# Roundtable: Is the VC Model Broken? The Biggest Disconnect Ever Between TVPI & DPI

Why Market Size is Dangerous, Why "Go Fast" is Terrible Advice, The Dangers of Raising Large Rounds at High Prices & Why Next Year Will See the Biggest Hiring Spree i

20VC · Sep 20, 2023 · 78 min · 16,984 words
Speakers: Mike Maples, Eric Paley, Jason Lemkin, Harry Stebbings
Source: https://www.996.fm/episodes/20vc--ep-a0728ef4/

## Cold open

**Mike Maples** [0:00]:

The outliers usually start out at a low price because they're outliers, because they're nonconsensus and right. We do not focus on ownership.

**Eric Paley** [0:08]:

I think we've had a period of quite apathetic capital. I would bet the last few years will be one of the biggest disconnects between TVPI and DPI for venture funds in venture history.

**Jason Lemkin** [0:19]:

I actually don't think venture fully makes sense in B2B at co I generally don't think it works. There are good times to be

**Eric Paley** [0:24]:

buyers in our industry, and there are good times to be sellers. Rarely is it both.

**Harry Stebbings** [0:28]:

This is 20 VC

## Intro

**Harry Stebbings** [0:29]:

with me, Harry Stebbings. And today, we have a roundtable with the best seed investors of a generation. Eric Paley at Founder Collective, who's backed the likes of Uber and The Trade Desk. Then we have Mike Maples at Floodgate, who's invested in Twitter, Twitch, Lyft. And then Jason Lemkin with Algolia, TalkDesk, and Salesloft to name a few. This is such an incredible discussion. I absolutely love doing these shows. I think you can hear my terrible moderation, but also my passion when we do these roundtables. Let me know what you think of this new format of the show on Twitter at Harry Stebbings. I love to hear your thoughts. But before we dive into the show today,

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## Conversation

**Harry Stebbings** [4:05]:

We were all just saying that if we have this conversation, there's no better group of people to have around the table. So I wanna start and I wanna kick off. It's a new world of seed, and I've been speaking to a lot of LPs, particularly investing in seed funds. And when we look at 30,000,000 posts for YC rounds, the simple question that I think is just important to start with, and anyone can take this baton, is the classic seed model dead for the traditionalist, boutique y seed fund given these pricing environments?

**Eric Paley** [4:33]:

I don't think it's dead. I think there is a very small class of companies that will price themselves in a way that a large group of investors won't find very palatable. And some of the YC class will end up not getting those types of numbers, and others will get investors they're not as excited about, and others will actually get the investors they want. But that's a subset. I will say the rest of the industry sort of rationalizing back toward normal. I wouldn't say they got they're all the way back at what we've seen, you know, in the twenty fifteen rate time rate range, but I think prices have come down. And actually, all of that could sound lousy to the entrepreneur for a bunch of reasons, but I actually think being overpriced at seed is actually a bigger problem than most entrepreneurs realize, particularly as the market's adjusting. It's a very hard time to raise Series A in general, and it's a harder time if you're already priced where somebody might wanna price your Series A. You kinda become uninteresting to investors. And I think this is a multi round game, and you have to be very aware of that. Do you think prices are coming down, Jason and

**Mike Maples** [5:30]:

Mike? Am I am I seeing something different? I I tend to resist after doing this a while, I tend to resist making too many macro statements. Right? Like, I kinda look at it like every startup is its own snowflake. Is the average valuation higher than what I've seen before relative to where they should be? Probably. But I still think that there are lots of ways to make money and seed. And I, and I actually think they're surprisingly similar to how they've always been, which is you have to be non consensus and right investing in an entrepreneur who's non consensus and right. And you know, a lot of people say, well, that's changed. Look how big these exits are. But then when I look at those big exits, they all had low prices, Pinterest, Airbnb, Dropbox, Uber, Lyft, you know, and and invested $750,000 at five point five post in Lyft. Here's what people don't understand in my opinion. When a seed round is priced at 20 post, 30 post, it's not nonconsensus. It's priced to perfection, and it's priced in a way that everybody believes it's gonna succeed, that it's a hot deal. And that's bad for two reasons. It's bad for the investor because even if the investor's right, they're probably not gonna make much money. And what Sam Lemkin said on your show a few weeks ago is exactly right. He said billion dollar exits where he didn't make much money. But it's a problem for the entrepreneur too because if everybody is chasing their deal and bidding up the price, they should be self reflective about, do I really have a nonconsensus idea, or do I have an idea that plays well with what's popular, which I haven't had as good luck with. So, you know, Coinbase, when it was funded by Gary Tan, it wasn't popular to fund a crypto exchange yet. And ride sharing, we weren't sure if it was gonna be illegal or not. An air bed and breakfast is what it was called at the time. People were afraid you'd get murdered in somebody's house, staying in one. And so a lot of these, a lot of these seed rounds that end up being really good, the fact that they're not popular as a feature, not a bug. And that's reflected in irrational price. And the more irrational the price gets, the more I think it's a lose lose for everybody in the game, to be honest.

