Altimeter's Brad Gerstner on Why Supercycles and the Powerlaw is the Most Important Thing…

I mean, Harry, thanks for having me. As you know, I’m a huge fan. And I have to say it’s an incredible honor to be podcast number 3,300. I mean, didn’t make the first 3,000, but, you know, 3,003 hundred’s not bad. Well, you know I left I left Harry speechless to start.

Get on your feet.

I really think my thinking on this in terms of why I wanted to be an investor started in childhood. I mean, I grew up in Indiana. I was a poor kid. My dad was an engineer, kind of got forced into entrepreneurship. He was running a factory in Indiana and an acquirer came along. He promised the men they wouldn’t get laid off. Of course, the acquirer in 1978 lays everybody off. So my dad tries to hire all these men and compete and mortgages the house, ends up going bankrupt, never declares bankruptcy, refuses to, works his whole life to pay all that money back to the banks who had loaned him the money.

I was coming of age. I was third grade through probably sixth or seventh grade. It was tragic. My dad’s growing broke. So I start reading a bunch of biographies to try to understand the world. I come across Buffett and Munger. This is probably middle school, early high school. I would show up at school early and I started on graph paper like charting stocks because I was absolutely enthralled with this idea that people who of looked like me, Buffett was in Omaha and seemed to live a kind of normal life like the life I lived.

I really wanted to understand these markets and these things called stocks and how companies work, perhaps in a way to help explain to me why it didn’t work for my dad. Fast forward, go to law school because I said, you know, I had to get that insurance policy. I actually did a stint in politics, thought I was going to run for office. That’s a whole nother vector of trying to live a life of purpose and have impact on the world. But I realized I was poor, went back to business school.

In law school in 1995, I had gathered all of my friends around this computer in the law school library. I had just seen the Netscape browser. And I gathered my friends around, I said, this is going change everything. And I was convinced that not all, I understood markets a little bit, I understood stocks, and I was convinced that there was going to be incredible value creation and technology. You know, so I set about trying to get to Silicon Valley. In fact, I hopped on a plane when I was in law school, and I flew out to Silicon Valley and having no idea what this place was about and just started knocking on doors, including the old venture law group, to get a job.

But I went back to business school in business school, nineteen ninety nine, two thousand. Internet is going crazy. I feel like I’ve missed it. I’m too late. But I was hell bent on getting to Silicon Valley. But my classmate who became my wife decided that we’re going to stay in Boston. And I had met these two crazy folks, one crazier than the other, David Fialko and Joel Cutler, who were investing their own money at the time, entrepreneurial, thinking about starting a venture capital firm. And that was really my launch into investing was starting with David and Joel, helping them do their first deal, helping them think through General Catalyst.

That got me into the investing universe. I became co CEO of their first investment on the General Catalyst.

I mean, we all know that in investing, returns don’t follow a normal distribution. We know it’s eighty, twenty, ninety, ten. That’s a tiny number of firms in a tiny number of deals that represent the vast majority of the gross profits that get generated in the industry. If you look back ten, twenty years, average VC returns are not that compelling. In fact, they’re worse than the indexes. So to me, while we all know this, very few people actually organize their day, their life, their firm around this concept.

So it’s one of these things that lots of people know, but they don’t necessarily know what to do about it. And so for us, thinking about how we spend each minute of our time, thinking about where we’re focused, who are the founders we’re talking to, there’s this idea in venture that two people and an idea walk in your front door and you get lucky and you invest in that company and it hits it big. Nothing could be further from the truth in terms of like how we prosecute our strategy at Altimeter.

And I started learning that I would say my first decade of venture, I made a ton of mistakes two thousand to twenty ten, I spent a tremendous amount of time on ideas that even if everything was true, we’re going to be small outcomes. And the truth of the matter is it probably takes as much effort, emotional and intellectual to start a restaurant as it does to start Google. You really need to focus on what is the biggest trend in the world, what are the markets that you’re trying to invest against, and then prosecuting a strategy that allows you to take advantage of the power law instead of being on the tail where you spend an equal amount of time but don’t see the returns.

I think you have to be careful of commingling markets and what I describe as supercycles. Okay? So in my investing career, there have been three what I would describe as supercycles. The first, the internet, everybody coming online. It was very clear even by 2000 that we were going to have hundreds of millions or billions of people online. So the question was who beneficiaries of that? And so I would describe that period of time for me investing or me founding companies. I concluded that search making sense out of all this chaos and e commerce, which was really search for products, going to be the two biggest areas of category creation.

So seeing through that lens, Airbnb, which was making sense out of all the world’s long tail inventory, right? In the way that Craigslist had done for all properties that were not on booking.com, like actually fit. It wasn’t a new market at all. That was a business prosecuting a strategy in a massive supercycle with massive tailwinds. I would say the second supercycle in my career was the move from search and e commerce to mobile and applications that sit on top of mobile. And so what led us to Facebook in 2012, or what led us to ByteDance early was this idea that this device was going to be the principle and replacement mechanism for entertainment, for communication, for interaction.

And that wasn’t a market. It wasn’t, you know, when I met with you, I don’t know, it was 2016 in our offices. It wasn’t that I was looking to invest in a newsfeed called in China. Right? There was no TikTok. There was no idea about is there a big market for news in China? The question was, are there big tailwinds for a continuous feed in China where there was no feed. And then I would say finally, I think probably maybe the biggest supercycle yet for us.

What led us to Twilio? What led us to Snowflake? It wasn’t that we had a strong conviction on the data warehouse market. What we had conviction in was that all the world storage and compute was going to move into the cloud, that it would be more performant, that it would be lower cost than every company doing it for themselves. And so I think there’s a lot of talk about TAM or markets. We focus on supercycles and power law.

