are. Our investors say, look for you to
Speaker 1: stay in business, we want to see three times our
Speaker 1: money being returned in every fun cycle basis for ten
Speaker 1: years right, So give us three times your money, you know,
Speaker 1: which probably means somewhere between twenty five and three, you know,
Speaker 1: kind of I r R S right annualized returns. Uh. Yeah,
Speaker 1: if you do that, look we'll keep giving the money.
Speaker 1: You get to play the game again. I mentioned earlier
Speaker 1: you are my third victim from Andrews and Horowitz. Um.
Speaker 1: Not only did I have a nice time talking to
Speaker 1: um Bennett Evans, who has a wonderful newsletter that comes
Speaker 1: out of your shop as well as is it one
Speaker 1: or two podcasts? I think it's probably too at this
Speaker 1: point time. Um, but I had a great time speaking
Speaker 1: with Mark and Reason in your in the Pitch conference room,
Speaker 1: which was fun. And if you listen to that interview,
Speaker 1: you could hear me bang the table and it's pretty
Speaker 1: hilarious because, uh, it was just one of those like
Speaker 1: surreal locations to have do a podcast. And I had
Speaker 1: a number of people email me and say, you know,
Speaker 1: I normally listen at two times regular speed, but this
Speaker 1: guy's talk so fast I couldn't keep up with it.
Speaker 1: I'm like, have you not heard Mark Andreason speak before?
Speaker 1: He just he's like a New Yorker, He's like he
Speaker 1: is a fast speak, right, and a lot of interesting,
Speaker 1: dense stuff. So I take that as a compliment when
Speaker 1: someone says I had to listen at regular at regular speed,
Speaker 1: you want to miss a word, that's good. We mentioned
Speaker 1: earlier you were employee number one, after Andreason and Horowitz.
Speaker 1: What is your role today? You were you're managing partner.
Speaker 1: What does that mean? What's your day job? Like? Uh so,
Speaker 1: it's a lot of things. Actually, my uh my nickname
Speaker 1: inside the firm is actually called slash like kind of
Speaker 1: the like the cut the class right. Well, no, actually
Speaker 1: not slash like cut cost slash as in, I have
Speaker 1: a lot of jobs, right, So so some days it's
Speaker 1: exactly right. So some days it's go raise money. So
Speaker 1: we just you know, finished a fundraise not too long ago.
Speaker 1: So how much did you guys? We just ray just
Speaker 1: about three billion dollars? Actually, so wait, I've been quoting
Speaker 1: I know seven actually believe it or not? Is even
Speaker 1: is out of date as of you know, literally about
Speaker 1: three days ago. I apologize her. No, not at all.
Speaker 1: It's in the book and it's you know, yeah, yeah,
Speaker 1: we go fix Wikipedia. It's wrong, right, go figure who
Speaker 1: who would have ever guessed something on Wikipedia? Is. Um,
Speaker 1: so yeah, we're over We're just about over ten now,
Speaker 1: ye know, it's been a lot of fun. So yeah,
Speaker 1: so what most of my job. But by the way,
Speaker 1: how how many people get to say, yeah, raised three
Speaker 1: billion dollars. It's been a lot of fun. It's uh,
Speaker 1: you must really love your job. I do love my job.
Speaker 1: It's great. I mean, I love I love the capital
Speaker 1: raising part of it. We have a great limited partner
Speaker 1: base and so it's a lot of fun to do
Speaker 1: and a lot of pensions and endowments, pensions, universities. Um,
Speaker 1: we do have some sommer wealth funds too, so we
Speaker 1: talked about that. It's kind of been one of our segments. Um,
Speaker 1: you know, some family office is not that many. Um.
Speaker 1: And then we've got we're starting to build up more
Speaker 1: of international base now, so kind of most of it
Speaker 1: was North America really basically US, and we're thinking now
Speaker 1: we've kind of suspanded into Europe and then you know,
Speaker 1: some parts of the Middle East and some parts of Asia.
Speaker 1: So it's been a fun opportunity just to kind of
Speaker 1: learn that side of the business. Canna a VC scale
Speaker 1: significantly above where you are. I mean, if you were
Speaker 1: a software company we need to talk about how software
Speaker 1: I hear is eating the world. But but if you were,
Speaker 1: you know, if your software company, you could scale up infinitely.
Speaker 1: You know, Google Docs. Nothing's going to prevent every person
Speaker 1: in the world from having a hundred sheets and docks
Speaker 1: on Google Docs. It just scales infinitely. You literally have
Speaker 1: partners who have to sign off on stuff, associates who
Speaker 1: have to do some of the grunt work. There's a
Speaker 1: lot of decisions to be made. Where where do you
Speaker 1: top out? Yeah, this is this is the real conundrum
Speaker 1: with this business is so that the limitter in scale
Speaker 1: is basically the number of board seats that a general
Speaker 1: partner can sit on, right, and it varies. You know,
Speaker 1: some people top out at ten. We've got some of
Speaker 1: our folks who are doing like fifteen and sixteen who
Speaker 1: think they can go to five. You know, we'll see,
Speaker 1: we'll see if they get there. But but you're right,
Speaker 1: So the kind of limitters are at some point in
Speaker 1: time you tap out your board seats, and then some
Speaker 1: point in time the room gets so big where you
Speaker 1: just have too many people, you know, trying to express
Speaker 1: an opinion. So the way we're trying to solve that
Speaker 1: is we do a little bit more kind of verticalization basically,
Speaker 1: so I mentioned earlier than creates different sleeves. And so
Speaker 1: we've got a consumer team, right, and so we can
Speaker 1: grow that team more because you know, right now there
Speaker 1: are probably what four people on our consumer team, and
Speaker 1: so you could probably continue to grow that as long
Speaker 1: as the deal opportunity set is there and you don't
Speaker 1: have too many people in the room to make a decision. Right,
Speaker 1: our our financial services team is too strong today, you
Speaker 1: could certainly grow that more. So we're trying to say, look,
Speaker 1: let's push the decision making down at the vertical level
Speaker 1: to the teams that have the right domain expertise and
Speaker 1: then above a certain dollar threshold, Hey, if someone wants
Speaker 1: to write a fifty million dollar a hundred million dollar check,
Speaker 1: let's kind of get everybody in the room and make
Speaker 1: sure that nobody's gonna blow a hole in the you know,
Speaker 1: in the side of the ship. Right. So a hundred
Speaker 1: and seventy employees, how many partners out of that group?
Speaker 1: So we have fifteen partners today. Relationship like a law
Speaker 1: firm or similar right, some of the big firms, it
Speaker 1: was seven and one sort of ratio. The other big
Speaker 1: difference though, with our firm, right is a hundred of
Speaker 1: those hundreds, so many people actually work with our company's
Speaker 1: post investment. So we're kind of an odd, odd beast
Speaker 1: in the venture, meaning that they're not going to your
Speaker 1: office each day, they're going to the entrepreneurs. No, no,
Speaker 1: so they actually they're at our office. They work for us,
Speaker 1: but they do things like, hey, can we help you
Speaker 1: get introduced to Bloomberg, to the ce IO or so
Speaker 1: more of what I would traditionally imagine is a partner's
Speaker 1: job description. You're pushing that down to the level of staff.