**Jason Lemkin** [7:30]:

The nonconsensus question. I wonder in 2023 with how big cloud is overall, consumer, B2B, whatever. Are there any non consensus categories? I get that crypto is a little bit out of it's funny when I started investing literally ten years ago last week. Right? I remember I was brought in by a meeting from a, you know, a top three venture firm saying, hey, we we haven't done a lot of SaaS. We wanted to get to know SaaS. We've only done HubSpot, and we really wanna learn whether and there were, like, very few billion dollar plus exits. Right? So actually, as crazy as sounds, when I started being a SaaS entrepreneur, I only knew SaaS, but it was not consensus. I'm wondering if anything vertical SaaS, B2B, B2C payments, fintech, you can rag on these things. They go up and down, but is it what's non consensus today?

**Mike Maples** [8:11]:

Here's my view of that is that if there is no non consensus opportunity, there's no opportunity to be an active investor. You could buy the index if you don't know anything the market doesn't know. The way you make money as investors to know something the market doesn't know. You don't make money by doing what everybody else does. You make money by doing something uniquely right that you do. That is the job description is to find those opportunities. Otherwise I should just buy an index fund and call it a day. And so like, I believe that there are such things. I don't think that you can do it by chasing what's popular or sort of your mind has to be prepared in some way to receive the insight that an entrepreneur has when normally you wouldn't been present and awake enough to see it. But that's, that my view is that the business exists because of inefficiencies. And that that is the job of us as investors to find those inefficiencies.

**Eric Paley** [9:03]:

We did an analysis recently of what was the hottest theme in each of the last twenty years of venture capital investing. It's a very funny thing to look at because you're like, really? Why was group commerce so exciting? It's hard to even get your head back into why a 150 of these companies would have gotten funded. But what's really interesting is what we what we did in the analysis is we looked at, okay, then what was the most valuable company created the year in each of those years? Never, not in the last twenty years, has the most valuable company born in any single year, valuable as of now, been this in the theme that was hot in that year. It has not happened. So my favorite on this one is in 2015, I believe it is. I'm going off the top my head here. So if I'm a little off, I apologize. The company that inspired this year's hottest theme, OpenAI, with generative AI being the hottest theme of this year without question. 2015, it was founded. The hottest theme that year was direct to consumer commerce, which is almost unfundable right now. Right? It's finding you know, if you were a Warby born today or a away or a Casper or a this would be an here it is an incredibly difficult environment to raise money for that kind of company. But I think what Mike is saying is absolutely right. The most valuable company born in 2023 could very well be in direct to consumer commerce because that's not

**Harry Stebbings** [10:18]:

where anyone wants to play right now. Can I ask you? What happens if the nonconsensus actually doesn't align to the capital structure of funds today? And what I mean by that is when you look at energy, when you look at climate, when you look at a lot of infrastructure plays, they're incredibly capital intensive. Bio in particular as well. They're incredibly different in terms of a capital requirement basis, and they don't really align to the current capital providing that we have as seed funds. What happens if the nonconsensus doesn't align to our capital structures?

**Mike Maples** [10:48]:

We exist as investors in seed to take those chances with those entrepreneurs before the rest of the market's ready to take those chances. Like, that's where we generate alpha in my view.

**Harry Stebbings** [10:58]:

But can we might? When it costs you I had the founder of character. A I on the show, and it cost $2,000,000 to train a single model. They needed tens of millions of dollars to get off the ground. Is it even possible for traditional seed to play in that world where the capital crime is so much so early?