I honestly couldn’t disagree more with that with with that strategy. First, there are not hundreds of big outcomes. And so if you have a diversified portfolio across hundreds of investments, you will have an index like return, which as we started off by saying, it’s not very compelling in this category. Secondly, what I would say is if you look at the difference between the Sequoia round in Figma or the durable round in Figma, it’s the difference between having a 100 plus X outcome and a two X outcome.

A two X outcome is nice, but those are not venture returns. And so for us, I look for pattern recognition around companies that become the market leaders in supercycles. It was clear to me that Yaming could build the largest entertainment and newsfeed in China. That was a bet. And it was a deliberate bet against a supercycle. It was clear to us that booking.com, in fact, I teach a class on this at Columbia Business School, it was clear that they had less than 1% penetration of what was going to be a massive market, was buying hotel rooms online.

And that that would compound for a very long period of time. And so that’s the other closely related item here, Harry, which is I think if you sit back, if you’re leaning back and saying, or if you’re talking to all your buddies and they’re like, this is the winner, this is the winner. To me, that represents a lot of momentum trend following. And the history of that venture is not particularly great. The history and venture has really inured to the benefit of first principle thinkers who frankly, rather than waiting for the founder to show up in their office, they identify what they want to invest in and they go find them.

For us, why was our mind fertile and prepared when I took a walk in a park with Mike Spizer, and we talked for seventy minutes about a number of things. And I had known Mike since business school. And in fact, the main idea that we were talking about the entire walk was pure storage. And at the very end of the walk, I said, Mike, what’s the new thing you’re working on? And he said, Ah, something, but it’s too early for you. I’m the CEO of it thinking about, we’re starting to recruit for a CEO.

But Benoit and Terry, these engineers out of Oracle, have a whole new concept for a data architecture in the cloud. And it’ll start with maybe a data warehouse, but eventually it’s about rewriting the world’s most important databases native for the cloud. And I said, that’s what we want to do. But I couldn’t have said that had we not spent one thousand hours thinking about it as public market investors and venture investors as to why we thought all data was gonna move to the cloud.

You know, we often say around here, we’re anthropologists who just happen to be investors. And we spend our days challenging each other, thinking, inviting people into opine on the subject that we might have around, for example, the modern data stack, obviously written a lot about, you know, on Twitter and Substack, etcetera, Discord. But every day, we’re pulling together the most interesting founders, engineers and others and study. Drinking the Kool Aid is a recipe for disaster. But if you really have a culture of continuous learning, because there are plenty of things that we invested in where the facts change or where we were just wrong.

And throwing good money after bad when you were wrong is a really bad idea. I think being a public market investor is really a value add in terms of that type of culture when you’re investing in venture.

Can’t necessarily use all the specific names, but I would say this. The reality is we made this pre revenue investment in Snowflake. And I remember Mike called me maybe six months after we made the investment. And he said, Hey, we’re not hitting the milestones we need to hit to get the next round of investing. So let’s just put in a little bit more money, of an interim round, because we’ll get there. And we talked through the reasons why, etcetera. It was very clear to us that what was going on in the business had no outcome on the big bet.

So that was a very easy decision. I mean, that conversation lasted a minute. Yes, we’ll put more money in the business. Let’s go. I would say, know, we’re an investor right now. Listen, there’s been a massive dislocation in the world and there’s a bunch of really bad stuff that occurred last year and a bunch of valuations that are totally not supportable. We have a software company where they misplant by 70%, an incredible group of investors around the table. But this particular group, the lack of truth telling about what’s really going on, confronting the truth.

I mean, I think that’s so important in having the courage. I’m not being a good friend to the founder if I’m blowing smoke up their ass in the boardroom. And then the second they walk out of the boardroom, all the investors have a different conversation. Being willing to tell the truth as I would have wanted as a founder. Fialko, when he was on my board, trust me, in 2000, when the world was coming undone, he talked truth. Or on September 11, when planes ran into buildings, Rich Barton and I and David Fiagile, we talked truth.

And so to me, I treated founders the way I’d want to be treated. I tell them exactly the same thing in front of them that I tell them when they’re not in the room. That’s the culture we have as a firm. The question of knowing when it’s just a blip and when it’s different, the facts in this particular software company radically changed. The facts in the world radically changed. Their products relevance in the world changed. Their performance changed. And so you have to accept that market feedback.

And then you have a different question. Will you support me in the pivot of this business or not? But that’s a totally new underwriting. That’s a different question.

Why? Why did you deem the prices not to be fair or too high?

interrupting you, but okay. So they’re three x what they were three months prior. What were they relative to your target price at exit?

Okay. So listen, if somebody comes to me and they want me to invest in a company that is at a price higher than I in my own underwriting and all my research, right, assuming that things go well, I can’t get to that price, then I’m not investing. That is just momentum. What has happened over the last twenty four months has been a great disservice to founders and is the worst example, I think, of lack of discipline. And listen, we get caught up in it too. There is a entire body of work in behavioral economics around the lemming effect, group think, etcetera.

And, boy, was this industry caught up in it over the course of the last twelve to eighteen months.

Whenever Bill asks me a question, I always have to ask a clarifying question because it’s usually smarter than I’m able to grok in the kind of first instance. But when you say value reshuffling, what do you mean by that?

I mean, as Bill well knows, and as our group chats often include in them, interest rates are to valuations, what gravity is to the apple. We can all say we don’t do macro, we ignore the backdrop, but we can only say that because most investors have only been investing during a period of really low rates. So when you have low and stable rates, you’ve never had to think about it. But trust me, if you were investing in 1978 or 1982, you thought a lot about it.

And in particular, the rate of change of rates is super impactful, particularly when we’re talking about long duration, growth assets. You have to accept that you should have had a margin of safety baked into the cake when you made the original investment. If you made the mistake and you didn’t, you have to be sober today. What is the multiple that’s going to get paid at exit? Everybody on my team, for example, knows that we’re applying a 20% discount to the pre COVID ten year average. That is the exit multiple that we use.

