NEW FORMAT: Mega Funds Will Come Back

We were chatting before about things I learned when I started investing I didn’t get. But when I started investing, I remember one of my LPs, limited partners, came back, and this is probably nine years ago, from Founders Fund LP meeting. Right? And this is a decade ago. And they came back, and they told their LPs who were stunned that they’re aiming for at least $100,000,000,000 outcome per fund. People’s jaws dropped, but Peter Chill obviously was the angel in seed in Facebook, so they’d had multiple $100,000,000,000 outcomes.

They drew a line, and they said, this is how the Internet’s growing. This is how many people are using the Internet. Over the next ten years, we should be able to have at least $100,000,000,000 outcome per fund. That is still a slightly audacious goal in venture, but I think everyone has adopted one lovable. You gotta have these $10,000,000,000 outcomes. And I do think everyone that’s been doing venture for a while that is elite has at least one $10,000,000,000 outcome. That’s what fuels these big funds. Right?

That and fees, as Rick alluded to, right, and other things. You know, one $10,000,000,000 outcome per GP per fund can fuel fuel the tank for a long time. The problem is that that 10% of a billion dollar outcome is a 100,000,000 in a billion dollar fund. You’re not even you’re, you know, you’re 10%. You’re you’re barely you’re an asterisk, like we talked about. You’re an asterisk outcome. You don’t even count.

But I think this is one of the reasons why, like, structurally, like, bigger funds at early stage are problematic, is that at a seed stage, it’s extremely, extremely difficult to say, okay, here’s gonna be a Decor versus, you know, a billion dollar. Like, yes, there are certain TAM constraints on some of these companies, but think I you talked about in one of the last round tables, Jason, about TalkDesk, that you were like, oh, this is like, you know, own company, it’s a five nine, this is maybe a $150,000,000 outcome, and it’s a $10,000,000,000 company.

So I think, like, you know, the reality is, yeah, if you’re founders fund or if you’re seeing these companies that have the chance to be a snowflake or something else like that, I mean, the reality is, what, there’s 20 companies in cloud that are worth more than $10,000,000,000, and there’s a lot of companies that are worth 1,000,000,000 to 10,000,000,000. If you’re a later stage investor, being able to back up the truck on one of those is completely different than if you have to pick those at the seed or Series A stage, and with hopefully, they become $10,000,000,000 companies.

But if you need them to because your math doesn’t work, that seems really, really, really problematic to me.

I think they’re gonna reflate at the end of next year. I think there will be a resurgence of mega funds in late twenty twenty four and 2025. I think we’re all looking backwards. There’s so many stories of how hard it is to raise a fund and how LPs are are cutting back. It doesn’t last. It doesn’t last. It can’t last. Right? You’re either in this asset class or you’re not. So I know it may seem contrarian, but I don’t think so. I think is you know, 2021 was a great year for LPs.

Right? 2022 for some LPs actually was still great because of the time lag. You could actually have a great year as an LP in 2022 if you’re finally getting your post lockup distributions. A lot of folks had a good 2022. Some had a terrible, but it bled in. But when times are good, money will re flood into this. So I think we just have to be careful about drawing short term conclusions. When I actually see so many things getting slightly better, like slightly better, it’s really hard to see that curve, that logarithmic or parabolic distribution, but we want to count them out, but I think we should count them in.

Yeah. I mean, I don’t disagree with you that these funds are going to keep on getting bigger. I think one thing that we could see is the maturation of this truly going from like venture capital to an asset management business, which if you look at the way that the Bridgewaters or Carlisle’s or those, like, they had core funds, and then they splintered off into strategies, and I think firms like Andreessen and Square have already started doing that with their sub strategies and so forth, and having dedicated teams around those, that I think that’ll start driving a little bit more rational math around, how do we go and return a fund that fits that strategy as they start doing that across their teams.

And we’re gonna see more of that as the venture business looks more like an asset management business for those type of firms. But I think the splintering off of professionalization and turning into asset management is really going to happen in venture in the next couple of years. I know

you ask this version of this question a lot about multi stage funds coming in early, displacing seed funds, instead of doing a two on 10, doing a 10 on 40, or whatever the math is. I actually don’t think it’s new. Here’s my thought back. So what? Here’s the here’s the cry me a river part. Founders, your job is not to run out of money. The problem is that they run out of money. The seed guys will say the problem with five on 25 is you can’t raise the next round.

You’re you’re stuck. You’re you have a you have a hostage, you know, huge fund won’t write you a second check. It’s all true. It’s all true if your seed’s at 50, it’s really hard to raise the next round of 20. And it’s all true that if mega funds puts the money in, they they see you as an option. But so what? Your job as a founder, if you got 8,000,000 instead of 2,000,000, is not to spend it all. Why are they spending it all? As a founder, your job is not to run out of money, and where did this get lost in the in the seed dialogue?

Like, where did it get lost?

Why? Why don’t the great founders do that? Why can’t they use a spreadsheet and do the math and say, I got a gift from heaven. I got four years of runway, I’m not gonna screw it up. Why can’t the best founders take advantage of this?

