How To Do a 10x Seed Fund in 2025

known you since probably before you

can as long as you’re way less than a 100,000,000. So I think that you can do investments of less than 100 k. We’ve And talked about this before. Right? I mean, I imagine now with your major fund, Harry, you know, you probably don’t let angels come in for much more than a 100 k. Right? No way. Not a chance. Right. Like, if if you say, hey, I’m doing 750 k rounds, and I’m a I’m an angel, and Harry, let’s go do deals together, you might say, hey, that’s great.

Good for you. I’ll see you out there. But are you gonna do that person any favors? Probably not.

Yeah. But but I suppose if if you’re investing less than a 100 k let’s say Tim Ferriss comes to you and says, I’m willing to do a 100 k in some project that could benefit from his brand and publicity. Probably. A 100%. Of course. And so if you if you say, hey. I’m I’m doing a 100 k checks. I think that could work, but that’s a fund size of probably $10,000,000. Right? That’s not a 100. I completely agree. Why is your fund one fifty when it was $70.80?

Basically, to me, your fund size is your strategy, and I guess I’m kind of famous for saying that for a long time. I don’t know if I’ve ever really expressed why that is, so here’s why. The power law is real. People don’t realize that Pareto is not just eighty twenty. It’s a curve. It’s a continuous curve. So 80% comes from 20%, but it’s also true that four percent yields 64% because 80% squared is 64%, and 20% squared is 4%. And so when you have a fund, let’s let’s just use ballpark figures.

Let’s say you have 25 investments in a fund. Your best investment is gonna have to return 64% of all returns, that one deal. So if you want a five x fund, that one investment by itself needs to return, you know, 64% of five times the fund in profit. That’s why your fund size is your strategy. Your fund size is basically it’s kinda like if you’re a pole vaulter. It’s the height of the bar that you set that you promised to jump over. And if you don’t jump over that height, you have a bad fund.

Did you ever feel like your fund size was not aligned to your strategy? I never really did. I you know, it’s weird. We’re better at a 150,000,000 than we were at 75. I don’t think that was really due to fund size. So, like, trace our history. Our first couple of funds were just awesome. Tapped into the zeitgeist and hit the market at exact right time. You know, I was making a video this morning for Josh Koppelmann’s twentieth anniversary, I just marvel at the fact we used to hang out at Il Fornayo and just marvel at the fact that nobody realized what a great business opportunity this was.

We’re like, are we just stupid? Are we just having delusions? Because nobody seems to think this is a good idea, And this just seems like one of the opportunities of the century just right here. And every time I would see something, I’d show it to Josh and every time he saw something, he showed it to me because neither of us had any money. Like, we were just seeing all these things. Well, fast forward a few years, I’m on 22 boards. I just didn’t have the sharpness of mind.

When your phone’s blowing up all the time and there’s if you’re on 22 boards, it’s blowing up all the time. There’s always something totally screwed up. You’re not as awake to the possibility of what Pinterest could be when you get pitched by Pinterest. Right? And so our next two funds at about 75 weren’t as good. And I remember at the time having some angst about it. So we flew out to Yale because the Yale endowment is one of our LPs. It went to Dave Swenson and said, hey.

Look. I’m gonna have regrets if I don’t tell you. Here’s mistakes I think we’re making and what we’re gonna do about it. And part of it was getting our fund size to an amount where we thought that we could really execute our model well. But we made some changes. You know, we changed the way we did follow on investing. We had a dedicated partner, Iris Choi, do follow ons, and that’s all. And she’s accountable for follow on returns, which more seed funds should do.

Well, yeah, so so the pro rata rights are a right. And so the high order bit to me in all investing, there’s two. Right? One is you gotta get paid for the risk you take, and the other is always play offense with your money. And if you’re a seed fund, in theory, your first checks, you’re playing offense with your money. If you’re not, you’ve got no business. You do you’re just not in business. Right? But there’s the occasional situation where, you know, you own shares in a great company, Applied Intuition, Figma, Twitter, Okta, one of these.

And sometimes you just kinda know. And, yes, the prices get bit up, but there are great firms are coming in. You have a choice whether you wanna exercise that right. And keep in mind, it’s a right that you have that nobody else has. To me, that would be an example playing offense with your money.

Correct. What I came to believe was that the first question you gotta answer is, do I wanna do follow ons at all? You know, you can’t have it be zero. That’s one option. But you’re giving something up when you do that. You’re giving up a right that’s worth something. The other way to look at it would be to say, I think it’s probably higher than zero. And so then the question is just how much higher? And so we settled on 70% upfront, 30% in reserves. But Iris is accountable for that 30%.

Ann and I can’t strong-arm her into trying to, you know, protect some investment that’s not working. She’s like, look, Maples. You know? You guys are holding me accountable for returns on this basket of money.

Well, Iris knows. Right? She’s part of Floodgate. She gets to know the founders, and she looks at every investment that we make as if it were her pipeline. And so some of these, like Applied Intuition, she actually bought super pro rata. She found ways to get more ownership than our initial first check because she’s like, look, this is the best company in in fund six, and we should own as much as we can. Here’s the thing. Right? Most seed funds would say, I know more about this company than the market knows.

That’s why I’m gonna give this company money even though it can’t raise. And in those cases, I I used to say, you know, I think you know things that aren’t so. Right? So I give the market writ large a lot of credit for knowing what a good Series A deal is. You’re talking about firms like Benchmark and Sequoia and General Catalyst and A16z. If none of them want to invest in a given company in our portfolio, I’m like, okay. Who’s more likely to be right about the progress of that company?