Speaker 1: That's exactly right. So the whole idea behind the firm
Speaker 1: was kind of this concept of, look, can we disaggregate
Speaker 1: the general partner job and say what are the things
Speaker 1: that we really need the general partners to do? Right? So,
Speaker 1: so good, you're gonna disaggregate, right, how about that? But
Speaker 1: you know what, that's an accurate description. So, yeah, we
Speaker 1: want a general partner to look for great deals, build relationships,
Speaker 1: make investment decisions, and sit on boards and be valuable
Speaker 1: to those companies. Right, But we don't necessarily need a
Speaker 1: general partner who's not an expert in recruiting CFOs to
Speaker 1: know how to do that. So instead we have a
Speaker 1: whole talent team and that's their job is, let's know
Speaker 1: all the top CFOs in the business, let's build relationships
Speaker 1: with them, and then we're appropriate, let's connect them into
Speaker 1: our portfolio companies. Right, And so we do that on talent,
Speaker 1: on both executives as well as engineers. We do that
Speaker 1: on sales and business development prospects. So you know, we
Speaker 1: cover companies like Bloomberg and others and say, who are
Speaker 1: the decision makers that might buy software here or that
Speaker 1: might you know, buy ad time for some of our
Speaker 1: ad based companies, and we ought to know all those
Speaker 1: people and then figure out when can we connect them
Speaker 1: into our companies to help them accelerate their sales. Really intriguing,
Speaker 1: So what are your vertical um specialties? What are the
Speaker 1: different groups? Yeah, so right now there's a couple. So
Speaker 1: basically kind of consumer is one, and think of that
Speaker 1: as you know, that's a Facebook and instat cart, anything
Speaker 1: that the end us essentially exactly that's exactly right. Yeah,
Speaker 1: that's a good way to think about it. Uh, financial services,
Speaker 1: so fintech is one and that kind of has some
Speaker 1: b two C and some B two B elements of it, right,
Speaker 1: So it could be we have a company called a firm,
Speaker 1: which basically is kind of point of sale lending enough,
Speaker 1: you know this, but so if you by a Casper mattress,
Speaker 1: you know financing, right, So that's a the ability to
Speaker 1: make a fairly instantaneous that's exactly right credit that's exactly right,
Speaker 1: credit card, or somewhere between a credit card and a
Speaker 1: bank loan. Right. And then on you know, completely other
Speaker 1: end of the spectrum. We've got a company called Branch
Speaker 1: which basically does lending to sub Saharan African countries. Basically
Speaker 1: a people in those countries, so literally think of it
Speaker 1: as a taxi driver or a local store owner micro lending, right,
Speaker 1: So who doesn't have credit? Right? Basically in a lot
Speaker 1: of these countries, you know, we have these credit bureaus, right,
Speaker 1: so you have kind of you get your credit score
Speaker 1: and then you take that to the lender. In a
Speaker 1: lot of these other countries there is no concept of
Speaker 1: a credit bureau So a company like Branch literally is
Speaker 1: building people's individual credit files by giving them small micro
Speaker 1: loans and that as they pay it back. Obviously they
Speaker 1: started to get higher credit limit. That's fintech. Uh, enterprise.
Speaker 1: So enterprise could be anything from like an application company
Speaker 1: like a slack for example, it would be in that
Speaker 1: to something more s terek, like a security company or
Speaker 1: a company that's doing you know, a database or things
Speaker 1: of that sort. Um, we do crypto, which is an
Speaker 1: interesting area which we can talk about. Sure, let's talk
Speaker 1: a little bit about crypto. So, uh, this crazy Facebook
Speaker 1: libra then, so I walked right into that one. Right,
Speaker 1: Let's let's just talk about this. So Facebook, who has
Speaker 1: helped um undermine democracy as they as they worked hand
Speaker 1: in hand with the Russians to spread fake news, decided
Speaker 1: that they want to replace money. So how could that
Speaker 1: ever go wrong? Yeah, so they're not They don't want
Speaker 1: to replace money. They want to create Internet money, right right,
Speaker 1: So that's the way you think about That's at least
Speaker 1: how we think. So not a h not credit, not venmo,
Speaker 1: which um I use venmo as a verb inappropriately. The
Speaker 1: young guys in my office tell me, so, I when
Speaker 1: I when I owed someone money they bought tickets for something,
Speaker 1: I said, just venmo me And he's like, dude, that's
Speaker 1: just And I'm like, just venmo. I think that's pretty forward.
Speaker 1: So he said, no, no venoment. He goes, I'm gonna
Speaker 1: invoice you. You're gonna vendomo me? Do I really? Okay,
Speaker 1: I'll be more formal, so send me your request and
Speaker 1: I will pay you. Is that better? But anyway, a
Speaker 1: really interesting concept, right. So the concept is again we
Speaker 1: we've been using this term Internet money, right, So if
Speaker 1: you think about it, there are things like, of course
Speaker 1: there are things like PayPal and stuff like that today,
Speaker 1: but they all depend on your right, They depend on
Speaker 1: other stuff right there, and it's expensive. Not everybody has
Speaker 1: access to that, and particularly in countries like you know,
Speaker 1: Venezuela for example, right where you know you've got these
Speaker 1: hyper inflation countries, people want, you know, a stable currency
Speaker 1: that they actually don't have to worry about, you know,
Speaker 1: putting in wheelbarrels every day. And so what basically the
Speaker 1: Facebook consortium that they put together is you know, intending
Speaker 1: to do, is to say, look, could we create this
Speaker 1: concept of Internet money so that you can procure things
Speaker 1: on the Internet. You can even do like micro payments,
Speaker 1: which is very hard to do because of trains action costs.
Speaker 1: So you know, if you wanted to charge people ten
Speaker 1: cents an episode to listen to your podcast. Maybe that's
Speaker 1: a good way to monetize the podcast instead of advertising
Speaker 1: for example. You know, I don't know, I don't know
Speaker 1: if that's the right math. Where do we sign up? Right,
Speaker 1: you've converted me to liberate, But you couldn't You couldn't
Speaker 1: do that today, right because you know, by time you
Speaker 1: took transaction fees and stuff, you would be losing. It
Speaker 1: would be basically paying the credit card company to to
Speaker 1: charge somebody ten cents. So that's the that's the kind
Speaker 1: of big idea of what they're trying to do. Now, look,
Speaker 1: it's you know, uh, it's brand new, it's a consortium.
Speaker 1: It's going to be developed in a crypto framework, which
Speaker 1: means it will be decentralized and governed by all these
Speaker 1: different kind of groups that are being part of it.
Speaker 1: So it's not going to be Facebook actually central centralizing
Speaker 1: it and owning it. And uh, you know, it'll be
Speaker 1: an interesting experiment to see if they can make it work.
Speaker 1: So let me let me ask you a disclosure question. So,
Speaker 1: you guys famously were an early early investor in Facebook.