You can’t do the math. You can’t figure out your zero cash date. You can’t build a spreadsheet. You can’t do a last four months analysis. Why why why can’t you do these things?

But I think this is all because, you know, the assumption on capital being so abundant, and the reality is a focus on growth rather than a focus on return on equity. A big part of this is the investors steering in the wrong direction and saying that money is going to be there. They’re looking at a bunch of their peers and seeing the folks do the same thing. I mean, the amount of stupid things that us as VCs and founders have done over the course of the last four or five years is ludicrous.

So anyone who grew up ten years ago and had to go through hard times, I think they do appreciate that dollar. But, you know, we all got a little high at the party, and the reality is, like, people are paying off for that right now.

We did, and I blame the VC’s at least as much as the founders. Right? 51%, 49. But the founders, it’s your life. I don’t get why they drive the car off the cliff. The fact that your business was declining eighteen months ago, you should have seen it. You should have adjusted. You should have done something, or at least not run out of money. At least not run out of money. Okay? This is like, you can go back to the dons of venture capital. Rule one in 1784 was don’t run out of money.

It’s John Doors rule. It’s a isn’t it well, how what excuse is there? I don’t get why there’s an excuse for running out of money.

I mean, Jason, I’d be interested to get your take. Like, did you ever have to do a RIF at any of your Like No.

I took no salary for eighteen months. Okay? I invested my own limited money from my first startup and my second. Okay? I did a lot of crap. I had no I went from a modest salary to none for eighteen months. I stayed more efficient than I should have. No, I hunkered down. I focused on viral acquisition, which costs zero, and I paid myself nothing so I could hire a person and have to replace me. That’s what you do.

And how many RIFs have you been a part of as an investor?

Listen, I know this may be triggering. I wrote this post years ago on SaaStr. If you’re a great SaaS CEO, you should never have a RIF. It’s called recurring revenue. I get it in B2C or D2C or X and Y and Z2C. I don’t think good SaaS CEO should I think it’s an utter failing to ever have a RIF, unless it’s a quiet talent reorg. That’s different. A 5% RIF to work out the bottom 5% and replace them with top performers is one thing, but no, you should never have a RIF.

I never had one as a founder. I think every CO should be embarrassed in in B2B if they do. The point that I’m trying to

get at here is like, your N of companies that you have if you found are very, very small, and that RIF feels deeply, deeply, deeply personal. The end of companies that you have as investor, the reality is we’ve had to go through RIFs. Like, you know, one of the things that we said over the last like twelve months is like everyone’s either RIF or RIF. The reality is I think when you’ve seen how productive a RIF can be, and right sizing company especially over the course, you just pick up more data points as investor that it yes, it feels a little less personal.

Those aren’t people that you’re working with on a day to day basis, but I think this is the reason why, like, there needs to be more, like, cut the shit between, you know, investors and founders, which we really moved away from that over the course of the last five, ten years because, like, just like you were talking about, like, there’s a lot of incentive to sell sell a founder, a lot of incentive to be all about the NPS score, everyone’s trying to, you know, raise funds every 12 months, so they need, you know, those founder references when the the best relationships I have with my founder is like, you can go to bat, you can fight, and get back to the table the next day because there’s trust there, but that really moved away where it became a lot of kind of patty cake, and you never vote against the founder, and you never kind of push back on the founder.

And I I do think, like, hopefully, like, this creates a more productive plateau where there can actually be friction between an investor and a founder to arrive to the right point, because I do agree with what you’re saying. Those risks shouldn’t happen if your company is working, but the reality is there’s no pushback and people kind of get lost when they’re on a highway, like speeding up, and they don’t see all the risks that are around them, and that’s an issue.

And that should be your job as investors to help leverage the fact that you have a larger end of companies than a founder does to say, hey, like, you’re doing something that is really concerning based on the other best practices, and people haven’t done that for the last couple of years. I’ve seen in my own companies with other board members being, like, asleep at the wheel, not wanting to push back against founders, and founders need it too. We’re all trying to make money together.

Look, I’ll tell you a story, Harry. We do have tell you a newer one. Was I’d love to be the first or second largest investor in a startup, but there’s one I really love. I’m the third largest. I’m not on the board. I’m not even an observer. I’m the largest below that level, but I am reasonably close to the founders for a very long time, and I caught up with the the largest investor, and I love everything about this company, but the burn rate remains very high.

It remains 2021 high. And I said, just wondering, like, what do you guys chat I don’t go to the board meetings because what are you guys chatting about? Or like, it hasn’t come up. What do you mean it’s coming up? I just don’t know how to address it. I don’t wanna I don’t wanna impact the relationship. I’m like, oh, I gotta do it again. I’ll do it. I’m the number three investor, but put the Zoom together. I brought it up with the founder who is an a plus a 10, but burning like it’s 2021.

The top line justifies it. Right? But the reality of today’s world doesn’t justify it. And it’s been a year, and no one wants to to talk about the issues. Right? I think we’re still seeing these twenty twenty one, twenty twenty two reverberations happen. In the end, people will have wished that conversation happened six to eight months ago. But ever the the tenor’s changed. Everything’s changed. I don’t hear VC’s address. It’s a meta question. Is the so you have a cap table. The cap table can only add up to a 100%.