Having said that, if they decide they really do want to invest aggressively, that’s a pretty strong signal too because they’re picking not just from the companies we invested in, but from every seed investor. And so they’re judging that to be among the very best outcomes of all seed investments. And in those cases, I think you got to at least look at, do I wanna exercise my pro rata right? You can’t just blindly follow Sequoia and Benchmark and folks like that. But if they’re saying, hey. I think this is one of the best projects in the private landscape right now, having the right to invest in that is worth something.

You not think you should just blindly follow if you get a tier one? No. But but that’s closer to right than not. If I look at fund one, what was our top performer? It was Demandforce. Who followed me in Demandforce? Bill Gurley at Benchmark. What was the second best performer? Twitch. Who followed us in Twitch? Ethan Bessemer. Okay. Let’s talk fun two. What was number one in fun two? It was Lyft who followed us. Naveen at Mayfield Fund, Founders Fund, a 16 z. Okay. What was the second biggest winner?

Okta. We did that with a 16 z, then Sequoia came in, Gray Lock and Sequoia. And so one way to think about it is your follow on dollars might be best thought of as a subset of where the best firms follow. Because we’ve had the best firms follow and the companies not do well. Virage sale, Sequoia aggressively followed and it didn’t didn’t do well. One way I think about follow on investing is for a seed fund, it’s closer to index investing than people think. And if you say, okay, I’m gonna index off of the very best funds, as you kind of point out, more often than not, if that’s all you did, you’d you’d have massively better follow on returns than most most firms.

If the LPs knew if they if they tracked, what’s the return on follow on checks versus first checks? There’d be pitchforks and, like, revolts in the street. It’s so bad. Do you agree with ethos that every check has to be a fund return? Ish. Here’s the way I would phrase it. Our business is hard in seed but not complicated. 5% of our checks need to be a 100 x cash on cash on the first check. 10 to 15% need to be 20 x cash or cash on the first check.

You achieve that, you’re 10 x fund. Now the loss ratio is about the same between a three x fund and a 10 x plus fund. What matters is the magnitude of your big winners, but it kinda goes back to this Pareto idea. If your best company returns, say, 64% of your fund, the follow on check-in that company is gonna probably be a 20 bagger.

You never know, but but you can say we have a way to hold ourselves accountable. Ann and I, we’re measured on what we call picking skill, which is what fraction of our first checks become 20 baggers or 100 baggers. IRIS is measured on what fraction of follow on dollars go in the best companies. And that’s completely objective, right? You can just say, here’s a stack ranking of the companies by their current value, what percentage of our dollars are in those top companies. That made a big difference in our returns.

That sounds fancier than what we do. Do you

No. I say I say, for this to make a 100 x on the first check, what would have to be true? The way I think of scenario planning on a first check is I say, okay, given that it’s 85% likely, it’s not in the top 15%. You know, if I say every investment is gonna be in the top 15%, it’s just simply true. Right? It’s not grounded in reality. The better discussion to have is to say, look, given that it’s 85% likely to not be the 15 top percent, how big does it need to be if it is in the top 15%?

And is there a world where that could happen? What does that world look like? And this is why, you know, there’s all these, I believe, false debates about valuation. Everybody says, well, if the company’s awesome, you can pay any price. And I’m like, that’s true to the extent that you can make a 100 x on the first check. To me, that’s a high order bit. If we’re gonna invest 1 to $2,000,000, can we make a 100 x on the first check? And if we’re doing it at 40 post, like we did Applied Intuition, okay, they just raised it 6,000,000,000.

So we forecast that, but but this is why price matters. Right? So it’s a lot easier because our entry price is 25 now. In the case where that’s your entry price, that’s what the exit needs to be. Yeah. Yep. And there’s no escaping that. And people say, well, that was then. This was now. I’m like, no. I’ve studied venture returns for the last fifty years, and the physics of what a good fund looks like has not changed.

I don’t think so. I just think that a lot of people have forgotten what the right goal is. I sit there and I say, look, I need to make 100 X on my first check. There has to be a way I can do that if everything goes my way. I’m not going to get that by acting like an efficient market operator. To the extent that seed investing is an efficient market, it’s not gonna be a good business. And so you gotta find inefficiencies for it to be a good business.

And then people say, well, what if what if I can’t find inefficiencies? I’m like, okay, then you shouldn’t be a seed investor because the idea is not to invest as an active investor in efficient markets. Right? Like, if you’re an active investor, you have to find inefficiencies in the market or you got no business investing.

The mistake that people make is to think of startups as a, quote, unquote, market. More of the companies are fully priced today than they were when Josh and I got started. But to me, that’s just part of the fun of it. That’s part of the spirit of the game is to see what other people aren’t seeing or at least try to do that or maybe occasionally to get into something that not everybody can get into. But to me, that’s the fun of it. It’s it’s like solving a puzzle or a riddle.

There’s so many startups. There’ll always be 30 or so every year that are great.

I’m unlikely to do that. I I like, I need to think that it could move the needle on the fund. You know, I need to, you know, probably about as low as I would go as $500,000.

Okay. You should have done it then.

I believe that there’s always and I don’t know what your fund size was back then. It’s probably 30. Okay. You should have done that deal. Yeah. I like to say, you know, our business is hard, but not complicated. 100 baggers on the first check, 5% of the time. In order to do that, you have to you have to pick opportunities that can be big enough if they work, but you also have to care somewhat about the price.

Can it make a 100 x on the first check? Will you do these rounds? If I think it can make a 100 x on the if it was cast or Eunice, I would. But I’m like, okay. So, like, this will happen sometimes. Some of our younger folks will come to me and say, hey. Look. Here’s a round that’s done at ten at forty post, and we did Applied Intuition at ten at forty post. Then I say, okay. Is the founder Cas or Eunice? Because I think Casor is one of the best founders I’ve ever worked with.