Speaker 1: It worked out fabulously for for that investment, are you
Speaker 1: still a Facebook holder or is that long since been
Speaker 1: worked out? So as a fund we we don't hold
Speaker 1: Facebook shares anymore. A lot of us into visually do,
Speaker 1: and I will personally disclose I do have. I do
Speaker 1: home Facebook shares, and I don't know if Mark or
Speaker 1: other people still do. I assume Mark does because he's
Speaker 1: on the board. So imagine he gets, you know, some
Speaker 1: kind of granted every every quarter or every year. But
Speaker 1: but in general, kind of the way our business works is,
Speaker 1: you know, our LPs pay us to manage private assets, right,
Speaker 1: and so it's public. Look, you guys, so here's the
Speaker 1: question here. You sell their Facebook shares or do you
Speaker 1: dole that out to the LPs and let them sell.
Speaker 1: Usually what we do is we distribute the shares, and
Speaker 1: then you know, different LPs do different things. Some of
Speaker 1: them actually say, look, every time I get a distribution
Speaker 1: from a venture capitalist, I'm just gonna automatically sell a lot.
Speaker 1: I'm not gonna make an independent judgment. Some of them
Speaker 1: are who are particularly the ones who are more sophisticated,
Speaker 1: say wait a second, you know I like Facebook stock
Speaker 1: and oh, by the way, my one of my public
Speaker 1: managers has it. But I want an overweight position in
Speaker 1: Facebook stocks. So you know what, I'm just gonna hold
Speaker 1: onto this and this has such a low cost basis.
Speaker 1: That's exactly to it for this Although they're really there there,
Speaker 1: they're saying most of them are pretty right, right, they
Speaker 1: have the luxury. If not, I immediately think of cost
Speaker 1: basis and makes a big difference, you know. And then
Speaker 1: there's a whole there's where you're going to locate the assets.
Speaker 1: You these guys, they're all completely taxed. It shouldn't make
Speaker 1: any but that's basically how we think about the business.
Speaker 1: So look in general. Yeah, like if they want to
Speaker 1: buy Facebook stock, they can buy Facebook stock. They don't
Speaker 1: need to pay us to do that. That that makes
Speaker 1: perfect sense. Um, I didn't ask you during our broadcast
Speaker 1: portion the venture capital life cycle, which you talk about
Speaker 1: in the book. Um, let's let's let's get a little
Speaker 1: wonky and talk about life cycles. And then I want
Speaker 1: to talk about persistency and underfitting. So we're really gonna
Speaker 1: walk out. So what's the VC life cycle? Yeah, So basically,
Speaker 1: we raise funds and those funds typically have a tenure life.
Speaker 1: Now if you've talked to any LP but ten years
Speaker 1: I'm gonna interrupt you. Is ten years standard. I kind
Speaker 1: of remember being a little shorter years ago, seven eight years.
Speaker 1: Since I've been in the business, it's been ten. It's
Speaker 1: actually and the opposite is actually true, which is but
Speaker 1: any LP will tell you there's no such thing as
Speaker 1: a ten year fund. These funds go twelve, fifteen years.
Speaker 1: You're always left with stubs that haven't done anything and
Speaker 1: hope the bulk of it. The assumption is, hey, if
Speaker 1: it's not done by ten years, just write it down
Speaker 1: to zero and whatever comes out later that is a bonus.
Speaker 1: So I don't know if stub is the right technical term.
Speaker 1: I think it is a technical term. But but I'm
Speaker 1: under the impression that after a certain point, it either
Speaker 1: works or it doesn't, and it's not going to catch
Speaker 1: fire on the eleventh year, so we just need to
Speaker 1: make it one more year. But remember right, it's taking ten, eleven,
Speaker 1: twelve years where companies go public now, so it's possible
Speaker 1: that it could catch fire. So it depends on whether
Speaker 1: it's on that path or not, I guess. And at
Speaker 1: that point it's certainly easy enough to find somebody who's
Speaker 1: gonna that's come in and take it off your hands.
Speaker 1: So anyways, you've got ten years. Basically, you do most
Speaker 1: of your investing typically in the first three or four
Speaker 1: years is what's more typical, and then kind of in
Speaker 1: those later years you're doing what's called follow on investing, right,
Speaker 1: you're kind of maybe adding to positions that second round,
Speaker 1: the second round or third round or stuff. How does
Speaker 1: the capital calls work? Is it like a hedge fund
Speaker 1: where all the money shows up or is it like
Speaker 1: private equity where you make a commitment, give a small
Speaker 1: amount of money up front, and then they call it
Speaker 1: as needed. Yeah, it's the latter. So basically, when an
Speaker 1: LP invest in our fund, what they're doing is they're saying, okay, like,
Speaker 1: I'm committing to ten million dollars over the life your fund,
Speaker 1: and you know, we'll call it kind of we typically
Speaker 1: call quarterly because you know, we kind of generally know
Speaker 1: what the cadence is. So yeah, I think about it
Speaker 1: as probably seventy percent of your money gets called in
Speaker 1: that first three or four years when you're doing primary investing,
Speaker 1: and then the remainder gets called over years four through
Speaker 1: eight or nine or something, you know, for that follow
Speaker 1: up investing. That that's that's pretty interesting. And so that's
Speaker 1: the life cycle over of a typical fund, that's right,
Speaker 1: And then you know, we'll go raise a new fund
Speaker 1: hopefully so hopefully after three or four years, if we've
Speaker 1: you know, exhausted that fund, if we're doing well enough,
Speaker 1: then our LPs will say great, like, we'll give you
Speaker 1: another shot at it, and you go raise a new fund.
Speaker 1: And each new fund is a new legal entidy with
Speaker 1: with uh. I want to call it a sixteen Z.
Speaker 1: You can, but people are not gonna understand what that is.
Speaker 1: So I have this great blue hat that sits in
Speaker 1: my car, um, and it literally says A six team
Speaker 1: Z dot com and there are sixteen letters between the
Speaker 1: A and injuries and the Z. You got it. I mean,
Speaker 1: it wasn't hey, I cracked that code. It wasn't too difficult. Um.
Speaker 1: But it's really a very interesting idea. And it allows you,
Speaker 1: guys to come up with a almost random web you
Speaker 1: r l you're going to get a website. They're all taken.
Speaker 1: It's it's kind of crazy, and it allows people to
Speaker 1: actually find it because if you had to spell in
Speaker 1: recent Horwitz dot I always get exactly. I always get
Speaker 1: that wrong. So um, persistence was what you mentioned. We
Speaker 1: didn't talk about you are so sure. Let's just let's
Speaker 1: talk about so each of these are separate fund You're
Speaker 1: the fun firm is the GP, and it may or
Speaker 1: may not be the same LPs in it. And so
Speaker 1: you just did FUN six, that's right. If you're just
Speaker 1: raising money for fund six and that was put to bed,
Speaker 1: Fund seven is a couple of years down, that's probably right. Yeah,
Speaker 1: we tell our LPs kind of think about it as
Speaker 1: two and a half three or three and a half
Speaker 1: your cycles is probably the right right think about. So
Speaker 1: let's let's talk about assistance, which is kind of interesting.