You sell slots. Right? So let’s imagine you sold half your company in two and a half rounds. Right? 50 does that mean the VC’s get 50% say in how you run the company? Does it mean they have no say? Because the cap table, they don’t run the company. They’re not working three hundred and sixty five days, seventy hours a week, thinking about it on run, a 20 mile run, thinking about it in the shower, sweating it. They’re dialing in for Portofino, or wherever. So what does the ratio of the cap table have to control?

Right? And at a board meeting, it seems very one on one. Right? But what should it be in the new world? I don’t know. I think that’s what we’re struggling with. And Rick, your point of going back to the old days is very compelling for folks that have been around. Right? But part of me wonders, is that not is it too late? Like, that relationship to the cap table, to responsibility been disconnected? And I think that’s how founders think about it. Founders don’t think, hey, sold 40% of my company.

That means they have a 40% say. I think a lot of founders think that means they have a nunce percent say, a 0% say. I don’t know what it is, but it ain’t what it was five or even five or six years ago when it was fortyforty or forty=twenty. It’s forty=zero for founders.

The reality is you’re 100% right that the say that board members have had over the last couple of years is definitely a lot less than what it was probably five, six, seven years ago. There’s two things that that probably matter in terms of who I say, and that’s one, like, whether the founder wants to engage it and is actually willing to hear it. If so, like, investors will talk and give opinions, but if the founder doesn’t want to hear it, it’s kind of dead air and there’s no real point, it’s gonna be frustrating intention anyways.

I do think that there is like a need to opt into that process. Two, there’s also board votes. For better or worse, if a board controls a company, the founders probably going to to listen a little bit more than if the board does not control a company. And I think, as you go and see a bunch of bridge rounds, down rounds, and all this other stuff that’s gonna happen in the next couple years, like, the reality is founders are going to have to listen a lot more to their board, and because if the board doesn’t agree with it,

maybe those

fine

tuning But you’re you’re of course right technically, and legally, and contractually. Just don’t see the world working that way today anymore. I think they may listen more to the board members the week before they run out of cash, but I I don’t see that awareness of that dynamic of, hey, you you could ignore your investors for a while, but you’ll regret it when you need a bridge. I mean, there’s so many great tweet storms and 20 VCs on it, but I just don’t see that resonating with founders this day.

I think I think it’s either too subtle, or it’s like, I’ll deal with I’ll deal with that later. I’ve got too many fires today to deal with. Or, of course, the next round will come. I don’t know what it is, but I think that that dynamic is lost on 95%. Not all, but 95% of founders. I think it’s lost.

I think there’s gonna be more bust than down rounds and bridges. I think there’s not a whole lot of satin for folks to come in and out. Unless they’re funds that already own a ton of a company, then there’s some salvage value there. But reality is, yeah, there’s gonna be a lot of busts, I think that’s the reason why, like, if you’re a board member, you have fiduciary duty. There’s not a lot of incentive if you’re at a mega fund to go and have those tough conversations because you know it’s never gonna move the needle.

Salvage value is and loss management really doesn’t matter at those funds. There’s less of an incentive and less of a mindset around, like, how to push back and do those responsible things to cut burns so that you can actually get to a profitable, sustainable business if you’re not going to be able to raise around, which I think you’re right. Like, if it’s not super hot or not going to be a decorum company, my guess is most of those top 10 venture firms that are over 2,000,000,000 are not gonna be knocking on your door.

One of the top things I’ve been thinking about in SaaS, because we went through a very interesting AB test or experiment the last 1.25 or so. A ton of SaaS startups did layoffs and cuts that we chatted about, but they mainly did it so they wouldn’t run out of money. Right? These were not really strategic decisions. But the public companies all got for their really for the first time, no matter what he says, huge pressure to get profitable, to get efficient. For the first time, this is what happened on Wall Street.

And you saw folks in one year all do it. Like, monday.com went from minus 10% operating margins to almost 20% in one year. In one year, companies that are incredibly tough to be profitable, like Toast, went from negative to positive in one year. Mongo increased its margins. Every single company that wanted to in one year went from modestly or not profitable to profitable, or at least strong operating margins. We don’t have to debate what’s GAAP profitable. And they all did it in a year. They all did it in a year, and and no one had the discipline.

The truth is no one had the discipline or the need to do it before. For the first time in my whole life in SaaS, we now we have to face decision now that we’ve proven these B2B companies can be efficient, Snowflake’s now predicting 45% operating margins going forward. 45% operating margins. So do you get an excuse? Can you burn the massive amounts of money, and and will it be tolerated? Or do sales and marketing have to make sense? Does CAC have to make sense? I’m wondering, but I think founders should pay attention.

I think founders are out of the loop what’s happened in the public markets, and founders are out of the loop about efficiency. Founders may need to be radically more efficient for the next five to ten years if things don’t swing back. Once the public markets get comfortable that, hey, these these companies actually are very efficient, I don’t know if they’re gonna wanna fund massive losses afterwards. I don’t know if they will. I don’t know if they will favor these ones.