So now we have to say, let’s assume everything goes right. Let’s give the entrepreneur the benefit of the doubt. This is a supercycle, a company we love. We want to be investors. So let’s assume all of that, but apply a rational multiple to that. Do we get a target return that’s worth us writing the check? And oftentimes, these $1,000,000,000 $2,000,000,000 $3,000,000,000 software rounds that are done with very little revenue, you have to assume a tremendous amount goes right. And then you probably have to assume an absurd multiple.

And everybody’s counting on the greater fool. There’s going to be a lot of money that gets lost in all of those rounds. And so I don’t particularly care if it’s full of all the great investors or anything else. We do our own work. I don’t carry the bags for anybody. We do our own work, and we’re gonna force ourselves through that screen around valuation.

So if you think about it, 2000, 2001, 2002, rates were at 6% or 7%, and there was a tremendous amount of value creation between 2000 and 2005, right? Because we had this massive secular tailwind in the internet, but the rate was fairly stable during this period of time and was moving the market believe directionally lower.

When you have a period where we just went through something that is a major standard deviation event, which is going from basically 50 basis points to 400 basis points on the ten year, it leads to a state of paralysis because our job is to predict the future, but we also have to forecast what is the multiple the world’s going to be willing to pay at a point in time in the future. And so I think when people see a huge rate of change, now we have Larry Summers saying we may go to six or 7%.

Well, cost of capital is going up. You need to have some predictability about that cost of capital. Let me take it to its logical extreme, Harry. Let me tell you that you could earn 20% a year in a risk free investment. How many fewer investments would you make? You would make 90% fewer investments. Okay? Because the hurdle rate to that capital now gets so profoundly different. This is why interest rates do have the impact they do. It really matters. And so once you go to a logical extreme, it becomes very obvious.

We would all just go surf and ski and hang out to double your money every four years. That’s a higher rate of return than the seventieth percentile in venture. And it’s risk free. We spend a lot of time thinking about it, but we don’t try to outforecast the best macro people in the world. What we effectively do is we look at the future strip and we say, what is the market telling us that future rates are going to be? So right now, the market saying Fed funds rate will peak out in March of next year, something like four, four and half percent.

You know, we don’t try to outsmart the market. We just say, okay, let’s use that as, you know, kind of a rule of thumb. There was one period of time, October of last year, where I went on CNBC, and I said, think that the market could very well be getting it wrong. Once COVID normalizes, I expect us to go back to January 2020 levels on interest rates. And if we do that, then multiples on the NASDAQ will be down 20 to 30%, which means the NASDAQ will be down 20 to 30%.

I wish I had followed that wisdom as well as I articulated it. But the reality is nobody should be surprised. Fact, in some ways, we should be celebrating. You know what rates mean today? It means that humanity beat a global pandemic, that in March 2020, we thought might wipe out twenty percent of the world’s population. That’s what this means. So I suspect that the new normal is gonna look a lot like the old normal, but we have to get through this period of massive uncertain and volatility so that you and I can underwrite to a predictable cost of capital.

I mean, well, come on. If it’s girly versus, you know which way you gotta go. I mean, just put it out. No. They’re both they’re both brilliant, and here’s what I would say on that. Our strategy has always been, we’re not going to say all or none. As a firm, we say less or more. So your aperture should be expanding and contracting based upon what you see going on in the world. So if multiples are at an all time high, like they were last October, and I went on all in and CNBC, we showed the charts, etcetera.

We talked about the things we’re concerned about. If multiples are at an all time high, your aperture should be contracting. It doesn’t mean you shouldn’t do any deals, but you should be really clear that you’re only doing the best deals because only the best deals will clear those valuation hurdles. At the same time, when the world’s panicked, when there’s blood in the streets, as Buffett says, I agree with Gurley, your aperture should be expanding. But let’s be clear about where we are today. This is not a blood in the streets moment.

It feels catastrophic because we have growth names that are down forty, fifty, 70% in the public markets. But look at where they are compared to where we were in January 2020. For most of these companies, it’s just getting back to the normal or slightly below normal or average valuations. That’s how far in left field we were in terms of valuations. Right? So don’t anchor yourself to the stupidity of the last eighteen months. Do a de novo underwriting based upon the facts as they exist today. So for Altimeter, we just signed a Series A deal, we have a Series B term sheet out.

I still think that valuations are full. I think valuations in venture and CD and E are still overvalued. So we have a lot of work to do. But the secular curve around value creation and disruption, all data moving to the cloud, there will be more value created over the next ten years than over the last ten years. But price of entry matters.

As long as I’ve been in venture, so for over twenty years, this is debate. And here’s how it goes. When the world’s really hot, everybody wants to have a permanent fund and never distribute. Everything is going to grow to the moon. When the world sucks, everybody wants to sell. Like, literally, the impulse is the exact opposite, the exact opposite of what it should be. And so we just try to use a really quantitative framework. As public fund investors as well, I think it forces us. You know, Rich Barton once said to me, I I showed up to a board meeting at Zillow, and I opened up my model, I gave some feedback.

He said, what the hell is that? And I said, it’s my model. He’s like, why are you building a model on the company? It was kind of a joke in the boardroom, which Gurley was in, and Jay Hoag was in and Maffei was in. But even though we were early Series B, I was already thinking and forecasting ahead to say, if we did this, how does it show up in the numbers? So for us, when I think about distributing is, do we still have venture returns left in this over a reasonable period of time?

And if the answer is we don’t, we don’t see a three to five x over the course of the next three to five years in that deal, then we’re obliged to distribute to our LPs because that’s the deal we’ve made with them. The most important thing is what is your deal with your LPs, making sure that you have LP alignment talking the other night. You know, everybody wants to hold and compound things forever. You know, the number of companies you should have actually held on to, we’re talking less than 20.