Speaker 1: And again, at risk of of I don't want to
Speaker 1: put words in your mouth and slag a competitor, but
Speaker 1: let me just talk about some of the talk of
Speaker 1: the town. So Kleina Perkins, one of the most storied
Speaker 1: John Door and that whole collection of folks. Um incredible,
Speaker 1: trans Cisco and Apple and Mike Microsoft, I mean, go
Speaker 1: down the list. It was insane intel Um they did
Speaker 1: fabulously in the eighties and the nineties. The latter farm
Speaker 1: funds seem to have not had the same UM track records.
Speaker 1: So the question is, was it luck, or did the
Speaker 1: environment change so much that they failed to adapt? Did
Speaker 1: that whole sex discrimination case throw them off their game?
Speaker 1: These are my words, not yours. I don't want to
Speaker 1: put you have to see these people, and I don't
Speaker 1: want anybody saying, Hey, Scott, what the hell man? So
Speaker 1: this is I apologize to John Doran everybody. I'm repeating
Speaker 1: what I read. I don't know this for a fact.
Speaker 1: I've never met these folks. You certainly have never said
Speaker 1: any of this, So I'm giving you giving you some
Speaker 1: plausible deniability. Um. So, first of all, you're upset. Kliner is,
Speaker 1: you know, an icon in the industry, there's no question.
Speaker 1: And their early track record was just yeah. And then
Speaker 1: you know they also had a whole life sciences part
Speaker 1: of their business. You know, people like Brook Briers write
Speaker 1: one of the name partners there have done great things.
Speaker 1: Um And and actually right now they have a they
Speaker 1: have a whole new set of a whole new teams.
Speaker 1: So they've kind of brought on some some new people
Speaker 1: to kind of build out re kind of build out
Speaker 1: their software business. And look, they've successfully raised new funds
Speaker 1: and stuff. So you know, I wouldn't I certainly wouldn't
Speaker 1: count anybody out of this business. I mean, they're they're
Speaker 1: an iconic name with an iconic brand, and but that
Speaker 1: brings us back to the issue of persistency. So the
Speaker 1: whole concept of fat headlong tail is there's a handful
Speaker 1: of winners, let's a winner take all distribution, and those
Speaker 1: winners tend to stay winners. So so it's it's really interesting, right,
Speaker 1: So if you look at the if you look at
Speaker 1: all the academic literature around VC, basically, uh, you have
Speaker 1: a firm that is performed in the top quartile of
Speaker 1: returns in one cycle, is likely to then continue to
Speaker 1: be in the top quartile in the next cycle, right
Speaker 1: in the next fun And I think the theory behind
Speaker 1: it goes back to a little bit of this kind
Speaker 1: of idea that we talked about earlier about kind of
Speaker 1: zero sum and signaling, which is, you know, if you're
Speaker 1: a firm like Climber Perkins, let's just use them an example.
Speaker 1: You have a brand and you've you know, you've invested
Speaker 1: some of these fantastic companies like Cisco and Apple, and
Speaker 1: so you know, I'm an entrepreneur who is you know,
Speaker 1: looking to kind of get that brand affiliation to help
Speaker 1: me with my business. Right, So I want your money
Speaker 1: because you know you've invested in smart people before, and
Speaker 1: therefore you must think I'm smart. Their money is more
Speaker 1: than just money, that's right, right, It goes with the
Speaker 1: brand and with the success they built over time. Right.
Speaker 1: And so if I'm trying to recruit employees, you know,
Speaker 1: I say, hey, well, you know I've got money from
Speaker 1: these Climber Perkins folks in this case, you know they're smart.
Speaker 1: Therefore you know you should come work for me, right,
Speaker 1: do something crazy like quit your job and tell your
Speaker 1: spouse that you're going to take a fifty cut and
Speaker 1: pay and come work for me. Or if you're a customer,
Speaker 1: you know you have kind of the customer kind of
Speaker 1: gets the brand connotation of Klin of Perkins. They may
Speaker 1: not know you, but they've heard of John Door, they've
Speaker 1: heard of you know, that organization. So you get that
Speaker 1: kind of brand affiliation. So I think that's why there
Speaker 1: is this persistence. And then therefore, also as we talked about,
Speaker 1: because these deals are often zero sum, if you've got
Speaker 1: the brand that gives you an unfair advantage in competing
Speaker 1: for the new deals. Uh. And when you win that
Speaker 1: a round the deal. That means nobody else in the
Speaker 1: industry got to win that deal either, Right, so you
Speaker 1: you kind of allow that persistence to kind of, you know,
Speaker 1: take effect and give you competitive advantage. Now, this is
Speaker 1: the same thing we see in where do you want
Speaker 1: to go with this hedge fund Ivy League schools? Is
Speaker 1: Harvard really Harvard? Or are they just coasting on their reputation? Yeah, Look,
Speaker 1: we we use signaling all the time, right, and it's
Speaker 1: you're you're right, it's not it's not necessary fair. Look,
Speaker 1: there's plenty of smart students at other places that don't
Speaker 1: go to Stanford to Harvard. But you know, an employer
Speaker 1: looks at that and they say, hey, like, you know,
Speaker 1: it's probably the case that they've they've screened the student,
Speaker 1: they've done something, and so you know, I accept that
Speaker 1: as kind of you know, brand affiliation for that students.
Speaker 1: But you're absolutely right, it's not fair. But it is, unfortunately,
Speaker 1: you know, part of the way the world works. So
Speaker 1: we're not talking about fair. We're talking about if you're
Speaker 1: a pension funds or if you're an allocator and you
Speaker 1: have to decide, hey, I'm gonna budget five percent of
Speaker 1: my my assets to venture capital UM. In the world
Speaker 1: of hedge funds, if you're not in the top ten percent,
Speaker 1: you're paying a lot for not great performance. It sounds
Speaker 1: like the VC world is very, very sick. It's similar.
Speaker 1: If you're not in the top firms, well then you really,
Speaker 1: as you pointed out and on aggregate, gonna underperform the
Speaker 1: public mark. Yeah, this is where I think a lot
Speaker 1: of the LPs sometimes have kind of made mistakes in
Speaker 1: their venture portfolio. Is you know they diversify, Yeah, they diverseify.