And I actually think that’s why, like, founders and investors both, we’ve kind of slipped away from financial acumen as investors where it just became really focused on revenue multiples and how do we chase that multiple as much as we can. And it really comes down to business model quality and whether these companies have a path to profitability and ultimately a path to free cash flow, which like, for all those companies that you can point to on the SaaS side that had really good NDR, really good metrics, there was a business model that enabled them to get profitable.

I can point to a ton of consumer companies, a ton of fintech companies that moved the opposite direction. Despite trying to cut back, their growth went through the floor, and those companies are largely dead right now. So I think getting back to business model quality, understanding what actually has the potential to drive real shareholder value rather than just chasing revenue. A lot of people are learning a finance lesson for the first time over the last couple of years, and I think like They are. That means we reintroduced into what investing in company creation, company value look like, and it’s something that certainly is something that we’re teaching to the younger folks on our team a lot of, like, okay.

Here’s how you create value, not just revenue.

founders. The path was a gift for founders that had long runways and mediocre growth. They got a year to be left alone. I was in a board meeting where the founder said, I’m, you know, I’m frustrated. I’m only growing 60% this year. And one of the huge VC said, you’ve got five years of runway. I don’t care. Like, I got so many fires in my portfolio last year. I’m glad you’re worried about it, because I don’t have time to worry about the fact you’re only growing 60% this year.

Everyone got a pass for a year, and it was a gift. And I remember right when COVID hit in in 2020, Byron Dieter, we did this thing, and he said to all founders, you get you’re getting a little bit of a pass for a quarter or Now it ended up we didn’t go back to the office. The world changed, but everyone got a pass. And but the pass is over. And whether the venture outcome is 300,000,000 or a billion or 10,000,000,000, you can’t avoid triple triple double double, at least in B2B.

Can’t avoid it. If you don’t get back on the wagon, it’s over. Right? This is a cruel thing for founders, but it is over from a venture perspective. Right? And you either got to get back to growth or move to a different phase of your life as a founder. This is the time. Like, you got to think about it now, this summer, this fall. You either got to get back to growth or it’s over.

what would you tell them? It comes down to the company level. I’ve definitely heard some secondary offers on some big, big companies that I know that are gonna turn some of our peers from seven ex funds to one ex funds. That would be really, really scary, but I think this is gonna wash out a ton of venture firms. I think a lot of folks who weren’t honest with their LPs, who did a ton of SPVs and these things on the way up, you know, trying to kind of grab every buck that they had, and they didn’t take liquidity on something that was a 3 to $5,000,000,000 outcome across, like and it was the one company working in their 50 company portfolio.

That’s a really, really tough situation now that you’re under $600,000,000 of preference, and that company is not really worth anything. And your LPs are gonna be really pissed with you if you screwed up on SPV and didn’t deliver fund returns to them. So I think that’s a tough situation.

I have two two thoughts. I’ll tell you what I’ve done myself. Right? At once the market turned. Right? First, I basically decided anything north of 15 x ARR had a suspect valuation in the current world. Okay? That’s what the top and most startups are not gonna gonna be the very top. Most aren’t gonna be Datadoggers, Snowflakes. On the other hand, they’re earlier. So I said anything over 15 x ARR is suspect, and I did a matrix. Here’s the revenue of everything. Here’s the last round valuation, and here are the asterisks and daggers for ones that are overvalued based on public comps.

Right? And if you want as an LP, you could value it this way. Like, you could value the portfolio based on this way. It doesn’t work if you’re too early. Right? But it works anywhere north of 5 to 10,000,000 in revenue. That’s one approach. On the other hand, once you’ve done that, and maybe you take a haircut or two, right, and I took two markdowns from this process, but not 20, then then the question is, okay, you gotta look how healthy is this company? What are the probabilities that you will still have big outcomes?

And did the do those valuations make sense? And then I asked two of my top LPs, what would you like to see? Would you like to see huge markdowns or something crazy or a massive discount? And their response was no. Their response was, if these valuations are reasonably market correct, they’re not done by crazy Tiger or SoftBank things that don’t make sense, and they’re in the zone of valuation that makes sense. They said, don’t care. You’re not that much money to us. You’re not a $10,000,000,000 commitment.

We want it directionally correct. You’re not a problem, and so the meta learning was it wasn’t as big an issue. Or I didn’t even get engagement on it, frankly. Didn’t even get the engagement.

Right. So what’s 50 times 15? $7.50, if it’s a good one. So mark that one down by half. Okay. Shoot the market to zero, unless I turn it out of money. Just mark it down by

think the way we’ve done markups, especially for smaller and other funds, has completely corrupted the industry. Venture would be radically different if there were no markups. I’m confident it would be a better industry with no markups. Or at best, even though it’s expensive and a headache, a conservative Black Scholes analysis of these assets that would be annoying, but you’d sit on a 1.2 x, 1.5 x, two x fund for a decade, and so be it. It’s not that I don’t think mark to market is is I do think it’s telling.