They’re like, well, I don’t know if he’s Casor good. I’m like, okay. It’s not worth forty Post. You know, forty Post was like a real stretch for us. And and we’re like, this company is gonna have to be worth north of $5,000,000,000 at least for that bet to have been justified. Because here’s the other thing, Harry, is let’s say that I I thought, okay. I can’t make a 100 x, but I can make 20, and he’s that good. There’s an opportunity cost. Right? My fund, I only get 40 shots on goal.

And if I take one shot that I don’t believe has any chance of being a 100 x, now I have 39 shots on goal. And I have one fewer way to make a 100 x. If I’m gonna raise a $150,000,000, I need to know what game I’m playing, and I need to be honest about it and play that game with integrity. There’s a few things that give you a real advantage today that didn’t matter as much then. I think today having a temperament advantage makes a big difference.

What do you mean a temperament advantage? So like in 2021, we’re seeing all these projects and they’re they’re raising money at 30 and 35 and 40. Ann and I are just looking at each other like, we don’t have to do that. Some of the young associates and principals are like, we haven’t done any deals this year. I’m like, that’s okay. You know, we haven’t found any that meet our conditions. I think that Ann and I have done this long enough to be like, okay, we don’t have anything we need to prove to each other and we don’t need to, you know, have points on the board this quarter, this month, this year.

Silicon Valley will make more. We’ll be there. And so I spent a lot of time as does Anne thinking about what’s our circle of competence. What are the situations where we’ve made money historically? And what are the situations where we think we’re well set up to make money in the future? And we need to see projects that meet those conditions. Did you agree with Gurley that you play the game on the field or not? You have to play the game that’s on the field. But what if the field is not your conditions?

Well, if the field’s not your conditions, you just have to be more discerning. Buffett said it well once. Investing is like a game where there’s no called strikes. And so you just let pitch over pitch go by. And everybody says swing, you bum. Everybody else is swinging. And you say, no. I don’t have to swing. I don’t like, I don’t see my pitch. I’m just gonna wait until a meatball comes over the plate and just swing at it with all my might. And if one doesn’t come, well, I’ll wait.

Some will, someday. This is a great way to think about pacing because in 2009, everybody was in the fetal position. And Ann and I were seeing deal after deal where we’re like, this totally meets our criteria. This is awesome. Ann funded Lyft at 5,500,000 post money. How big was the check? She wrote $7.50 k. So she did pretty well on that. Right? She made like, 250 x maybe on that investment. But we were in an environment where people were afraid to invest. People thought the world was gonna come to an end.

But because we were like, okay, this is the type of project that we think is attractive. When we see one of those, we don’t care what the market’s doing. We’re gonna we’re gonna say yes to those. Similarly, in 2021, I only made one investment the whole year, this company, Hadrian. Why is that? Well, I just didn’t find any companies that met my criteria. And so one thing that’s interesting about having a circle of competence, and I actually learned this from Buffett and Munger, is if you know what your circle of competence is, if everything’s systematically overpriced, you do fewer deals because fewer deals meet your conditions.

If everything’s systematically underpriced, you do more deals. But that’s the situation you wanna be in.

You have to play the game that’s on the field, but you don’t have to play the way everybody else plays. Ultimately, if you’re not finding inefficiencies in the game, you ought to be asking yourself, what am I doing? What am I in this for? That’s what we’re paid to do. We’re paid to find opportunities that are gonna make money. Nobody’s interested in indexing the broader overpriced seed market. That’s not a good business. And so you gotta find attractive opportunities.

For us, a lot of that in the AI arena has been some of these enterprise, you know, so Applied Intuition was one, a more recent one was Cicero, which is kind of more focused on legal tech that but we had a very specific set of conditions for what kinds of AI investments we would do and not do.

Well, Applied was expensive. It was 40 post. When you look at your

No. The reverse is true, but I don’t know if that would still be the case. Were they hot? Well, Applied was hot. Kassar would have raised money from anybody he pitched. He was that good, and his idea was that good. He was that well prepared. So he pitched two firms, got term sheets from both, decided to work with Mark. Mark joined the board. And I kinda said, okay. Probably the Series B round is a little bit derisked here, and so I should probably put in as much as I can get in, on the round, and so that’s what we did.

And then immediately, as soon as our check cleared, Iris was trying to buy more.

Yeah. And then the other thing I’ve done is I’ve, I’ve been in a situation where the founder wanted me to do something with him, and I said, I’d like to work with you too, but the price is too high. And this is one of the things about convertible notes is I could say to that person, look, you know, you can issue a convertible note any price you want. You know, if you’re raising at 20, you can sell me half of it at 20 and half of them at 5.

They might say, well, other people may not like that very much. I’m like, I understand that, but, like, you can you you can decide, but I’m not gonna pay I’m not gonna pay that price that everybody else is paying. You know, you learn quickly whether they value your involvement in a differential way or not.

I would if it made a difference meaningfully in my ownership early, I’d do it. It’s the difference in winning and losing the deal. It’s not so much that. It would be maybe I can say to the founder, hey, look, this is a way for us to have some type of a joint gain. I know you need to get the price you wanna get. There are reasons that you wanna get that, but maybe we can get some type of a blended price if I buy preferred plus common.

And then I I own more. I’m taking more risk. But if I believe in the company, I’ve never made money or lost money based on common or preferred, ever in the ones that work. Will you do uncapped notes? Only in very rare cases. Have there been any? We would have done one for Applied. Like, right after the Series A, we wanted to own more. And so there are times when doing an uncapped note works to your favor if you say, I have so much conviction. I’ll pay a discount to whatever the next price is.

I don’t care. You know? Otherwise, why is the founder gonna give you any kind of preferential treatment when the round comes together? If you believe in the company, you gotta position yourself for the next round.

I was tempted to at times, but I never did.