**Mike Maples** [11:15]:

Yeah. And I wish whoever funded that round all the luck of the world, but I don't see that as a nonconsensus investment. I see that as a expensive, high priced investment, and hopefully it works. But you're not going to make a thousand times your money on that deal. You're probably not going to make a 100 times your money even in the best of circumstances. And so our job is hard, but not complicated. We need to find companies early that have insights about the future that aren't obvious, that have entrepreneurs that can make those insights real. And then we need to have the presence of mind to see that before other investors upstream see that, and then make a bet with them and co create the future with them to the extent of our ability. That always exists. The opportunity to find inefficiency always exists. But you have to not just accept the conventional rules as they're given. That is the job, right? The job isn't to get into the hot deal. The job is to get into the great deal that other people don't understand is great yet.

**Eric Paley** [12:12]:

But what's really tough about what Mike's saying, and I would say this to any friend of mine who's a new manager, the short term incentives do not align to becoming a very good long term investor. Most VCs are interested in markups. They're interested in TVPI because, frankly, it helps them raise more funds, bigger funds, or even just get to your next fund, which I understand for new managers is, of course, very important. And investing in the theme of the moment is the most likely thing to be able to upsell to another investor. So in some ways, being the most consensus has very strong short term benefit. Long term, it doesn't pay. Most VCs get paid on management fees. They don't get paid on carried interest because TVPI in that case doesn't actually translate to DPI. We're going have an era many years now where a lot of TVPI does not translate into DPI.

**Mike Maples** [13:02]:

Yeah, and Eric, an investor that I respect a lot, what you said, that's the beauty of it. Patience is a form of arbitrage. And the ability to play your game to seek inefficient markets while everybody else is regressing the mean by chasing what's hot, that is the arb. Right? The arb is to be patient and to play that game when everybody else is playing the popular game.

**Harry Stebbings** [13:26]:

I

**Mike Maples** [13:26]:

love that

**Harry Stebbings** [13:27]:

patience is an arbitrage. I mean, are poetic, Mike. I mean, god, I wish I had your lyricism. I feel like you've been writing songs. Does that mean then that we're not investing in AI? I mean, I wrote my investor letter recently. I said the worst place to invest right now is AI at seed. Given what we've all just said, does that mean we're not investing in

**Jason Lemkin** [13:47]:

hot AI seed rounds? As a seed investor, you do have to be cognizant of the next round, whether the company is self sufficient with one round or whether it'll need another. And I will say the theme of talking with a lot of B2B GPs over the last couple of months is basically no one will touch a deal that isn't AI. Right? I had a discussion with Byron Dieter on it recently. David Sachs did an opener with me. He said of crafts 3,300,000,000. They said 80% is going into B2B AI. Now whatever forget about whatever that means. We could debate it. But I think if you don't have an AI story, I worry, at least in my domain in B2B, you cannot raise an A, and maybe that's fine. Maybe it's okay, or you have to cobble together a seed extension. But I just think in today's world, a lot of A and later aren't touching anything without an AI story.

**Eric Paley** [14:29]:

If you are able to show that your experiments are working, which is really the point of seed, and drive evidence in demonstrating your thesis, there's a lot of money out there in the world. You may not get the big markup. I don't think that's the whole game or or frankly, in many cases, it's actually counterproductive to the whole game, but you you can find money. And so it's gonna be harder. The venture industry needs a new bubble, and and we're we're inflating one as as fast as we possibly can because it serves a lot of people's short term interest. I think the other side of it, just to be clear, I'm not speaking out generally against AI. I view AI as another progression of software, most of which is going to be open source software. I think if we're having a conversation about, Is open source software going to be in all of our companies going forward? Of course, it's been in all of our companies since we started our fund, it will continue to be in all of our companies. So I think AI is going be part of it. Are we really just talking about companies that are totally 100% focused on innovation in AI? Are we talking about companies that just have an AI narrative? We all know of many very huge companies that are trying to tell AI narratives. But look, we're in the business of following entrepreneurs who help show us a map of where they're trying to go. Some of them will definite interesting ones will be interested in AI, and and we will we will follow them there. We're not thematically trying to chase AI because the market loves it right now. That's a bad short term trade off or or trading off short term for the long term.