Everybody references, well, if I only held on to Apple or I had only held on to Google, mean, we are talking about such a small subset. We distributed, part of that was luck. We could have done more, but we were following a process. But I will tell you most of that distribution, not all, but most of that distribution was Snowflake. And the truth of the matter is, I think Snowflake will be worth a lot more in the future than it is today and even more in the future than it was then.

So they’re never easy decisions. But the way I feel about Snowflake, I’ve felt about less than five companies over the entire course of my career. And so that’s what made that one as difficult as it was.

I think our policy is pretty standard with most managers, which is we don’t spend a lot of time marking up our books when the NASDAQ’s going up, and we don’t spend a lot of time marking down our books when the NASDAQ’s going down. When the facts change or new rounds intervene or down rounds occur, obviously, we will make changes to the portfolio. But again, what’s so important is I have that very clear expectation with my LPs. How do you think we ought to think about valuations?

I would take everything in your portfolio that received a valuation over the last two years over $500,000,000 and I’d mark it down by 50%. If I look at the average gross stock in the NASDAQ, it’s down 50%. Every LP needs to assess for themselves how they carry it. So I don’t think it’s just a GP issue. Ultimately, I have different LPs. Some are longer duration, some are shorter duration. Some have the denominator problem that you described because they’re running an endowment model. Some don’t because they’re families and they want to double down.

I think it’s just important to talk clearly with your LPs about what your approach is. And then if you get the question like I got a useful heuristic. If you want to mark up and down with the NASDAQ, then just put all your exposure in a book. Hell, you can mark it every day. What’s the NASDAQ up today? What’s the NASDAQ down today? And mark your book accordingly. Have a score sheet, put it up on the wall. We don’t need to do that. We don’t do it, but it’s not hard to do.

Again, you’re right. It’s structural. One of the ways, like, if I’m an LP and I’m allocating to somebody, I need to think about their economic alignment. At Altimeter, the return to me of an incremental turn on the multiple is a lot more important and dramatically more important on an after tax basis than return to me from fee, from management fee. I’m very well aligned with my partners that I’m going to size our funds in a way that I think balances maximizing return and building the firm.

For example, our fund started off at 100,000,000, our first VC fund, VC6 was closer to 1,000,000,000. We could have raised a lot more than a billion and 0.5. Why did we choose billion and 0.5? The space we occupy at Altimeter, which is sitting in between the best seed and investors in the world and the public markets and really helping invest in those companies like Snowflake, like Modern Treasury, like dbt, pre revenue and growing with them all the way to public markets. We need scale to do that.

And so how much is enough scale, but not so much as it becomes hugely dilutive or even meaningfully dilutive to our returns. Deploying a $10,000,000,000 fund or God forbid a $50,000,000,000 or $100,000,000,000 fund like Masa tried to do, you already know you will not generate alpha in that. You are getting the beta of the global tech industry when you’re investing those dollars at best. And most likely, there’ll be adverse selection because the best founders in the world don’t want to be part of that portfolio. The best founders in the world want to be with the best brands and the best brands in the world aren’t raising that size of fund.

And so for us, we’re perfectly happy and content. If I get a call over the weekend and a company that we love needs $100,000,000 we can write them that check. At the same time, I can write a $10,000,000 check like I’m doing today in a Series A investment that has enough impact on that fund to really matter.

just answered your own question.

I won’t describe it as a problem. I’ll describe it as just a reality in the world. So for example, when I got started in this business with David and Joel, sovereign wealth funds were not allocating to venture. Pension funds weren’t allocating in any real way to venture. Swinson and Yale were in the vanguard of allocating to venture. So it’s important for GPs to understand the world has structurally changed. I’m getting cold called from Middle East sovereigns who want to invest. This is going to mean that we have a permanent increase in the amount of capital that exists in venture capital, a permanent increase and pension funds one in.

And by the way, their hurdle rate, what they need to make on that money is much lower than what MIT expected to make. Now, if you’re Yale or MIT, you may say these guys are ruining the party. And to some extent, they are. The industry is going from highly fragmented to much more industrial scale, returns are going to compress. The reason I still remain so optimistic, where we started. It’s a power law industry. It doesn’t matter that you’re in 200 deals. Hell, you don’t want to be in 200 deals.

The question is, is the best founder, is Mike Spicer and Bob Muglia going to do that deal with Altimeter? Are they going to do it with a $100,000,000,000 fund or a $10,000,000,000 fund that can’t have the impact that doesn’t stand in our shoes? I think the best founders in the world wanna be with the best partners in the world who proven themselves to be much more than just a commodity when it comes to money.

When I think about concentration, you gotta know, again, I come out of this Buffett school, I think as Buffett has said, diversification is a great way to preserve wealth, but a terrible way to create it. And so I think diversification in many ways is the greatest myth perpetrated on the investing public, the idea that risk mitigation is the equivalent of diversification. Anybody who lived through 2008 knows that all asset and all pricing was correlated. Hell, look at a chart on any technology company over the course of the last nine months, how much did diversification help you?

And so what I want to do and what people should pay me for or choose not to pay me for, right? Like they either believe or they don’t believe is, can you, are you in a position intellectually, network, conversion, etcetera, to generate alpha? And if you are, if I find a company where I have a level of conviction like I did in booking.com and Priceline 2004, Google in 2005, or Snowflake in 2014, if we find those opportunities and we re underwrite them at every phase, mentally flexible, stay open to the idea that you’re wrong, but I want maximum dollars.

Again, it’s my money. I’m taking my partners along for the ride. I want maximum dollars behind our best ideas. Why the hell would I put an incremental dollar in my tenth best idea or my fifteenth best idea when I can put more money in my best idea? At the end of the day, you got to live with the result, right? And the result is there’s batting average and there’s slugging percentage. Altimeter needs to have a really high slugging percentage. When we swing hard at the ball, runners are in scoring position.