Yeah. So I I think that there’s a couple of things. And by the way, this is something we haven’t really talked about yet that is good for seed. So let’s imagine it’s 2015. Lyft’s stock at the time in the private markets was about $25 a share. It was worth more than it is today by a meaningful amount. At the beginning of the year, we said, you know, we need to sell some of this. We’re behind a billion and $0.5 preference stack. We’re in this thing at a $5,500,000 post in my evaluation.

We’re competing against Travis Kalanick, who’s a freaking maniac. He’s not a fun guy to compete with. This thing is gonna impact our fund. Right? We are way in the money on this thing. And so Ann had a post it note on her monitor that said IQ test. We put it on in January that year, and the IQ test was I need to find a way to sell some of our Lyft stock. So she ended up selling a fair chunk of it. I don’t think half of our stake, but a fair amount in 2015.

So one thing I think that a lot of seed funds What price? $25 a share, let’s say, or 5,000,000,000, something Yeah. Like It was really good. Like the highest it ever got. That returns the funds straight away, no? Yeah. Oh, yeah. So so we were like, okay, we need to sell enough to return all the fund to. So she did. One thing that I think a lot of seed funds don’t get is there’s two ways to make money. One is on entry pricing inefficiency, but the other is to arbitrage exit price inefficiency.

And like with Lyft, a 16 z was in Lyft. They couldn’t have done that because the the problem is, a, it would have sent a signal, and, b, selling couple $100,000,000 or whatever, it doesn’t matter to a 16 z. It doesn’t affect their fund enough. And so one of the things that seed funds can do is they can start to say, hey, is the market about to value this thing as if it executes perfectly for all the next five years? Because the capital markets are such that there’s so much money that a lot of these companies, no matter how exciting they are, are gonna get fully valued as if they’re perfect for a very long time.

that’s the thing. Right? Like, this is the other thing I found is that when the times you should be selling into some of those rounds, everybody wants a share of the company. What I learned was that it’s actually a win win for the founder because you say to the founder, you you can’t just do it on the fly. You can’t be transactional. But if you say to the founder, hey. Look. Let’s be realistic here. You’re better off in the fullness of time if certain players are in your cap table and not a seed fund.

Fidelity or, you know, folks like that. So what do you say we get strategic about it? How about we put ourselves in a position where we can get somebody like that in when you raise your next round if it clears a certain threshold? What usually ends up happening is at first they’re like, I don’t know. But what ends up happening in reality is by the time the round comes together, the founder is coming to you saying, dude, you gotta do me a solid. You said you were gonna sell.

I need you to sell more because everybody becomes pigs. Everybody wants in. Nobody pays attention. So ironically, the the times that it’s easiest to sell in these really up rounds is probably the time you should think seriously about it when you’re a seed fund. Iris came up with a term for it, actually. We call it an initial liquidity event. So it’s an event that has the same impact on fund economics as an IPO. So it can’t be just, you know, 10,000,000 here, 15,000,000 there. It’s gotta be something where it has the same impact on your fund as if the company went public.

Yeah. You never make a trade that you don’t somewhat regret. But you crushed it with Lyft, Mike. Yeah. But, you know, Lyft Lyft traded up to, like, 75 when it went public and lock up. We got out at, like, 75. And so we would have done even better, but it was still the right decision. It was still the right risk adjusted decision. Once your funds in the carry and you’re in the money and it’s like you’ve still got that upside. Does

I think it does a little bit, but I think that that the other thing is it’s like you get into these situations where the variance in the potential outcomes is so great. So I agree with Brian Zingerman in one sense, which is some of these things can ride a lot farther and higher than you think. I agree with that. The issue though is that sometimes both can be true. Right? You can you can be in a situation where you’re a 100 times in the money in five years, And no matter how good the company is, it’s just valued to absolute perfection.

In those cases, I look at it like even if the Brian Zingerman outcome happens and it doubles again or even quadruples again, just have enough stock so that, you know, you’re gonna benefit from that upside too. I just think that when your 100 baggers are pretty rare. Right? I keep track of them. I so I have a list. I can show you on my laptop. Right? 100 baggers of the last twenty years. How many have you got? There’s a little over a 100 that are exited, and there’s a little over a 100 nonexited that I track.

Most of them I don’t track because I don’t think they’re real. But How many 100 baggers have you got? Let’s see. How many have I got? I’ve only got, like, three or four. Twitter was a little over 300 x. Ann gets all the credit for Lyft. That was 205 x. Applied is probably encroaching on a 100 x in the first check, which got close, but not quite there. It got to 94 x. And there’s a few others that I think have a shot.

But here’s the key. You gotta do it in a way where you’re not just being selfish about it. You wanna do it in a way that, in fact, we did sell some applied, but we did it in a way where it was in full cooperation with Gasser. Right? I was like, I’m not gonna do this behind your back or I’m not gonna do this against your good wishes. And so is there a way we can make this a win for you? But you can’t have that discussion the day the round closes.

Right? You gotta you gotta be like, hey. Here’s how I’m seeing things. Am I making sense? You know, Castor is a grown up. Right? He’s like, hey. I get it. I understand you got a business to run. So do I.

They do. Especially if you don’t surprise them and you’re just not greedy and transactional about it. Or do it behind their backs. Yeah. That’s And and if you say to them if you say to the founder, hey. Look. Can we agree that all things being equal, this would be a good investor to have in your cap table after the next round, and this is a good way for you to get them without getting crazy massive dilution? What do you say we try to engineer those circumstances?

in the

Hopefully not much. I think that that sometimes the place where I would also agree with Brian Zingerman would be sometimes you get in the money and you lose sight of the fact that you can get a lot more in the money. I I think I I

I I think it kinda goes back to the first principles. Right? You can make money on the buy, and you can make money on the sell. And what most people don’t understand is that the seed funds are actually better positioned to make money on the sell than anybody, better positioned than the multistage by a wide margin. That requires, though, for the seed manager to be much more sophisticated than most are being. Most are just like, should I sell? Should I not sell? What you wanna do is have an opinion.