I do think there’s something to all of it. Right? But it’s corrupted behavior in a way that that I don’t think we anticipate. It’s corrupted everything up and down the stack. Right? Why? It’s created an incentive to overfund companies. When times are good, you hear Rick and others saying, hey, let’s keep companies properly funded. Let’s let’s leave room for proper exits. No one gave a heck when they got a markup, when they had a five x fund and could raise another fund. Even less discussed is that a lot of LPs, at the bigger LPs, they’re compensated based on paper markups too.

This is less They’re well compensated. This drove crazy where where did all this unicorn explosion come from? People don’t understand that the cash had to come from somewhere. Right? It didn’t all come from what’s his name at SoftBank himself, And the fact that not most, but many LPs got compensated themselves on paper markups drove an endless round of markups too. The seed VCs wanted it because the seeds guys looked like genius for the first time. My last fund, the first year, had a 140% IRR. That’s moronic.

It can’t last. I’m not that good. You can’t it can’t last for fourteen years. And so, of course, you get addicted to it. Right? You want that, and it and it means raising too many rounds at two I valuation. Maybe we took a pause on it briefly, but that corruption’s gonna come back. Every CBC wants a four x or higher fund and a couple unicorns to sustain their business. Everyone wants it. Everyone says they don’t, think is lying.

I think LPs are wiser to that now, Jason. I don’t know.

Yeah, they don’t want nothing, but they don’t want a one x fund forever, or a none x fund. They sure don’t want the opposite. Like, they say that, Rick, and I don’t mean to interrupt. They say that, but they don’t want I don’t think they want the opposite. I don’t think they want all of them are gonna be sub 9 figure exits, or all of them are dogs, or, you know, SoftBank or whoever, and Andreessen won’t invest in any. They don’t want that either.

I think they want 10 bagger funds, and they want trust. And I think the reality is, like, if they could be an emergence fund or a USB fund that has a 20 bag, you know, the returns of those funds are amazing, and very confident that those didn’t look like a 140% IRR funds right out the gate, like they took time to compound. But I think those funds have developed tremendous amount of trust with their LP bases, say, okay, we’re gonna let the game play out.

Now, if you’re an emerging manager, like, I certainly felt pressure on this on Equal One of like, okay, I wanna show our LPs that, you know, I wanna show the market, you know, we have a great portfolio, so, you know, let’s go and get all these markups, and that certainly helped us. The best LPs do think that. They’re saying, hey, like, you don’t know what your portfolio is worth here. Like, what’s your process that you have? Do we believe in that process? Do we believe in your team?

Do we believe in your approach? But I think all the emerging managers that have come to the game over the last couple of years, like, we were all fighting for so much capital with each other, like, lot of those doors are now closed, and I think it’s LPs figuring out how much trust do I have that these people are not bullshitting me on these numbers? How much trust do I have that, like, these are actually high quality companies? And I’m hopeful that that actually gets us all a little bit off the hamster wheel, because, you know, there were times over the last couple years that I felt like an investment banker, and that’s like the last thing that I want to be.

Do you think LPs trust their managers?

LPs trust when you’re big, it’s different. But most funds that aren’t huge have a few core anchors. And typically, relationships are trust driven. The rest, it is transactional, and LPs should be suspect. There’s there’s suspect GP behavior. There’s suspect CO behavior. I think this suspect GP behavior is more subtle. It’s overstating things. It’s exaggerating your role with companies. It’s draw connecting dots that don’t quite exist in terms of ownership and stake and time. And twenty twenty twenty one was a weird world. It’s hard for all but the best funds to raise LP capital.

And so that naturally leads to everyone trying to be as aggressive with the facts as they can be, and LP seeing them as a product. It’s a complicated relationship. And I’ll tell you my learn you know, I just met with a great LP who has been a bit of a mentor to me, and he was thinking about dropping a top tier fund because managers had changed, and they hadn’t been properly communicated, and he wasn’t sure what would happen with the next generation of the fund. Right?

There’s just lots of dynamics, and it’s very hard to be an LP. It’s just very it’s it’s an easy job in that it’s very, very slow, but it’s very hard to get good at it. It’s it’s another order of magnitude slower feedback loop than venture, which is which is pretty slow.

I mean, you you do hit on something that’s really important on this, Jason, is that there’s just been, like, such a focus on salesmanship across the entire venture ecosystem. It’s like So salesmanship. Pitching out YPD demo day. Oh, It’s like, GPs like pitching as much as they can let’s just cut through the sales for a second and actually just like have substance, which I think I haven’t taken a pitch in eight years because I think pitching is bullshit. Because I think it’s all about sales salesmanship and rather than actually like me understanding your understanding of a company.

And I think if we all did 10% less sales and actually 10% more substance, everyone would be a lot better off.

Was talking about up and down the entire like, when we went out for Fun One, our pitch was terrible. Like, won’t say we’d find it fun, but one of my friends showed me the notes in their CRM from and they’re like, this pitch sucks. Like, doesn’t make sense. The LPs that we ended up resonating with, they took time to understand us, They realized that we sucked at pitching, and really got on board with the story and the process. Those are the type of founders that I like.