How often do we hit the ball? That to me is what makes the grade in this business. I see a lot of venture capitalists and others. They say, Oh, yeah, I was in that deal. I was in Snowflake. I was in this. I was in that. And I say, Well, how much do have in it? You know, I had $1,000,000 in a late stage round. It’s like, who cares? The gross profit dollars come from having conviction before the rest of the world does and putting sufficient money behind it.

Our first fund VC one hell, I couldn’t even raise it. I was 20 or 25% of the fund. We put over 30% of that fund in Snowflake at a point in time that the world thought we were crazy. The world didn’t, you know, didn’t think the cloud was pessimistic about the cloud, to be honest.

I would say a couple of things. Number one, never go over a structure like a cliff without first inspecting the other side. It’s massively calculated. And then you prepare your mind for those moments. You know what you’re going to feel like when the amygdala starts firing, when that frontal cortex says what you’re doing is a mistake. So unless you’ve done the work, unless you built the model, unless you have the conviction, you won’t be able to do it. What the outside world oftentimes perceives as tremendous amount of risk to the person who’s done the work, prepared themselves.

Of course, you can’t eliminate risk, but often for the protagonist who’s actually doing it, it feels much less risky than everybody who’s perceiving it from the outside in. If Sequoia was adding money to Airbnb in the series b or series c, a bunch of people on the outside may say, oh my god. That’s so crazy. Look at the valuation. I can’t believe they’re doing that deal. It’s so risky. I’m certain they didn’t feel that way. I’m certain we did not feel that way in every subsequent round we co led in Snowflake because we had done the work, prepared ourselves, had the information, had studied, we looked over the cliff, we understood what it meant for the fund.

But yes, I will conclude by saying this. My goal is not to raise $50,000,000,000 funds and never take any risk. And we get to have choices what we do with our days. I wanna live a life that matters. I wanna do shit that matters. And that means that when you believe something, you actually do something about it. You actually stand with a little conviction behind it. If we’re not doing that, then we’re not the firm I want us to be.

You know, so our cultural north star at Altimeter is essentialism, right? It’s kind of an operating roadmap for me in life. But minimalism is to Johnny Ive. Essentialism is to life design and business design for us. So the art of doing less, better. Everybody in our firm would tell you that that’s what our cultural North Star is. They’ll tell you how we practice it. And so for a firm that prides itself on that, there’s no doubt over the course of the last twenty four months, where we’re all working remotely, where there’s a lot of FOMO, where the cost of capital is really low, we did more than we should have.

And I think most folks would raise their hand if they’re being intellectually honest and say that that’s the case. One manifestation for that was us doing a SPAC into Grab. And so if you think about SPACs, people might say, Oh, you know, Brad was chasing the latest fad. But as girly knows, I started my career as an IPO lawyer. I’ve been studying IPOs for over twenty years. I helped Bill put on the Direct List Conference. We spent a tremendous amount of time thinking about more efficient ways for companies and our portfolios to come public.

And when we looked at the SPAC, we said, You know, if done right, this could be a third door to the public markets where you have an equity sponsor who’s willing to raise their hand, write a check into the deal and help the company get public. We studied it, we thought about it, we tried to make sure that we weren’t just jumping on the bandwagon. But ultimately, what you’re doing when you do a SPAC or an IPO is you’re committing to buying something at a price.

And the biggest mistake we made with Grab is we committed to that deal in April of last year. I told the teams, we need to have this public by June or July because the world can change. And if the cost of capital changes, valuations will change. So we know what we’re underwriting to in April. But the truth is that deal didn’t get public until December. And so it was like an IPO right on the doorstep of the single biggest change in interest rates that we’ve had in thirty years.

And multiples radically change. Grab’s a good company. It’s got good management. I’m a big believer in Southeast Asia. I still think philosophically, the idea of a SPAC as a third door makes sense. But the prosecution of that at a period that the world was radically changing was a problem.

You know, honestly, there’s an opportunity cost to our time, Harry. So the essentialist in me, Johnny Ive recently, I was listening to a panel, an incredible panel. He and Tim Cook and Loreen Powell Jobs. I was listening to them talk about Steve. And Johnny said, Steve would say to us, unless we are saying no to great ideas, great ideas, not just the good ideas, not just the average ideas, but unless we are saying no to the great ideas, then we’re doing too many things. To me, the practice of essentialism is kind of like my practice of yoga that I’ve been doing for over twenty years.

It is not just a statement you put on the top of your whiteboard, but it’s something that you aspire to every single day. Is this a creative to who we are as humans? Is this a creative to who we are as a firm? Is this a creative to my intellectual understanding? And if it’s not, we shouldn’t be doing it.

I mean, listen, I came into the business at exactly this time. I mean, I graduated from business school in May 2000. David and Joel were starting GC and I was running our first investment. This pattern recognition comes from a painful exercise. I saw my dad go through it. And my first trade at Altimeter was 11/01/2008, literally into the teeth of that crisis. Remember, November and December were wipeouts. The market bottomed in March 2009. And so the advice I give to them is if you don’t have a stomach for it, find a different thing to do.

This was never meant to be a get rich quick scheme. The people who thrive in this business, Mike Moritz is great in this business because he has incredible curiosity and passion for understanding the world around him. And he expresses that finding in his investments. Same with Bill Gurley, same with Brad Gerstner, same with Jam and Ball on my team. When I look for recruiting, Paul Reeder, who’s my mentor and incredible investor, He said to me early in my career, he said, it’s harder to pick people than it is to pick stocks.