Right? And you want it to be grounded in the facts. Why do I collect information on the 100 baggers? Because I’m like a train spotter. I’m like, you know, in Britain, right, you have those train spotters. Do do you like

I think it’s case by case. I think I think you should say to yourself, okay. There was a time when we were sober, and we kinda said if if the following things happen, we might be sellers, and that’s happening now. So do you still feel

Most of my mistakes have been in our early funds, we followed on in too many rounds in the companies that weren’t gonna make the difference.

Our biggest failures have been failures of imagination. You know, it’s like when I passed on Airbnb, date a dog.

at it is I need to understand what I didn’t see, and I need to be really tough minded about that. That’s not about beating myself up. It’s just saying, is there a set of frameworks that we embrace today that would have caused us to say yes? But we do that not just with Airbnb. We do it with all the 100 baggers. We do these 100 bagger deep dives. We did one on Marketa. We did one on Zoom. We did one What do you learn from them?

So we one of the things we track is, okay, if you’d said yes at the seed round, what kind of a multiple would you have made? How soon would you have made it? What kind of dilution would you have seen? Then you say, okay, here’s our frameworks. One of our frameworks is did they have an insight? One of our frameworks is did it harness an inflection? One framework is founder future fit. We’re in What is

So like, I’ll give you an example. So like Zoom. Zoom, we didn’t see, but started out as this consumer everyman conferencing thing called SaaS be, and that’s when you would have had to invest in the seed round. So did it really harness an inflection? Hard to argue. Did he have a fundamental insight? Hard to argue. His initial vision for the product was just wrong. But like Eric had been at at Cisco as part of Webex for ten years. He’d been thinking about video conferencing all the time.

So his founder future fit was actually quite good. So like what I founder future fit is it comes from William Gibson. He says the future’s already here. It’s just not evenly distributed. And what he means by that is that great startup ideas don’t come from trying to think of a startup. They come from a founder who’s living in the future and who notices what’s missing in the future and builds what’s missing in the future. And it reminds me of, Isaac Newton. He was supposedly at a party, asked, when the apple fell on your head, why is it that you all of a sudden had this insight about gravity?

And Newton said, it’s because I was thinking about it all the time. And so the founders have found our future fit. They’re like obsessed train spotters in a rabbit hole thinking about this stuff all the time.

It’s it’s really hard. Right? I think there’s a few apart from just do you think the founder’s great, There’s a few signals that are interesting. Right? One one is does it harness inflection? Lyft harnessed the iPhone four s had a GPS chip in it. So that happens outside of the startup. The second thing we look for is, what do you know about the future that’s nonconsensus and right? And then the third is founder future fit. One of the things that I’ve learned in looking at these 100 bagger studies is some of these things become clearer later, and you have to figure out what’s the real signal at the time you have to decide.

And so you wanna get a time capsule of that startup. You wanna know what was the founder like at the time? What was the pitch deck like at the time? What was knowable about it at the time? And quite often, I’ve found in doing these that founder future fit is the best signal. It’s the most discernible way to figure out if the founder’s likely to figure this out.

Yeah. So, like, I I look at it like almost every great startup is pursuing a future that’s meant to be, and there is usually one team that’s ideally suited to that future. So give you a couple examples. So like Okta. So I meet Todd MacKinnon, and he’s with Todd and Freddie. And he says, I’ve been at Salesforce for all this time. All the early adopters of the cloud use Salesforce, and now they’re using other cloud apps. There’s gonna be identity management problems for cloud apps, and I’m gonna build a system.

And I’m the VP of engineering at Salesforce. These customers trust me. I know what their problems are. And I’m like, okay. It’s a good pitch. Pretty damn good pitch. Right? And I’m like, okay. If anybody can do it, he can do it. And if anyone knows, he knows. If anybody knows, he knows. So what was true about Todd? First of all, he was living in the future with those customers. And when you live in the future with those customers and you’re intrinsically motivated by that future, you’re more likely to understand what you should build, number one.

Number two, you’re more likely to attract early believers because you’re more credible. And so I look for founders who are living in a valid future, are intrinsically motivated by the future they’re pursuing, are more likely to notice specifically what to build and are more likely to convince people to believe that they’ve built the right thing. If that team is present, I say, is this team the most likely team in the world to make this future real the quickest?

No. Because let’s take one. Mark Andreessen. Right? He was at the University of Illinois. He’d never run a business before. He was in a supercomputer lab. At the time, the Internet had just been made legal for business, so it could only be used in universities and academia. And Mark is trying to make a collaboration software for a team of researchers. And so he starts tinkering with the early technologies of the world wide web, and he creates a browser. But was Mark going after a market for browsers?

Heck no. Mark didn’t know what markets were at the time. Right? He was just trying to build what was missing about the Internet. He was he was trying to make the Internet immediately more useful for him and his team. So why is that important? Well, Mark was living in a time machine. It turns out that he was using machines similar to the machines everybody would have soon. He was on a network similar to the kind of networks everybody would be on soon, and he was using the type of web protocols everybody would be using soon.

And so his knowledge about that, that domain knowledge of the future was more important than any business person’s knowledge of improving the present. Everybody thought AT and T is gonna build a digital highway or that, you know, Time Warner or Microsoft Network or AOL or maybe the government should build the digital superhighway. Everybody just assumed it would be a top down extension of what is, and nobody assumed that some kid making minimum wage as a programmer in a supercomputer lab would have the better answer. It it wasn’t gonna be tops down.