I don’t like a pitch. I just want to understand them and see how they work. You know? But I do think that this overselling across like founders selling GPs, GPs sounding LPs, everything feeling like it’s a demo day. I think it takes us away from what we’re supposed to be doing on the field, and actually makes us just obsessed with pitching all the time.

I see your point. Yeah. I actually do Harry’s right. I do really like it when the founder is good at pitching. I like it when the first email is so good that you wanna invest by the bottom of the email. I like it when I’m already wanna invest before the Zoom starts. I wanna invest before the minute I meet them, and it and you miss stuff. Like, going to Rick’s point, you miss you would have missed Rick’s First Fund. You would have missed these other founders.

Right? I did this catch up with the monday.com founders the other day, and they showed me the e the pitch email they sent me. It was the worst ever when they were starting. It had a different name. It was terrible. It’s like, we’re thinking about doing something in productivity. Would you like to talk? Okay? And it was and these are the best guys in the world. Right? That was the worst. So I didn’t take the meeting. Not that I lost. I didn’t even take the meeting for forget about passing or missing it.

So you’ll miss the Mondays by this approach, but you gain a ton of efficiency, because in B2B, you gotta sell, man. No one needs another SaaS product. We already have 11 payroll companies, and 88 CRMs, and 96 mark we don’t need one. So if you can’t force your way into a market, and selling stock is sales. It’s a weird, nichey sales, but you better get it as a founder. So I like the ones, not that are used car salesmen, but I like the ones that are new car salesmen.

Like, they convinced me there’s a model three that came out of nowhere, and I got to buy it, and I’m all in. Like, I’m all in when I see that.

reduced. So I would say, like, when numbers do your talking for you, that pitch is so much easier. But I do think that pitching is very much an art form that Silicon Valley, like, has embraced. Like, it’s very much in this Don Val Don Valentine archetype. Yeah, there’s people that all they do is practice pitching and they forget how to run a business. Salesmanship is one thing, but like, if you’re selling to the insurance industry or selling to truck driver, that’s very, very different than selling to a venture capitalist.

I do think, Jason, what you do, like, very locked into a certain type of sales process around selling to CIOs, CTOs, enterprises, like, you understand that 10 times better than I will ever if I spend the next twenty years of my life focused on it. But I do find, at least in what we do, where the customer bases are very different, we just haven’t seen a lot of correlation between the folks who are really great at raising money at the seed stage, and the folks who are really great at building a business.

The people who are really great at building a business, they get pretty good at pitching over time too. But

depends how much gamification is happening. So, you know, if someone knows that you’re gonna ask that question, someone’s gonna prepare for that question. It’s like the the way that people are preparing for the GMAT. Like, is it really a test of intelligence when you know if you, you know, spend enough time training to answer a certain type, like, you going to get good at it? Like, the answer is yes.

So at least my approach, which is different from other members of our team, this is just me, is the reality is like, I review your deck, I actually know the four or five key questions to get me to conviction, and I come in there and like I spring on the founder, hey, we’re not gonna do a pitch, I wanna talk about these four or five things, like, here’s what I need to get to conviction, like, let’s go. If they really understand their business, they’re gonna be able to talk through this.

If they don’t, they are gonna completely like, it’s a bad meeting very, very early.

It is absolutely true that at some point as a founder, you will get good at pitching in VCs. I do think Rick’s got a good point that people aren’t necessarily born great fundraisers. Most founders are born great builders, like we build products. And the question is, do you wanna put in the energy to cut them the slack? Because what I do takes no energy, right, to judge somebody by their email. Like, it does cut out education bias and a bunch of other and country bias, but it doesn’t cut out sell your vision well bias.

Right? But if his two best investments are ones that had terrible pitches and no traction, you gotta put in the time. Like, you gotta really meet a thousand companies a year. I’ll read 50 emails a week, but I only wanna do one pitch a week. And I find when I do two, three, or four, the other three aren’t worth it. And then I gotta follow-up with the email, and I gotta explain why, and they don’t listen, and it’s like 11 emails. And I never should have done the third or fourth meeting, because it was on the bubble.

Right? So you gotta do 50 to do this strategy.

James, you wanna hear something absolutely insane? Yeah. I take one new founder meeting a week. We are so meticulously thesis driven that I really try to down select, and there’s this bar that we have that is like, does this deal have the potential to change your life? If not, pass.

So here’s my mental model around it, and it’s, one, does this have the chance to be such a f u big outcome that like it’s going to completely like return our fund five, ten times that like you believe in your heart of hearts that it’s an uber sized outcome with deco core potential that you see that so early that you cannot miss it. And that’s a meeting that I need to take. Two, we have a process that we call hunting, like we have our top ten, fifteen ideas on our big board that like I am laser focused on finding companies related to those, and screening for the quality of those companies, and our team screening for the quality of those.

So if it’s an idea that I feel like I need to flip the card, like flipping that card changes my life. Or third, is it one of these founders that you believe that has the chance to be like truly once in a generation that is that exceptional in a very objective way? Not like a good founder, but someone who has the chance to be absolutely that insanely good. At least for me, like, yeah, we miss a ton of great companies, a ton of great companies. But I do find screening that down and really focusing on, like, how can I win the best companies that are the best fit for our approach?