And he’s like, I’m taking a chance on you because you have plausible alpha. He said, the road is littered with guys and gals who went to Harvard Business School who never made a nickel in this business. But you’re a lawyer, you’ve run three companies, you’ve got this network, you see your contrarian, you see the world a little different, you were charting stocks when you were in high school. Like, there’s a chance you have a little alpha. The truth of the matter is most of people you know, Harry, they’re not great.

They don’t have alpha. And, like, we’re gonna flush that out real quick. I’ve lived through two of these downturns, and I’ve watched people get flushed out. I’ve told you. I’ve watched you. You have alpha. You came up with this hack, 20 VC. I’m going to figure out how to get Brad Gerstner and Mike Moritz and Bill Gurley and all their friends to talk to me. And I’m going to build the most potent top of funnel in the world. And I’m going to bolt on this great business model underneath it called venture capital.

That’s a hack. That’s alpha. Okay? I ask everybody that we’re gonna hire. I ask them this question. Tell me how you’ve made money. You know the number of people who went to Harvard Business School and worked at Goldman Sachs who can’t answer that question? They’ve never had to make fucking money. I’ll tell you, you asked me that question. The first answer I’ll give you is in the sixth grade, I had my mom drop me off at the gas station. I bought candy. I took it to my locker, and I sold candy out of my locker at a two x markup.

That’s how I first made money. So I’ve spent my life figuring out hacks on stuff like this. And if somebody doesn’t have that grip, they can’t answer that question. That’s a disqualifier.

you’ve had to that question? I’m trying to think through the current list that I have. But honestly, Harry, I don’t even really care about the answer to the question. What I care about is they have an answer. When you don’t have an answer to that question, you know who has a lot of hustles? Jason Kalakanis. And by the way, respect. And some people will say, oh, that’s a liability. You know, he’s always hustling you. He’s always selling you. He’s always doing this. But when I look at somebody and I say, how the hell did they get here?

You and I were talking about, how did Carl Eschenbach go from being a wrestler in Pennsylvania to an incredible venture capitalist at Sequoia? That intrigues me. Having the curiosity, understanding those biographies, I think, is important.

I would say a couple of things. Number one, having figured out a way that you personally can build alpha is a condition required, though not sufficient, First, I know plenty of people have a good hustle, but they’re actually not great thinkers. I know plenty of people have good hustle who don’t have great discernment. So all I’m saying is when you’re looking at recruiting somebody, is it plausible that they have alpha that makes them different from everybody else in the world? Number two, what I would say is listen, my philosophy about people who work at Altimeter is that this place is not indentured servitude.

You’re all free agents. I say to everybody who comes to work here, you may work here a year, you may work here the rest of your career. The only thing I really care about is that it’s an incredible experience for you and an incredible experience for us. I’ve had three analysts, including my first analyst, Dennis Hong, who agreed to come work for me. He said, Listen, I want to work there three years. I want you to help me get into Harvard Business School, and I want to learn everything I can so I can start my own fund.

And I said, Deal. And we kept that deal. Went to Harvard Business School, he dropped out and he started his own fund, and I’m an LP from day one in his own fund. And so to have former employees who I feel that way about, Ram, James, who’ve all gone on to start their own funds, I don’t view that as a breach of loyalty. I view that as an example of the strength of the type of people that we attract.

Rather than focus on individual people, what I’ll talk about is structure. There are a lot of ways to make money in this business. There are a lot of ways to lose money in this business. I think you have to be very clear about what is your North Star? Who are you? What is your strategy? How do you differentiate and then build an organization that reflects that strategy? Right? So for me, I want to be an analyst. I want to sit at the head of the table, I want to be chief thinker, you know, I’m not some CEO who has MDs reporting to me, who have VPs reporting to them, who have associates, who have analysts reporting to them, that structure to me is hell.

I would want nothing to do with that. I don’t want to spend a day of my life working in that structure. We have an incredibly flat organization. We have 13 or 14 analysts. We all call ourselves analysts where we study. That’s what we do. We study, we try to find things that are consistent with that thinking. I would say that during the period of COVID, because we were all virtual, we had a little bit more layering because it was just harder organizationally. And that was a huge liability for us.

I didn’t like it. We’ve since said everybody has to be back in the office, got rid of the layers because the layers don’t work. At the end of the day, the principal source of both maximum fund for us and maximum results for us is prosecuting a strategy that’s very flat. So I would say most organizations that are growing, whose fund size increases, they feel like I got to have a certain number of partners because they do two or three deals a year and I want to have this much money.

So I have this many partners. The vast majority of organizations, okay, and I’m talking from Facebook and Twitter, all the way down to GPs, They would be well served to be much smaller, to be essentialist in the people that they have, because it’s very likely that your bottom 20 or 30 or 40% of your organization is dilutive, not accretive to your results.

I hear from LPs every day. The number one thing they worry about is how possibly can you guys do the stuff that you do with the size team that you have Relative to all of our peers, we’re way smaller. And I said, ultimately, you have to decide what you want. We prosecute our strategy as Seal Team six. Go talk to all the entrepreneurs we partnered with. It’s not like I do a deal and then I throw you into a consulting group who may help you with your HR or may help you with your marketing.

They get me, they get Jamin, they get Pauline, they get Gwen, they get this team. We are one team. They get all of us and we bust ass for them. That is a huge differentiator. And, you know, so I don’t think you have to have a larger organization to justify increased AUM. I suppose if you want to go raise $100,000,000,000 then fine. Do like SoftBank did and hire 50 people over a course of a year. We saw how that turned out. But for us, no problem at all.

We could manage twice as much money as we’re managing today with the exact same team because this game is about picking the right ideas, making good decisions, thinking clearly, having conviction. It’s not about your umpteenth analyst who’s doing the umpteenth deal because their buddy over at y z firm is doing said deal. That is a recipe to mediocrity.