It’s gonna be a messy bottoms up web of stuff, and that was the paradigm. That was the winning paradigm. Mark’s advantage was not born of his experience in business. It was born of his experience with the future. Where is your biggest weakness in how you analyze founders today? My biggest weakness has always been that, I’m I’m too optimistic about whether people can pull it off. It’s just exceptionalism is so rare, and so few people are truly great, and so few people just have the willpower and the grit and just the

Oh, yeah. Yeah. It has nothing to do with it. There is an aspect of great founders quite often where they’re disagreeable. Because when you think about it as a breakthrough startup is a provocative act. It’s a disagreement with the present. And the more of a breakthrough it is, the more disagreeable it is. Quite often, these founders are disagreeable people because the president will fight back, and it won’t fight back fair.

this saying, detach with love. So I’m like, hey. You know, it seems like I’m not able to help much here. I’m not just gonna sit here and tell you that you’re not doing a good job and that we disagree about everything, and so that’s okay. It’s nothing personal. And and if you change your mind and I can be helpful, let me know.

No. But you can’t affect it that much regardless. I’ve never worked with a company that got product market fit that wasn’t wildly successful, and so that’s kind of the only thing in the early days.

don’t think they have product market fit.

Do they still?

No. But so they didn’t. They just had a temporary they were like a solar flare.

You know, it is funny. I was talking to, Baijoubbat last week, you know, one of the cofounders, Robinhood. I like him. Yeah. Love that guy. We were talking about product market fit, and he goes, when we got it at Robinhood, I was like, oh, that’s what product market fit looks like. And so I

But but, like, if we go back to the kind of the the notion that I think you were getting at, can I help the founder get product market fit? Not that much in my opinion. There there are some things I can do. Part of what I can do is addition by subtraction. I can remind them that, you know, no matter what everybody’s saying, that is the thing. It’s like Vince Lombardi. You say winning isn’t everything. It’s the only thing. Product market fit isn’t everything. It’s the only thing.

Get product market fit, eliminate distractions. What can I do to help? And last time we talked, you said this is the bottleneck between us getting strong product market fit and today. Is that still the case? How can I be helpful there? The other thing, though, is and I’ve heard some of your prior guests get to this. Being a founder is not a fun job. It’s almost like being an artist. You know, it’s almost sometimes it’s almost more of a curse than a blessing, and it’s almost like you have to do it because you’re called to do it, but it’s a hard freaking job.

And it’s not a fun job. It’s a it’s

job.

Right. And this is why I really appreciate some of these founders that I’ve worked with who’ve done a good job, you know, like Casor. I mean, he has enough money to do whatever the heck he wants. But in fairness to the CEOs of those companies, a lot of them never had any influences around them that said, hey. You’re about to raise a bunch of money. That’s cool. But like, let’s not you and I be breathing our own fumes. We don’t have product market fit yet. We we don’t have an objective way to say, yes, check the box.

We have product market fit. And so if we’re not careful Or even

Yeah. But what but what usually happens that’s even worse is these companies raise a lot of money before they have legitimate product market fit, and they hire ahead of achieving it. And now all of a sudden, they’re doing a bunch of wacky nonsense that’s not contributing to product market fit and they just become culturally broken. Right? They just they just end up never developing any muscle memory for what an attractive customer is, how you should find one, what which ones to avoid, what features are gonna be added to the strategy, which ones won’t.

problem is there’s an element of this where everybody in the game has an incentive to keep keep the plate spinning. It goes back to the first thing we were talking about. My business is hard, your business is hard, but it’s not complicated. 100 bagger on the first check. And it’s like, if we get one or two or three of those in a fund, we’re gonna be successful.

Oh, yeah. What what one comes to mind? We had one that was struggling, and we were about out of money, cotweet. And so this is kind of a funny story, actually. So talk about in in The US football. Right? I have this expression. I call it a forward fumble. So Steve Anderson, a baseline, is talking to this company, co tweet, and he’s like, hey. You know, what do you think the the valuation ought to be? And I said, I don’t know, man. They don’t have a lot of traction.

I I don’t think I would do much more than 3,000,000 pre if I was you. So Steve comes back and, says, they accepted our offer. And I was like, what do you what do you mean our our offer? I thought you’re just looking for my just side about just what the price ought to be. I didn’t say I was offering anything. He’s like, come on, dude. You know, like, you can’t you can’t leave me hanging now. Jesse’s like, we’re both in this thing. And so I’m thinking, shit.

I really like Steve a lot, and I think he’s really, really a great guy. Brilliant. I was like, I’m kind of interested in it, I guess, and I don’t know, and I need to think about this. At least the price is pretty good. So we do this thing together. You know, I probably put in few $100,000, and Steve put in more. Not that much later, cotweets pretty much out of money. And Steve’s like, hey. We we kinda got this problem. We’re almost out of money. And I’m thinking to myself, damn it.

You know, I can’t believe I let him talk me into this. This is the dumbest. I’m never gonna make this mistake again. And then next thing I know, Steve says, hey. Well, it looks like exact target is gonna buy this company. At the time, I’ve never heard of exact target. They’re gonna buy them for stock. And I’m thinking to myself, great. The last thing I at least we’re not out of business, but now I have exact target stock. I’ve never heard of some company in Minneapolis.

Exact Target buys them, and then exact target goes public. And I’m like, wow. They’re going public. And I’m like, how soon can I sell? Right? Because I know nothing about exact target. Well, before the lockup expires, Salesforce decides to buy exact target. So we end up making 23 times our money. It was like when you fumble the football, it just bounces end over end up the field, just keeps going and going and going. And every time we’re like, oh, man, I wish I could get out of this.

We couldn’t. And it just kept going.

They are starting to blast a lot of rockets into outer space. I mean, what they have done is just so incredible, and I don’t have to squint too hard to see a world where they’re the most valuable company in the world. I mean, because if you’re the most important dominant company in outer space, that’s a big deal. You look at, like, North Carolina, you know, has this hurricane. We’ve passed some what it was at $40,000,000,000 build broadband better bullshit bill. Nobody’s built any broadband connections I’m aware of.