I

cheat code. Something we forgot about, Harry, when I started investing, I was taught this very simple heuristic or hubric, and then we all forgot about it. When I was taught when I was investing, when exits were all small in SaaS when I started, 2013, 2014, there were no HubSpot IPO ed 800,000,000. Like, weren’t these big outcomes. So I was taught this simple thing. Are you confident the next round will be three x this valuation? If you’re confident, do it. It solves for a lot of issues if you slow it down and think about it.

Right? Do you think it might be worth more? Well, every VC that doesn’t have deal flow thinks it’s gonna be worth more, doesn’t have good deals. Forget about whether Salesloft’s gonna be worth 2,500,000,000 in cash, which you didn’t know, or Pipedrive 1,000,000,000.5, or Algolia, whatever. Didn’t didn’t know to the the Byron point, but I was confident for a variety of reasons they would be worth three x the price. And and this all got blown up with crazy valuations, but it does force you to break it into one atomic unit.

Right? Which is, is this company doing enough good things, right, with enough good founder, and enough things so that you’re gonna have not even a two x, a three x outcome? That was what I used in the beginning of investing, and now thinking about it live, I regret that I moved away from it, because it it actually forced a pretty decent way of thinking. Like, don’t know what’s gonna happen with Pipedrive, or Algolia, or TalkDesk or Salesloft, but shoot, I’m I’m pretty sure we’re gonna the next round, pretty good founders, like, three x?

Yeah. Like, yeah, you know, and if every investment’s three x, as dumb as it sounds, you’ll have a three x fund. That’s I pretty

I think you’re right that that first one of this will change my life. It is really, really, really hard to figure out what is gonna be a massive company at the seed stage that plenty of people have haircut things and scratched the upside. The scary thing about venture is when you really cut yourself off that, like, if you’re a European seed stage VC and the only way you can win is if you have Spotify, that is a really, really tough position to to be in. If that’s the only way you can three to five extra fund, chances are is that you’re not gonna succeed, and then you’re gonna lose to guys like you.

I mean, you got a way better chance to get in that than 99% of the other, you know, VCs that are out there, but our job is to go and find ways to make money. And and I think there’s plenty of private equity funds, growth equity funds that have found ways to deliver 50% IRRs to their LPs without being inside those when you get on such a big fund cycle that you’re required to do that. I think when we force a company that rightfully is not going to be a DecoCora company down that irrational path, it’s like flushing money down the toilet.

It’s just an interesting question of a mistake I’ve made, and and maybe others made, is thinking through it, I think there’s two ways to build a a unicorn plus. You can stair step it, or you can you can swing for the fences from the start. And the swing from the fences, you can you can have the perfect idea and thesis, and make sure it’s a large space, and make sure that there’s a a $50,000,000,000 TAM accessible. Or you can stair step, and you say, look, am I a 100% sure, 90% sure there’s gonna be a three x to the next round?

Thinking on it, think I I’ve done better stair stepping. I’ve done better stair stepping than whiteboarding. I’ve done better now stair stepping does force you to be more valuation sensitive, which is maybe why a lot of us abandoned it. Like, it’s hard to stair step from a 100 to 300. It’s much easier to stair step from 15 to 45 or 10 to 30. And when we all lost discipline in the peak, maybe we all stopped stair stepping and looked for markups. But the the Twilio example or even even Shopify, Bessemer exited Shopify, they didn’t know.

Right? You gotta stair step some of these. Maybe that’s the back to basics. Founders don’t do this anymore, Harry and Rick. Don’t think. I don’t think this is if I want to be grouchy about something, they don’t raise around and say, am I a 100% sure I’m gonna three x it? Because they shouldn’t take the money. Like, slow it down if you’re and I literally had a founder the other day who had an offer at $4.50, and just turned it all down for the first time in history of this company.

And I asked him why. He’s like, the the three x math, it’s not worth it. Your VCs may pressure you on this, but if you triple their money, everything works out for everyone on the cap table. It may not make the fund. It may not. But if everyone three x’s, it’s enough, and so stair step your and I do think you can build unicorns and large funds stair stepping, and that’s what I’m gonna get back to. Right? Stair stepping deals, just stair stepping them. 20,000,000 posts, fine, but I gotta know it’s gonna be 60.

How do you feel about that in this market though, where like seed steals are absurdly expensive, and AS have definitely depressed in value? I would almost wonder whether you’re seeing some adverse selection in there.

Well, always can say that. A lot of these investment strategies, everyone will say there’s adverse selection. When I started investing in European founders, some folks I invested in said, don’t even tell the LPs that’s you’re doing that, because it shows you don’t you can’t get any Americans to invest in. Well, you know, wouldn’t have done Algolia or Front or Pipedrive or or Gorgias or others if I was prejudiced against Europeans. Right? I wouldn’t have even met Harry. And so but this adverse selection thing, I think you can take it too far because you wanna find the undiscovered gems.