This is deep, and I’ve done a lot of reflection on this. If you would have told me I have, was going to have what I have, let’s say when I was 20, and then you would have said, Describe to me the house you’re gonna live in, the car you’re gonna drive, the life that you’re gonna live. I would have described to you a life totally different than the life I’m living. From as early as I can remember, sixth grade, I was like, I have to make a million dollars by the time I’m 30.

It was a dragon in my life because it destroyed our lives. When my dad went broke, destroyed his health, his marriage. So when you grow up in that, like that is a real dragon. That’s a beast you have to slay. Fortunately, because Fioco and Cutler gave me a shot, I was able with NLG to slay that beast right at 30. And shortly thereafter, Samaya and I, Bejos now running light speed, we co founded my second company or our second company together called OpenList and we sold that another little base hit double.

And I’ll tell you, when I had a few million bucks, I was like, good to go. Like I had slayed the dragon because I didn’t come from a life of accoutrement. Remember when I started Altimeter, I started with less than 5,000,000. I couldn’t even convince my friends from HBS to contemplate being my partner in this thing. They’re like, dude, you’re embarrassing yourself. Go back to par. You know, so to me, I slayed the dragon around money. My life and priorities totally shifted. Now my priority is to raise two sons that have humility, understand the burden of having things, and to know what it feels like to climb up the mountain rather than being dropped out of helicopter on top of the mountain.

Is it

It is the most difficult, and I’ve discussed this with lots and lots of people on the topic. And here’s what I’ve concluded from wisdom from whether it’s, you know, from Buffett to Reeder is it’s not what you say to your kids. Like you can say, be humble, and then you go into your 18,000 square foot home. It’s not what you say, it’s what you do. It’s the life you live, it’s how they see you treating others, it’s the choices that they see you making. I ended up saying that my life is different.

I live in a small house. In fact, I had a founder of Decacorn who had visited other investors’ homes, he came over to my house. And he was so floored by it. He said, Can I take a video of this? I said, well, we’re sitting around the fire in the back, you know, fire pit in the backyard. He said, I’ve got to show this to my wife. She won’t believe that you live here. And so for me, my children know that we could afford a much different home, but they know that we choose to live there.

And now my son says to me, dad, I love that we live here because I’m not embarrassed to bring any of my friends here. Like, I love this house. I think there’s something that we’re doing right. But yeah, I think it’s about how you live your life every day. And listen, I have plenty of friends who live in big homes, and that’s awesome too. Like, we all have agency. We all have choice. I’m not trying to say I’ve denied myself all the life’s privileges. I certainly have not.

But I do think that, you know, there’s a lot of wisdom in Buffett living in in the home that he lives in and, you know, living the life he does. So I don’t have as many cashmere sweaters as, but I do enjoy having a good time.

First, the number of people in life who surround themselves with sycophantic others who are their yes people. Tell them what they want to hear, afraid of speaking truth. It’s almost everybody at a certain level because you can afford to do that. You can fire the people who say mean things to you and or disagreeable things to you, and you surround yourself with people who all agree with you. Listen, it starts with I have three siblings and an 86 year old mother, and we have a culture in our family of speaking truth.

My sister calls me fancy pants because I don’t come back and visit her enough. Siblings, dear friendships. You you talk to some folks, you know, Lexi Reese, who’s a dear friend. I mean, I get out of line on something or I, you know, I’m gonna hear from Lexi, and she’s gonna remind me of my priorities. And so having friends in your life who remind you of those priorities. And then children, my kids, the things that you think are important, your kids probably won’t. And I have kids now.

We do a service, a family service trip every year with Give Power, an incredible organization that uses solar micro grids to light up schools and health clinics around the world. And it was early in our kids. I don’t know how old they were, probably four. Our oldest was four. Michelle and I were in Hawaii at the Four Seasons. It was spring break. We paid an absurd amount for this room or whatever we were staying in. Everything was perfectly curated. It’s perfectly fun. And I said, this can’t be the end of our story.

We didn’t work this hard to have this be the life that our kids are going to live because it’s like dropping them out of a helicopter on top of the mountain. And so I said, we get three or four vacations a year. How about we as a family, we take one of those vacations and we go to a service trip. Fortunately, I found some incredible people, you know, around Give Power, we partnered with them, we came up with this idea where we fund the capital projects, a micro grids from Nepal to Tanzania to Colombia.

And then our family goes and lives in the village for the final week or two weeks or three weeks of the project. And I’ve been able to take a lot of friends on these treks with us, know, again, now my kids say it’s one of their favorite things they do all year long. Again, if you do this once, it’s maybe a gimmick. If you do it twice, it may be a curiosity. But if you really thread this stuff into your life, it becomes your values. We’re doing another trip over Thanksgiving.

And would I like to spend that with my family or friends or other things or in some fancy? Yeah, there’s part of me that wants to be on some fancy boat or doing something, but I know how important this will be in the final reflection.

What I would say is you mentioned a few people at the start of the show, Bob or Rich or others who’ve been fialco like brothers for twenty years. I can’t do anything for them. Can’t give them anything. My buddies from high school will be the first to call me up and call me out on something. Hey, I saw you on CNBC. You looked like an idiot. Fix your hair. Do this. Do that. So I think it’s about the choice of the people that you surround yourself with.

I don’t have a lot of people in life who I feel like are hangers on looking for something, perhaps because I just don’t do that. Right? I don’t have the 400 foot yacht in Saint Tropez. So maybe that, you know, like hanging out with me is eating a cheeseburger at Bucks and sitting in my backyard around a fire, and maybe the people who would be more inclined to hang out with hangers on aren’t as intrigued by that. But maybe I’ll leave you with this because I do think it’s related to it, not something you ask specifically.

A lot of my friends say, Brad, you’re kind of living your life at warp speed. You’re trying to pack all this in. What’s this all about? And I mentioned I lost my dad when I was young. I lost my best friend when I was young. And honestly, if a young person comes to me for advice or my own kids, this is the most important thing. We are all just passing through. Like this life is really, really short. And as humans, we’re programmed not to think about mortality.