And everybody’s like, Elon, can you help? Puts his satellites above and, like, you know, kind of makes it free. You know, he helped with Ukraine. You know,

Well, that’s a different question. But but, if like, you’re asking me company of the year, it’s SpaceX in my view. If people are saying, look, the problem with SpaceX is they’re too powerful and that they dominate the skies and all that stuff, to me that kind of underscores the year they had. But but also just, like, the impact that they have. Right? Just their ability to just provide broadband arbitrarily anywhere, anywhere in the world. And and by the way, it’s not gonna be just broadband. They’re gonna be able to launch payloads of all kinds of things.

Bayajubat’s new company, he’s trying to have these satellites that have these solar panels that beam lasers down to earth, you know, for energy anywhere at these base stations. And so who’s gonna put those things up into outer space? It’s gonna be SpaceX, you know, putting the payload out there. And so, you know, you get to a world where SpaceX becomes a platform dominant supplier for outer space, And I think that’s pretty, pretty impressive. What do you think was the fund of the year? I’m gonna go with 20VC.

Dude, dollars 400,000,000 fundraise, fist bump for the win, man. I mean It’s very, very good. Barely not even a kid. Yeah. And, know, and and you’re doing this in Europe, and, I mean, $400,000,000 in Europe, that’s something. You should be proud of what you did.

I was

America, I would have done it. That’s very, very kind of It’s interesting. I I don’t know if if you feel this, but some situations I’ve had when things worked my way, you didn’t always let yourself be fully aware of it at the time. You didn’t stop and say, hot damn. That was something. I really did something there. And, you know, maybe you’re not doing that when it comes to this $400,000,000 fund, but give yourself some time to come up for air and be like, hot damn.

I did that.

Yeah. But, also, it was legendary. Like, what you did was legendary. You still have a lot to do. Every now and then, it’s good to come up for air and take it in.

the

Founder of the year. Elon. And, you know, an investor of the year as an homage, I’d say it’s Charlie Munger because I I think the world’s really gonna miss him. Probably, of all the investors, you know, I’d say that that, Charlie Munger and Howard Marks have influenced my view of how to be a good all around investor more than anybody.

His memos for Oaktree Capital are just insane. A lot of the ideas, in Pattern Breakers were a realization that startups are all about being nonconsensus and right, but in a much more massively disruptive way. And so Howard looks at it through the lens of second level thinking and knowing something that the market doesn’t know when you make an investment so that you can outperform. But what startup capitalism is about is refusing the premise of the current rules and showing up out of nowhere and changing the subject.

And the only way you can do that is to be nonconsensus and right. You can’t only by being radically different can you make a radical difference. And a lot of that thinking I internalized from Howard. M and

or

I don’t think I have as good of an answer for that.

I think they definitely optimized their outcome.

twenty five. What will we see? I continue to be intrigued by what could happen with Bitcoin. When I think about the way venture capital has thought about crypto, most of the really smartest people I know have been focused on Ethereum and Solana. And I look at Bitcoin, and it just feels to me like it’s the thing hidden in plain sight. It feels to me like there’s a world where Bitcoin becomes more valuable than gold and then some, where, there’s an entire financial ecosystem and rails around it.

And if that happens, Bitcoin’s got a lot of room to run, but I think that there would be a lot of startups that could create an ecosystem around it that would be interesting.

To me, success would be it changes the cultural norms of what’s acceptable from an accountability standpoint. Like, I don’t think that Elon is gonna be able to do what he did with, say, Twitter, fire a bunch of people and change all the rules and Bring in a sink? Yeah. He might be able to do that. Am I the

Oh, god, you were thin. Yeah, let that sink in. Here’s what I think is happening. And by the way, it’s not just Doge, but like, I think for example, what Lonsdale, Joe Lonsdale is doing with his Project Cicero is really good. One of the problems that we have with government in The US is you’ll have a government entity that has a bunch of money that produces terrible results that are only getting worse, and they keep hoovering up more money. At some point, we need to get to a place where we can say, can we agree that if we put money into something, we should have a goal?

If the entity achieves the goal, it gets more money, and if it doesn’t achieve the goal, it gets less money. Can we agree that that’s true? Republican, Democrat, whatever. Can we agree that we should even at least try to see what the goal is? Hold people accountable for making those goals. Now you’d be surprised. Like, imagine, like, the crappiest company you ever saw. Now imagine that company, and the worse it does, the more money it gets. And the worst departments in the company get the most money because they say, well, the problem is that we’re underperforming because you guys are underinvesting in us.

That’s what, like, so much of the government is like today. And so it’s not just Doge in terms of the federal government, what Elon’s doing, what Vivek Ramaswamy is doing. What Lonsdale’s doing is important too because he’s trying to take it to the local level. You’re not gonna be able to solve this stuff overnight, but what you want to create is a culture and a set of mechanisms for accountability and for a natural way for things to recede when they’re not effective. And if you could create a permanent change on that front, that would really be a big deal, I think.

recede? Right now, there’s just too much money, but but I don’t I don’t don’t think it’s ever recede. Worse. I I think it might be.

The thing that I think that most people don’t have a handle on yet is exits are cyclical too. Throughout my career, you have these fifteen year windows where close to half of the exit profits are made, like, in an eighteen month to two year window.

to have That is the business. So so, you know, every fifteen years or so, you get this window of about eighteen months to two years. And if you wanna do really well, the secret is to have a bunch of very good companies in flight Yeah. When that happens. So a lot of these big multistage funds, the problem they’re gonna run into is they raised money on exits predicated by twenty twenty to twenty two twenty two exits. There’s a lot of evidence that’s just not gonna happen, that there’s gonna be a long window of time before we ever see that again.