Speaker 1: I right, Diversification turns out to be a bad strategy
Speaker 1: in venture, right, which is if you've got you know,
Speaker 1: you know, if you are with a great firm who's
Speaker 1: in the top quarter tril you know, obviously things change
Speaker 1: and of course maybe all the partners leave or you know,
Speaker 1: something catastrophic happens, but in general, you want to probably
Speaker 1: double down your money on those folks as as to actually,
Speaker 1: you know, kind of diverse buying. So the names I
Speaker 1: know like Flat Iron Ventures or Benchmark in addition to
Speaker 1: Climate Prokin's injuries, and I know there are dozens and
Speaker 1: dozens of others. The well known top tier firms really
Speaker 1: are well known and top tier for a reason. That's right, yeah,
Speaker 1: and they're look, those are those are great firms, and
Speaker 1: so what happens, right is the LPs want to allocate
Speaker 1: to those firms. And then what what often happens, I
Speaker 1: think where sometimes the LPs make mistakes as they say, look,
Speaker 1: I can't get access because you know, benchmarks, right, benchmarks,
Speaker 1: you know, you know, it's very hard to be a
Speaker 1: new LP and get access to a benchmark from they're
Speaker 1: they're so good that right, they haven't really added to
Speaker 1: their LP base, And so then people sometimes say, okay,
Speaker 1: well let me go down to the next year or
Speaker 1: the next year. And then unfortunately, and a lot of
Speaker 1: times in this business, you know, that means that you
Speaker 1: now start to get those returns we talked about, which
Speaker 1: converged to the media as opposed to the top returns.
Speaker 1: Mean reversion is exactly right, is quite a mean cruel,
Speaker 1: a cruel mistress. So I I made a reference, but
Speaker 1: we really didn't get into UM and Reason's piece, software
Speaker 1: is eating the world? That was two thousand eleven, and
Speaker 1: that turned out to be a fabulous call. So really
Speaker 1: the question is um is software still eating the world?
Speaker 1: And and when does this, you know, get replaced by
Speaker 1: whatever is going to replace software, or does that just
Speaker 1: never end it just keeps going. Yeah, I think so.
Speaker 1: I think software is still eating the world at least
Speaker 1: where we sit. We think it will continue to eat
Speaker 1: the world for I don't know what the time period is,
Speaker 1: but I don't I don't know what fun exactly right.
Speaker 1: I don't see an end to it at this point
Speaker 1: in time. And actually, what's interesting now is it's starting
Speaker 1: to touch a lot of industries that historically it never
Speaker 1: got to. So now we're starting to see software eating
Speaker 1: a little bit of education, a little bit of healthcare,
Speaker 1: government services, um, you know, oil and gas markets, energy markets.
Speaker 1: So there's these you know, very very markets that for
Speaker 1: a long time kind of we're you know, largely untouched.
Speaker 1: And I think we're still at the very very beating
Speaker 1: phass of it. So it's been our investment thesis for
Speaker 1: a long time. I think it's gonna be our investment
Speaker 1: thesis for the foreseable future. So I'm gonna throw a
Speaker 1: curve booll at you only because you brought it up.
Speaker 1: So health care. Healthcare is such a fascinating area. You
Speaker 1: guys have looked at biological science is not not where
Speaker 1: where you really focus. We we do actually have a
Speaker 1: bio fund, right, but but the whole there's a huge
Speaker 1: amount of um genomics and go down the whole list
Speaker 1: of stuff. You're really more hardcore tech, not not life sciences.
Speaker 1: But you do as you said, you do that. But
Speaker 1: when you brought it up, I immediately thought of the
Speaker 1: Berkshire Hathaway, Amazon, JP, Morgan Chase, the concept of Hey,
Speaker 1: healthcare in the United States is broken and we want
Speaker 1: to explore fixing it. When you see something like that,
Speaker 1: that does your vc um Pavlovian response start to go
Speaker 1: off and say, yes, it's broken and technology can fix it.
Speaker 1: In here's a billion dollars, Like, how do you hear?
Speaker 1: Like when I heard that story, I'm like, damn, that's
Speaker 1: some serious firepower. Yeah. How is this perceived at a
Speaker 1: shop where you're looking for the next great disruptive technology? Yeah? Yeah, Um, Look,
Speaker 1: we all take notice when things like that happened, obviously,
Speaker 1: particularly with those companies because they're obviously all kind of
Speaker 1: companies that have tremendous resources. In general, though funding something
Speaker 1: like that is not really that's just not really our
Speaker 1: m O. Right, So are are you know, we we
Speaker 1: may like that idea and we say great, Now, is
Speaker 1: there a set of you know, entrepreneurs who are starting
Speaker 1: from scratch with a completely blank slate, and we can
Speaker 1: you know, invest to three five million dollars in them
Speaker 1: to go try to build something that could be you know,
Speaker 1: equivalent in terms of the results that those three companies
Speaker 1: might deliver, but can do it where it's a tech
Speaker 1: first company and is really driven kind of bottoms up
Speaker 1: from the tech side. So it certainly kind of you know,
Speaker 1: piques our interest, but it's not it's just not in
Speaker 1: the scope of what we tend to do from funding perspective.
Speaker 1: And really the last I have a couple of more
Speaker 1: questions try I don't want to I don't wanna torch
Speaker 1: you with this um. One is debt versus equity and
Speaker 1: the other is valuations. You write about, Uh, debt versus
Speaker 1: equity is a question and that old entrepreneurs should think about,
Speaker 1: what explain why that's significant and how they should contextualize.
Speaker 1: So I think there's a couple of issues to think
Speaker 1: about on debt versus equity. So one is and let's
Speaker 1: assume we're talking about real debt here, not convertible debt. Right,
Speaker 1: so debt that actually is going to stay there. The
Speaker 1: problem with debt is at some point you have to
Speaker 1: pay it back, right and uh, you know it's not
Speaker 1: that we want to with equity, you have to pay.
Speaker 1: But you know, so if you think about it from
Speaker 1: a starter perspective, right, for you to take debt and
Speaker 1: then say, okay, three years from now, when hopefully my
Speaker 1: business is finally starting to hum, now I gotta take
Speaker 1: money out of you know that I could be plowing
Speaker 1: into R and D or other stuff, and I gotta
Speaker 1: go pay it back. Like it's it's what we call
Speaker 1: it's not permanent capital, right, So it can serve a purpose,
Speaker 1: but you know, I think for a startup business, it's
Speaker 1: a dangerous kind of you know, path to get on
Speaker 1: because you want the permanency of capital that allows you
Speaker 1: to kind of make the investments into the company that
Speaker 1: you hopefully want to invest in. So, you know, a
Speaker 1: lot of our companies do what's called convertible debt sometimes
Speaker 1: where you know, kind of that debt will start off
Speaker 1: his debt, but then it turns into equity at some
Speaker 1: point in time. Uh. And you know, people, what why
Speaker 1: do that? As opposed to straight equity. Look personally, you know,
Speaker 1: from our perspective, and we've been public on this, we
Speaker 1: would rather people do straight equity convertible. That started largely,
Speaker 1: I think because people said it's cheaper, it's just faster.
Speaker 1: You don't have to have, you know, hours and hours
Speaker 1: of lawyers doing this stuff. Uh, and it kind of
Speaker 1: punts the valuation question, right. We don't have to decide
Speaker 1: on the valuation today. We say, hey, look in the future,
Speaker 1: when there's equity round, we'll just convert it at that
Speaker 1: price or some discount. But we don't need to go
Speaker 1: fight about evaluation. Um. It's it's grown a lot um.