It’s actually a survival instinct. But I think that that leads to really bad decision making because people tend to meander their way through life, they don’t have the intentionality. And then, yeah, lots of studies of people on their deathbed is all the regrets they have. And so I would say that losing my dad early, losing my best friend early, I made a commitment at their funerals. Like, I’m not wasting it. I’m gonna love big. I’m gonna be intentional about how I spend each day. And I was recently reminded about this.

Lorraine was talking on this panel with Johnny Ive, and she said, you know, she goes, I’m not sure why Steve always had the sense, but he always had the sense that he had to get it done now because life was short. Lynn Miranda talking about in in Hamilton, why did Hamilton write like he was running out of time? The Federalist Papers. I mean, all younger people, particularly the ones you referenced, would be well served by thinking about what is the eulogy values they want to live by?

What do you want people to say about you when Harry Stebbings calls them? And I certainly don’t want them to say, Oh, he amassed the most money or he had the biggest firm or he has the most AUM, right? I actually want to live a life of purpose that matters of impact. I want to show that to my kids. I want my kids to live that life. I think it’s a recipe for happiness. And I actually think it’s a recipe for having a much more interesting life, a much more authentic and enriched network.

And I think it allows for great success in the business.

Woah. Is it you’re not gonna use the list I posted on Twitter, are you?

I’m I’m guess 3,301.

For me, one of the most impactful books was Snowball about Buffet, realizing that compounding is one of the greatest forces in the world. Start with a really small snowball on a really long hill. And I’m talking about compounding in love, compounding in impact, compounding in invention, compounding in investing. Figure that out in life and just get started and compound your way along the way.

Listen, I don’t think SPACs need to exist in the world. They’re a mechanism by which companies come public. Traditional bank IPO. They have forced more innovation in the direct list market. And what I really care about, what I’m trying to solve for is making sure that entrepreneurs and founders of iconic businesses have a fair and easy step into the public markets. It shouldn’t be so Byzantine. And we want to be partners to them because remember, some of the greatest venture returns in the history of venture capital occurred in the public markets.

Booking.com price line from 1,000,000,000 to 100,000,000,000, go through the list. Those are venture returns in plain sight.

Buffet, marry somebody you love. If you have a harem of a 100, you don’t get to know any of them very well. Apply that same logic to your portfolio.

I think the behavioral dynamics, the behavioral psychology around groupthink is super powerful. People love to follow others into deals because others did deals. It is very hard to resist. I would say young analyst associates partners in Silicon Valley are filled with FOMO, follow too many others rather than doing their own work.

check-in the ByteDance.

We can make a whole show on this. Maybe we should get rich and Bob will do a whole show on this. Now listen, there’s this view in the world that Burning Man is, you know, some hedonistic exercise of drugs and orgies and whatnot. And that’s fine because it just means there’s a lot of self selection, not everybody’s going to go and not everybody should go. For me, its core value is no judgment. Truly going to a place where you suspend judgment about what you see, the things going on around you, the people, etc.

Possible. It is a great open source experiment in humanity. It’s an open source festival of 75,000 people that could not possibly exist the way it does if it had a CEO or a head developer or architect who tried to micromanage what that event looked like. Not only do I see great friends, not only do I have fun, and I’m not saying crazy shit doesn’t happen, it does. But for me, I think it embodies a real spirit that we could bring into our daily lives, which is suspend judgment, or people are quick to get to judgment about people or the way they do things, have an open mind, and realize that that open design can lead to a lot of really incredible creativity.

Number one, I’m terrified that I will do a bad job as a dad and that my kids will grow up being entitled and not living to their full potential, and I will have deprived them of that really arduous but beautiful journey up the side of the mountain. And I would say related to that is this idea that whenever I die, whether it’s tomorrow or forty years from now, that I’ll have regrets. If there’s one thing that I feel great about the intentionality that I’m living every day with, I’m doing exactly what I want to do with the people that I want to be doing it with.

And that freedom, right? The freedom that comes from the economic freedom, which is a total privilege and not a lot of people have, give me the opportunity to have the impact. And that’s the challenge I put in front of myself. I put in front of our team organizations in front of my friends. We live at one of those privileged times in the history of humanity. I think capitalism is an incredible force for good, but it doesn’t just happen. Like, we’ve got to fucking show up and we’ve got to leverage all of this goodness, the technology, the resources, etcetera, and the system we’ve been lucky enough to be a part of.

And we’ve got to drive the goodness. And so my regret will be if I get to whatever the endpoint is and feel like I didn’t use my voice, use my platform, use my network to achieve that.

Well, I think it’s gonna be a lot more of the same. We may be five or 10 people bigger. The incredible partners and young people around here will have even more responsibility doing all the things that we do today. I mean, in the fullness of time, I wanna see Altimeter have an incredible generational transfer. They’re gonna end up owning most of place. My money, I’m gonna ultimately give away. We’ve started fast down that journey. But to me, I will have done my job if the Altimeter ten years from now looks very recognizable culturally, its values around impact, around radical candor, around intellectual honesty, thought leadership, partnership first.

If all of that is still pervasive here, and I think if we were a 500 person organization and look like the black stone of venture capital, I think we probably would have failed in that journey. That’s not our North Star. It’s not where we’re headed. Other people may do it, they may make a lot more money than us, they’ll certainly end up on the covers of magazines and whatnot. But knowing who we are and prosecuting that strategy and having a lot of fun along the way, if I don’t do that, shame on me.

thank you for bringing to all of us what you do. I started by saying I love biographies. You give us biographies every day. It helps everybody learn. And that in and of itself is an incredible cheat for young people to be able to listen to these things and maybe get up the learning curve a little bit faster. Thanks for having me, Harry.