The multistage funds will, over time, feel pressure to rationalize their fund sizes. They’ll they’ll do it slowly, and they’ll do it, quote, unquote, deliberately.

Well, and the other thing that’s happened is, I think a lot of people have forgotten what a seed round even is. And so now you you have seed rounds that are like 4 or $5,000,000. To me, the purpose of a seed round is you have an insight about the future, and you have a massive risk that you’re hoping to take out. The ideal seed round is one which provides slightly more than the minimum viable amount of money and time to take out that risk. And the reason is that that’s the riskiest time in the company, and it’s also the most expensive time to use capital because you never get more diluted than you do the seed round.

What founders should do with their seed round is they say, I’ve got an insight about the future that’s nonconsensus. I need to prove that I’m right. Because once that you prove that you’re right, you’ve taken the single biggest risk factor out of the business. You’ve done the most value additive possible thing you can do to the company. You’ll raise at will at a much higher price.

Fine.

the prob but here’s the problem. What happens more often is people raise $4,000,000 and they just go do a bunch of stuff. They just don’t have a clear line of sight. Like, what what you want to be able to say is I need to establish that my insight is true. And if I establish that my insight is true, now I’ve done more than any single thing I can do to take risk out of this. And that is the the best thing I can do to enhance value creation.

If that means they raise a lot of money after that, okay, fine. So be That that’s a different discussion. Then the the question becomes, what is the value strategy value creation strategy for Series A? But what’s happening now is people are raising $4,000,000 because that’s what it takes to dilute 20%. That’s just stupid. It’s it’s not a good way to get started, and it hurts the founders even more than it hurts the VCs because the one thing you never get back as a founder is your time.

And if you raise $4,000,000 you’re three years in, you’re doing seed extensions, you’ve hired a bunch of people, you’re much better off if the insight was wrong, you’re much better off knowing that within a year.

Most of those didn’t raise a lot of money before market fit.

they had have

I think

back. You know, constraints are powerful in the early days, and constraints are the thing that allows you to understand what the true laws of physics are for your company. And if you operate in the early days without constraints in terms of time and profit and finding desperate customers, you’ll be a worse business. You’ll just be a worse startup. It just is true.

I believe that more people should pay attention to the the core tenets of Christianity, and I don’t mean that in a religious way. I mean it in a philosophical way. There were some things that Christianity introduced to the world that were important. One is this idea of the forward notion of time rather than cyclical time. The other thing that Christianity introduced was human rights as an inalienable right. The other thing that it introduced is this idea of unconditional love, which is a little bit harder to explain in a sound bite, but it’s it’s sort of this idea that real love doesn’t have conditions.

And I think that those ideas are really important for sort of

Yeah. So boundaries are different from conditions. So, like, a condition would be I get my feelings hurt somehow, so I say something intentionally mean to hurt hurt you back. Well, if you buy into the premise of unconditional love, you’d say it would be irrational for me to ever do that because I love this person. Why would I why would I intentionally wanna harm that person? If they say something bad to me, I can say, hey. Look. Something’s clearly going wrong with this conversation. We need to have this conversation some other way.

This isn’t working for us. But like unconditional love is a really powerful way to think about stuff because it causes you to realize that if you love somebody that you always want what’s best for them. That doesn’t mean you always agree with them. That doesn’t mean you always put up with their crap. But it means that you sincerely want what’s best for them no matter what they do and that you try to show up in the world in a way that that’s true. And one of the things that I really like about the teachings of Jesus was he basically said, when you step back, that’s really true about everybody, that you should try to be that way about everybody.

That doesn’t mean if somebody’s hostile to you and you gotta defend yourself, you defend yourself. But you do it through the lens of saying, I regret the fact that I have to harm you because you’ve made a choice that gives me no alternative. But what you try to avoid is calling them names and, you know, all this other stuff. I think that that is a really profound idea, and not enough people have internalized that idea and how powerful philosophically that was. But like everything around us in the Western world, much of it came from Christianity.

And by that, I don’t mean Jesus as a religious figure, but Jesus is more like a philosopher king.

That’s another good one. It was, do your best. So what my dad helped me realize so, you know, in, another Brit, Adam Smith, did you ever read the Wealth of Nations? Yeah. Yeah. It’s pretty good. Right? Fantastic. Pretty legit. And so one of the things that he talks about in the Wealth of Nations is this principle of comparative advantage. I think most people have the wrong idea about competition. If you think about it, you have your strand of DNA, I have mine. Nobody in human history has ever had the same DNA as anybody else, ever.

And so that means every single one of us is like a node on a network, completely unique, which means that everybody in the world, everybody, I don’t care who it is, has some set of comparative advantages. And so the failure mode that a lot of people get into is they try to be the best. What I learned from my dad is that what you wanna do is do your best because there’s only one you, and you can’t be better than your best. I think Peter Thiel is really smart, but I’m never gonna be better at seed investing than Peter Thiel by trying to study, you know, Strauss and like Goethe and like Nietzsche and like all these historical economic sort of trends and macro stuff.

He’s going to beat me at that game. But if it’s like, who’s the better philosopher king about seed and like what makes greatness in a seed round and what makes greatness in a startup, I think I can win that game against anybody. Right? And so what I learned from my dad was that you as a person have intrinsic motivation. You as a person can provide something that the world wants that values that you can get paid to do. Part of honoring the limited time you have in this life is to figure out how to show up every day to honor the gift of your time by being your best, by doing the best you can do.

Yeah. There’s one thing I can tell you later, but I’d rather not say. The one thing that that I think would have been good would have been and I I still need to do better about it, but just to get outside more and do more sports and stuff like that. My dad was very cerebral into computers, and everything we talked about was computers and the computer business and programming and stuff. He was not, like, into sports. That’s something that, I’d like to do a better job of over time is to kind of promote that a little bit more.

putting up with me.