Speaker 1: It's problematic for a lot of reasons. I think the
Speaker 1: most The most place we see problems is founders will
Speaker 1: kind of do many debt rounds and then they don't
Speaker 1: really realize until they finally go to raise an equity round.
Speaker 1: When all that debt converts into equity, they realize, oh,
Speaker 1: my gosh, I've sold a lot more of the company
Speaker 1: than realized. Right, because you don't have that tangible Hey,
Speaker 1: you know, I got five million dollars and I gave
Speaker 1: up in my company or something like that. The math
Speaker 1: is easy to try it. And then the last question
Speaker 1: I have to ask you about is valuation. And I
Speaker 1: still have in my head marks comment that, Hey, look
Speaker 1: at all the companies that blew up in two thousand,
Speaker 1: two thousand two. They've all since The ideas were fine,
Speaker 1: they were just a little ahead of themselves. The perfect
Speaker 1: example back then it was pets dot com, and now
Speaker 1: Chili is just web band, web band and Instacart mirror
Speaker 1: images of one another. Basic. So and his take was,
Speaker 1: when we're looking for fifty or a hundred beggars, stop
Speaker 1: and think about it. If he overeaes. The example he
Speaker 1: used is I think he was in Facebook at like
Speaker 1: a twenty million dollar valuation, because well, when what happens
Speaker 1: if I paid a hundred million doesn't make any difference
Speaker 1: when it's fifty billion or a hundred billions, Like, it's
Speaker 1: almost irrelevant at that point. And for an equity for
Speaker 1: a public equity guy, I'm a guest at that. But
Speaker 1: intellectually his math makes sense. So it's funny. I'll give
Speaker 1: you a little bit inside baseball. So this is the
Speaker 1: number one thing that Mark and I fight about all
Speaker 1: the time inside the firm. Really, yeah, so I think
Speaker 1: I think his principle is right. And I've told him
Speaker 1: this before, so hopefully he won't fire me when he
Speaker 1: hears this. Um, his principle is, his principle is absolutely right,
Speaker 1: which is like, you're right if you're going to invest
Speaker 1: in Facebook, Look the difference between a thirty million or
Speaker 1: forty million or pigti million valuation? Who cares? Right, it's
Speaker 1: a hundred billion, you know, went to five. That's one winner.
Speaker 1: Look at it an aggregate against maybe the companies that weren't.
Speaker 1: I think that's right. I think I think the problem is, Um,
Speaker 1: it's very it's it's it's very hard then to know
Speaker 1: what is the price that which you wouldn't actually make
Speaker 1: that investment. In other words, so if I would make
Speaker 1: it at fifty or a hundred, would you pay five
Speaker 1: hundred for Facebook at that point in time? And look
Speaker 1: in retrospect it was Facebook, So again you would pay anything.
Speaker 1: But back at the hindsight bias, a company that we
Speaker 1: don't know X y Z, we don't know what it's
Speaker 1: going to be. Where do you draw a line. So
Speaker 1: what we try to do, right is we try to say, okay,
Speaker 1: let's assume everything works out. Okay, so what could this
Speaker 1: company be at scale? Right? So how big can it get?
Speaker 1: What's the market size? All those things? And then we say, okay,
Speaker 1: look if you you know, believe that it can actually
Speaker 1: get to a ten twenty billion dollar company, and you're right,
Speaker 1: you're trying to optimize for times your money. There's at
Speaker 1: least a range of prices, and it's it's you're right.
Speaker 1: If you loved it at thirty million, you probably are
Speaker 1: still loving it at forty million. But maybe the answer is, look,
Speaker 1: you don't love it a hundred million. The other piece
Speaker 1: to think about it is it's not just the entry
Speaker 1: valuation that matters for that purpose. That's the next round.
Speaker 1: That's exactly That's what I say, which is you know,
Speaker 1: at some point in time, leave yourself a little up.
Speaker 1: So that's exactly right. And so that's the other risk
Speaker 1: I think that you can get into if you don't
Speaker 1: at least think critically about valuation. Is you may be happy,
Speaker 1: but then look, these guys are gonna go raise you know,
Speaker 1: another two, three, four rounds and if every round every
Speaker 1: investor feels like they're getting pushed, it doesn't work. Now,
Speaker 1: there are examples where that works, you know, Uh, we
Speaker 1: famously you know, didn't invest in Square, which, um, that's
Speaker 1: to be great. And you know, at every round, you know,
Speaker 1: it always felt like you were paying ahead of what
Speaker 1: the what the actual intrinsic value the business was. But
Speaker 1: you know the reality is that's the way a lot
Speaker 1: of these things look. So I think his principle is right,
Speaker 1: and but I think you just have to say, okay,
Speaker 1: Look there is some limited which we say, okay, the
Speaker 1: risk of next round financing and you know, kind of
Speaker 1: the the real upside opportunity. He is somewhat constrained by valuation.
Speaker 1: So let's take an example, Uber, a giant by any measures,
Speaker 1: successful startup company. I think if you were, if you
Speaker 1: were a private investor, of the private investors are underwater
Speaker 1: based on where the training today. Right, Yeah, that may
Speaker 1: be right, but you know most of the look there
Speaker 1: are also people like Benchmark and lots of other firms
Speaker 1: who are certainly not right. Yeah exactly. Yeah, Look, I
Speaker 1: mean I would say, I guess a couple of things
Speaker 1: were left investors. So you know, you can take this
Speaker 1: with a big grain of salt um you need there
Speaker 1: you always I disagree with my friends got Galloway and
Speaker 1: then Stern who thinks Lift is toast is only gonna
Speaker 1: be one winner here. Hey, what name of field where
Speaker 1: there isn't a PEPSI to the code? I think that's what. Yeah,
Speaker 1: I don't think. I don't think that's the game. I mean, obviously, look,
Speaker 1: we we bet that way and we believe that. Um,
Speaker 1: you know. The the only other thing I'd say about
Speaker 1: Uber and I'd say it's about Lift two, which is, look, yes,
Speaker 1: they're underwater today. Judging these companies though, I think based
Speaker 1: on three, four or five weeks of stock price for
Speaker 1: it's a little bit unfair. That's totally look face book right, Facebook,
Speaker 1: you know went to fourteen dollars. They had a crappy
Speaker 1: I p O before. And so look, at some point
Speaker 1: in time, yes, these companies will all trade on some
Speaker 1: like multiple of cash flow at some point in time,
Speaker 1: and then we'll real be able to judge, quite frankly,
Speaker 1: you know, whether they're overvalued or not. And my last
Speaker 1: question before I get to my favorite uh speed round questions,
Speaker 1: we work seems to be just off the charts where
Speaker 1: a floor in a WE works building is worth more
Speaker 1: than the building itself. Does any of this make any sense? Yeah?