The adverse selection focuses on the eight guys from Stripe, the eight white men from Stripe that have the perfect Stripe two point o. That’s what positive selection gets you, and works for big funds. Right? Going from, like, decacorn

hunting to, like, okay, like, you know, maybe Jason is in the back to the basics, like, you know, camp, you know, now, which I, you know

I just think it’s simple. I but I think Harry’s got the point from the memo, which is you can stair step your way to an epic outcome. That’s what we lost track of. You can stair it’s not mitigating risk. It’s just stair stepping the way and and keeping life simple. Right? Just making sure, as an investor and as a founder, you’re just ultra confident you can triple that value, or you raise because you have no choice. That’s always okay. Like, you’re back against the wall and

just get that deal done. I think keeping life simple is actually really hard, which I think as an early stage VC, it’s, alright, how can you get enough really high quality shots on net on the field? Get those companies to product market fit. Get them to early stages of scale. Do all those hard things.

And then at that point, hopefully you own a ton of some companies that actually have the chance to ascend to greatness, but you gotta also be really draconian with the portfolio and say, okay, can I get a couple turns on my fund on some of these other ones that aren’t going to ascend to a decor type outcome, but you’ve kept it alive and got enough ownership and done the hard things? That really gets thrown to the wayside when, you know, you’re looking for a decacorem between seed and series a.

The, you know, the stair stepping, I think, is better for founders and it’s better for for investors. It just gets really, really hard when people don’t have patience in the ecosystem. They’re like, wait, if I didn’t get my next round done by Sequoia, this isn’t gonna be the one. Turns out that Sequoia didn’t invest in every single Deco horror company. I’m curious to sometimes it takes a little bit later. So many people give advice on how to win in venture, and I feel so many people try to follow the Sequoia playbook when they are not Sequoia.

The competitive advantages that Sequoia has to run and execute that playbook make them extremely, extremely good at. You know, I was talking to one of our LPs, major endowment. I was like, I get that that works for Sequoia, but, like, the reality is I’m not Sequoia. We are a very different strategy. We’re doing something very, very different. I’m gonna try to be the best version of Rick Zullo. I’m gonna be try to be the best version of Equal Ventures. We’ll see how it all bears out.

Give me another ten, fifteen years, and only either be really poor or really happy.

I think the reality is this broken incentives that venture firms have of all these zombie VCs that are Series A, Series B, Series C at multi stage funds. A lot of those venture investors may not be there three to five years from now.

If you are building a company, if you’re trying to construct your board, knowing who will and will not be there as your company is going through scaling, going public, that is a major risk that no one’s talking about and something that we are really concerned about as we look at downstream funding for companies and figure out, okay, how can we partner with folks like Jason who we know for better or worse, like Jason’s gonna be running his fund for, you know, here at the end of time because his name’s on the door.

Goodness. What I think the most common reason is they have good but not great growth. The risk for seed investors, especially late seed investors and I didn’t used to wanna think this was true. When I started investing, I did a whiteboard, and I looked at I said, okay. When I was at 10,000,000 ARR, I was growing a 100%. So I only wanna invest in companies growing at least a 120, and I boiled that down to at least 8% a month growth at sort of the mid seed stage.

And I kept it as a rule. Right? And I’ve bent that rule a little bit, and people will tell you otherwise, and they’ll tell you about folks that got lost in the jungle. But that’s where I don’t see it happen, is you do good. Like, you’re building a real company that’s growing, but it goes from one to two in a year, or it goes from two to to 3.1 in a year. And the founders don’t get it, but that’s where you fall. It’s it’s it’s tough, but that’s where you fall off the track.

And you can still have make good money as a founder, but you’re off the venture track without realizing it. The dime between good and great is subtle, but it’s painful, but it’s so real. It’s just so real. What’s the biggest investing

Honestly, I’m incredibly thesis driven, and I’ve missed a lot of amazing companies because of that. Like, around investing, the guys from Veterinary, and then like, they started a public company in our office and we didn’t invest. That company is called Archer Aviation, and like, that’s incredibly depressing. I’m very, very happy for those folks, but I do think it’s made me like very much think more about that third aspect of how folks can change their life, and being more open for founders that aren’t in your thesis, that you have a real deep connection with, that, like, I should’ve just written those guys a check.

You know? Like, that that was insane of me.

x. K. Everyone’s a thematic investor, and I think this has just started, and I think big money needs somewhere to go. Big money is still out there, and it can’t go into SaaS companies at 500 k in ARR. It’s gonna go into where massive spend is. And NVIDIA’s not going down, and OpenAI is not going bankrupt. And these may be terrible bets, in my opinion, but every top SaaS investor I know is now an AI investor, and I’m not sure they’re ready to to to go back to SaaS.

Are

or number of deals done? I’m talking about dollars. I’m convinced, right or wrong, it’s gonna double next year, even if it makes no actual sense it’s gonna die. It’s too big. If we’re

talking about high quality deals where money should be put, I don’t think it should be in AI next year. I’m already hearing, like, a lot of fatigue from folks. I’m like, okay, like, yeah, we we drove that. But there are gonna be a lot of these late stage companies. OpenAI could take like another 2,000,000,000, $3,000,000,000 check and then be like, okay, that’s actually like all of what went into Climate DEC actually just went into OpenAI, one company. I’m gonna