Speaker 1: So we're not investors, and we worked, Um, so you
Speaker 1: can tell us the straight well, look, and I so
Speaker 1: I don't know the numbers, but I do think there
Speaker 1: is this big question which is fundamentally, is it a
Speaker 1: technology company or is it a you know, a very
Speaker 1: successful real estate business? Right? And look, if it's the latter,
Speaker 1: we know that those things will trade on some cap
Speaker 1: right at some point in time. Uh, And all about
Speaker 1: I are are relative to the clost I think that's
Speaker 1: a question. Look, And I don't know since I'm an investor. Look,
Speaker 1: maybe they have some story which is look, maybe there's
Speaker 1: technology or something else which means they should trade at
Speaker 1: a premium to a to read basically because of you know,
Speaker 1: better margins or something like that. I don't know, but
Speaker 1: I think, look, that is the fundamental question them And
Speaker 1: and I think that's what you know, if if they
Speaker 1: go public, as at least it's rumored that they might
Speaker 1: go soon, I think, you know, we'll have the public
Speaker 1: markets ability to weigh in on that pretty soon. So
Speaker 1: I only have you here for a finite time, they're
Speaker 1: telling me. So let's jump to our favorite questions that
Speaker 1: I ask all my guests. Feel free to go as
Speaker 1: longer short with these as you like. Um, your first
Speaker 1: car make earin model. My first car was actually a
Speaker 1: Pugio five oh five s time it was. It was
Speaker 1: an old one and actual I'll tell you though, I
Speaker 1: loved it for the time it wasn't in the shop
Speaker 1: based it was literally you know, in the shop and
Speaker 1: every other day. But boy, when it wasn't, it was
Speaker 1: a fun car to drive, to say the least, that
Speaker 1: is fun car. What's the most important thing that people
Speaker 1: don't know about Scott Cooper? Uh? Well, I tell a
Speaker 1: little bit of the book, but I am well, maybe
Speaker 1: the most important thing is. Look, I'm a I'm the
Speaker 1: most introverted person probably you will ever meet, which I
Speaker 1: know sounds funny. I can, I can? I right, I
Speaker 1: play I play an extrovert on TV. But you are
Speaker 1: not the only uson who What I like to do
Speaker 1: is I like to go home and read a book
Speaker 1: and sit on my couch and watch Netflix. And right,
Speaker 1: I am right there with you. Who are some of
Speaker 1: your early mentors. I was actually mentored by a family friend,
Speaker 1: a guy named Armand Weinberg is his name, and Houston
Speaker 1: uh and he ran um at the MD Anderson Hospital,
Speaker 1: which is a very famous kind of you know, cancer hospital.
Speaker 1: He ran a bunch of studies around you know, kind
Speaker 1: of early cancer prevention, and so we did some research
Speaker 1: on you know, how do you detect and prevent breast
Speaker 1: cancer or prostate cancer? Thinks that sort, and it kind
Speaker 1: of got me into My initial love was kind of
Speaker 1: health policy and things of that sort. And uh, you know,
Speaker 1: he gave me jobs over the summer and did all
Speaker 1: kinds of stuff that helped me kind of get into
Speaker 1: that field. There's a lot of fun. Uh, let's talk
Speaker 1: about your favorite books. What are some of your favorite books,
Speaker 1: be they fiction, non fiction, um, investing related whatever you
Speaker 1: enjoy reading? You mentioned, but yeah, I love Uh I
Speaker 1: only read non fiction now. Uh isn't that terrible? I'm
Speaker 1: the same way and I miss fiction from my child too.
Speaker 1: You know, it's funny. I never was a big fiction
Speaker 1: reader growing up. I never, yeah, never got into that,
Speaker 1: not really. I mean, I you know, I read a
Speaker 1: few of them here and there, but into nothing, no,
Speaker 1: I I you know, look, truth be told. This is
Speaker 1: terrible to say, uh publicly, but I was I was
Speaker 1: not a reader growing up at all. I hated reading
Speaker 1: and in fact, I'll never forget this. Um, hopefully my college,
Speaker 1: Uh teachers aren't listening. But when I was applying to college,
Speaker 1: you know, after my junior year of high school, I
Speaker 1: got the applications and I was applying. Actually, Harvard was
Speaker 1: one of the schools I applied to. I did not
Speaker 1: get in, by the way. Um. And you know it said,
Speaker 1: tell us about the last three books you've read, And
Speaker 1: you know that's one of the questions. Well, no, it wasn't.
Speaker 1: I said, Oh my god, I've got to go read
Speaker 1: three books. I read three books that summer. It was
Speaker 1: the only three books I read, and I really, oh god,
Speaker 1: between Vonnegut and books were great and high school and
Speaker 1: then college. The problem with colleges they want you to
Speaker 1: read books that for a purpose as opposed for pleasures.
Speaker 1: So so I love I love nonfiction stuff. So like
Speaker 1: one of my favorite books is Master of the Senate,
Speaker 1: which is, you know, the book about Lennon Johnson. I
Speaker 1: think that's really cool. He's got that whole series. I
Speaker 1: think I've I've read all that. Apparently apparently he's got
Speaker 1: one more coming out about how he does his work, prices.
Speaker 1: It's it's supposed to be fabulous, But I was gonna
Speaker 1: say it's gonna nine our pages and you know, and uh,
Speaker 1: you know, obviously he's you know, he's not a young
Speaker 1: chicken anymore, and so he's got to get it done before.
Speaker 1: But his work is quite brilliant. He's great. Yeah, I'm
Speaker 1: reading a book right now. I'm gonna blank on the
Speaker 1: title about financial bubbles and speculation, which is really interesting.
Speaker 1: It's called it's called Devil Take the hindmost is. Yeah,
Speaker 1: it's an older book. It's actually I hadn't I couldn't
Speaker 1: believe I hadn't read it, and I ran across it somewhere. Um,
Speaker 1: and that's interesting. Um. And I'll, you know, I'll pick
Speaker 1: up some you know, lighter stuff every now and then,
Speaker 1: but I generally tend to try Edward Chancellor. Yes, yeah,
Speaker 1: this is a pretty pretty famous book. Yeah, it's a
Speaker 1: good book. It's very good. Give us one more, one more?
Speaker 1: That is exciting. Right now? What am I reading? Um?
Speaker 1: The guy who runs the AI Institute, I'm forgetting his name.
Speaker 1: He has a book out. It's actually called Love or
Speaker 1: Love Yourself or something like that. It's a very interesting
Speaker 1: book about kind of you know, it's a it's a
Speaker 1: book about modern politics, and about how, you know, kind
Speaker 1: of bifurcated. Obviously we've all become and this concept of
Speaker 1: you know, his general view is, look, you know, it's
Speaker 1: a lot of this his breakdown of human relationships. So
Speaker 1: I got a copy of that. Have you read it
Speaker 1: yet or I'm kind of I'm kind of like alright,
Speaker 1: So I got a review copy of it, and I
Speaker 1: recognize his name and the pitches we need to love
Speaker 1: each other more and we need to be more involved.
Speaker 1: And I'm thinking, wait a second, AI, you're the guys
Speaker 1: who said the poors cord of the crisis, this was
Speaker 1: all the fault of you know, first we did anti
Speaker 1: redlining and that and this whole thing about it was
Speaker 1: the black and brown people's fault. Wait, now you're pivoting
Speaker 1: to maybe this is his swan song. So the story
Speaker 1: I know, right is he's quitting AI after that. I
Speaker 1: didn't know. So, yeah, he's he's been there ten years.
Speaker 1: It's terrible. I can't remember his name. I apologize, I'll
Speaker 1: find you. Probably, so he is leaving AI after ten years.
Speaker 1: In fact, he had really interesting Arthur Brooks. Arthur Brooks. So,
Speaker 1: so when I got this from my editors, here I said,
Speaker 1: you don't mind if I, you know, remove these guys
Speaker 1: this guy's intestines and jump rope with it, because that's
Speaker 1: after after how divisive. So there's a whole another thing
Speaker 1: that in the old days, think tanks used to be
Speaker 1: think tanks, and now they've become these partisan idea shops
Speaker 1: and policy shops. So like, wait, after two decades of
Speaker 1: sheer partisan rancor, you're gonna tell me you now want
Speaker 1: everybody to hold hands and seeing kumbaya? Right, And I
Speaker 1: can't say what I want to say in the radio.
Speaker 1: But so I have not read it. But if you
Speaker 1: read it, I want and you like it, I want to.
Speaker 1: So I'm glad somebody I'll give you the review because,
Speaker 1: to be told, the reason I have it is because
Speaker 1: it was it was a free b at a conference
Speaker 1: I was at, so I might not have seen it otherwise,
Speaker 1: but that's saw him spec See, I'm more concerned about
Speaker 1: the than the cost of the book than my time
Speaker 1: commitment to read it, because it's ten or twelve hours
Speaker 1: that you'll like. And I've learned my my, I'm gonna
Speaker 1: share one thing with you. I've learned that when you
Speaker 1: start a book and you don't like it. You know,
Speaker 1: I was just gonna say that. That is somebody actually
Speaker 1: took a long time tots and one of my partners
Speaker 1: told me that, and boy, that's the most liberating thing
Speaker 1: I've ever heard. I agree. I never would do that.
Speaker 1: I would I would do the fourth March through the
Speaker 1: Baton Death March through the last hand. It is so
Speaker 1: liberating to say, Okay, look like I think I got it,
Speaker 1: and I think I understand the point, and you know,
Speaker 1: or you know, let me skip a couple of pages
Speaker 1: here and there. Nobody nobody should skip my book. Of course,
Speaker 1: I gotta go eat every word from start to finish.
Speaker 1: You gotta plow you a way right through it. Um.
Speaker 1: So what VC influenced your approach to venture investing? Yeah,
Speaker 1: so we've had UM. Probably one of the most interesting
Speaker 1: ones was a guy named Andy Ratcliffe, who was actually
Speaker 1: one of the founders of Benchmark. You know, I don't
Speaker 1: know him, And he was at a firm called Merrill
Speaker 1: Pickard actually, which is where a bunch to the Benchmark
Speaker 1: team spun out and and he was a little bit
Speaker 1: more on the enterprise side, so he did a bunch
Speaker 1: of their enterprise investing. But he was actually, um, he
Speaker 1: was the original investor in loud Cloud and opswere and
Speaker 1: so I just got to know him through that process.
Speaker 1: And uh and I have a few references to him
Speaker 1: in the book in the book there, but uh, you
Speaker 1: know he's he's his His famous thing that he talked
Speaker 1: about it Benchmark was this concept of markets versus teams,
Speaker 1: and uh, you know, basically he's got you know, his views. Look,
Speaker 1: which I think is true is you know, good markets
Speaker 1: always beat good teams, or I should say bad markets. Sorry,
Speaker 1: bad markets always be good teams. But you know, obviously
Speaker 1: you know, good teams can you know they can survive
Speaker 1: in a bad market, but will never likely you know,
Speaker 1: never likely kind of get there. All right, now we're
Speaker 1: gonna do the speed round because they need to take
Speaker 1: you to where of you going next. Tell us about
Speaker 1: the time you failed and what you learned from the experience. Yeah,
Speaker 1: Probably my most high profile failure was actually when I
Speaker 1: was applying to schools. I desperately wanted to go to Stanford, uh,
Speaker 1: coming out of school and was flatly rejected as I
Speaker 1: was at Harvard, as I mentioned, but you ended up going.
Speaker 1: I did end up going, So I went to pen
Speaker 1: actually for one year out here on the East Coast transferred. Yeah,
Speaker 1: but it was a you know, this little persistence persistence. Um.
Speaker 1: What do you do for fun when you're not in
Speaker 1: the office or home reading books? Yeah? I like to run.
Speaker 1: I've always liked to run. I used to be a marathoner,
Speaker 1: but kind of had to hang up, hang up that
Speaker 1: those shoes before. But STIPs, uncles, what is it? You
Speaker 1: name it? All those things? You know? Uh? And then
Speaker 1: I I like guitar, playing guitar. I'm not very good
Speaker 1: at it, but I'm always I've been a country music
Speaker 1: fan for a long time. So interesting, um our final
Speaker 1: two questions. A young millennial comes to you and says
Speaker 1: they're interested in a career in either venture capital or technology.
Speaker 1: What sort of advice would you give them? Yeah, my
Speaker 1: best advice is go into a startup company. You don't
Speaker 1: have to start your own company, but learn the company
Speaker 1: building process. Don't don't go to venture you know you
Speaker 1: will be a much venture better venture capitalist having understood
Speaker 1: the company building process. And my final question, what is
Speaker 1: it that you know about the world of investing today
Speaker 1: that you wish you new twenty plus years ago? Yeah?
Speaker 1: The biggest thing for me is I always I would
Speaker 1: have thought that most of the failure cases would be
Speaker 1: product or market failures, and and look that happens sometimes.
Speaker 1: Look sometimes the product just doesn't take or the market changes.
Speaker 1: The biggest thing that I found over the years we've
Speaker 1: been doing this is it's all about the team. And
Speaker 1: I know that sounds almost you know, kind of you know,
Speaker 1: comical to say, but I thought you're gonna say execution.
Speaker 1: I mean also embedded in that is execution, right, you know,
Speaker 1: are you hiring people at the right time, are you
Speaker 1: thinking about your go to market the right way? Do
Speaker 1: you have the right cultural dynamic in the company. Those
Speaker 1: are the things, you know, when we look at the
Speaker 1: companies that go awry in a good market, it's almost
Speaker 1: always something like that. Huh, quite quite fascinating. We have
Speaker 1: been speaking with Scott Cooper. He is the managing partner
Speaker 1: at Andres and Horowitz, now running ten billion dollars. If
Speaker 1: you enjoy this conversation, we'll be sure and come back
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Speaker 1: any of our previous two hundred and fifty such conversations.
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Speaker 1: I would be remiss if I did not thank the
Speaker 1: crack staff that helps put this together each week. Michael
Speaker 1: Boyle is my producer, slash booker. Attica val Brand is
Speaker 1: our project manager. Michael bat Nick is my head of research.
Speaker 1: I'm Barry Ri Halts. You've been listening to Masters in
Speaker 1: Business on Bloomberg Radio