**Mike Maples** [15:55]:

There there's an investor I have a great deal regard for, Howard Marks from Oaktree Capital, and he has an idea that I think applies to any category of investing, including seed, which is you can't predict the future. Really? The future is going to happen. It's a probability distribution, but what you can do is notice what people are doing in the present. Let me give an example right now. Almost everybody I talked to says commercial real estate's going to be host. That may be true, but like everybody seems to think it right now. And you know, the end of the world doesn't come that often. Maybe it will be host, but maybe not. If I was going to try to make money in a field outside of my field, that would be the vein I would tap because I'd be like, everybody is too over rotated to believing the same exact thing for it to be a 100% that true. To me, venture's a lot like that too. And that's why I think Eric's so right. The hot topic of the year is a way to qualify the over rotation of the present. You can pay a high price and still make money, but your probability of making money in the future is lower because there's just fewer ways to make money. There's a lot more ways to make money if you buy something at a low price today that nobody wants. And so whatever people say, there's no price too high, that's a bad sign. And when people say you couldn't give that away to me, that's a good sign because it means that there's something happening in the present where people are, it's become psychosocial in terms of, how people are thinking about it. And I and I think that that's having a firm grasp of the present. One of the best unlocks I've ever learned as investor from Howard Marks. When I talk to my LPs, I'm I'm trying to learn about what's going on, but part of what I'm trying to learn is what is the same thing they're all saying? Because that probably means that people are overly concerned about that thing. It doesn't mean it's not a concern, but it probably means that it's being overemphasized relative to other opportunities.

**Jason Lemkin** [17:44]:

On a scale of one to 10 for each three of you, just for venture, not not for the world. For venture, how much of an AI bubble are we in, if at all? One to 10. How much of a bubble?

**Eric Paley** [17:52]:

I think if you're if you're if you're describing bubble as the asset prices related to that general idea, I think we're in a very extreme bubble. I also wanna throw out there, and I think this is very nine? An eight? A 9.2? We're not quite at NFT level. We're probably at a at an eight or nine. But one of the things I really wanna throw out there is there's another whole problem that we touch on, but we're not hitting on enough that was very relevant in 2021 and is relevant in AI right now and every theme of every year, which is I'd love to see historically how many companies that ever got 50 to a 100 times revenue, that's sub 10,000,000 of revenue, that really ever became a success. But meaning a company that is, you know, in its adolescence in terms of its development, getting extraordinary amounts of capital. Now you should we all should believe if capital is really an asset, you would think that can't be a bad thing. At a minimum, it really should be a positive both in terms of selection bias. The companies that get access to that kind of valuation probably are the best companies, the best entrepreneurs, and the capital should be valuable. I would say I've just seen this time and time again. When a company is materially overvalued, particularly at an earlier stage, it all goes wrong for a whole bunch of reasons that we can get into the why. But it's another reason why being in the hot theme of the moment is actually detrimental. It's not just the over rotation. I agree with that. I think that's absolutely right. But it's also that the easy access to money at a accelerated stage that the company is not ready for usually will

**Mike Maples** [19:18]:

destroy the company's value. May it makes you stupid. It contributes to doing stupid things.

**Eric Paley** [19:23]:

I don't actually think people are per se wasteful. I think there's extremely limited capacity for good decision making, prioritization, and experimentation, like intellectual capacity. You can't just hire lots of people before you've built the platform that really is valuable to go figure that out. You just can't help but lose focus. And there are very few companies that wouldn't want if they could to add five more engineers or five more salespeople. Or you have so much constraint always that it's just that the lack of focus that comes with that, that amount of parallel processing things that aren't really working, the push to scale things that are kind of sort of working, but not really working, all of those things drive detrimental long term value.

**Mike Maples** [20:04]:

I like a thousand percent agree. I had this conversation a couple years back with Michael Seibel at YC. So I'd invested in this company back in the day, Justin TV. And he asked me, have you ever worked with a company that got real product market fit and wasn't wildly successful? And I was like, let me think about it. Let me think about it. I couldn't name a single example. If they got real product market fit, I never had anything but massive success working with that team. So I asked Michael, could you name a single example? You've now seen thousands of companies at YC. The only one he could name was Zenefits and they broke the law. And so he's like, so when I think about that, when I internalize that and the point you just made, Eric, what I think people are doing is they're hiring ahead of product market fit. And to get product market fit, there's an advantage in being lean and there's an advantage in having N-one resources rather than N plus one. Because like having too many resources lets you pursue losing ideas for too long. Having too few resources forces you to say, get product market fit, eliminate distractions. And you don't need that many people to do that. So what I saw happening was I have the money, I might as well spend it. I could get these great engineers. I've known them. I know what they're capable of. And before you know it, you develop too much product footprint, too soon, too opinionated. And now you're trying to sell your opinionated product that nobody wants, whereas you would have been better off having a tiny team of super focused people in one room, having product pulled out of them by customers, and you escalate your commitment as you escalate your certainty. That's what happened right in 2021. Is what's happening now in a lot of cases, as people are hiring as if they already have product market fit before they have it.

**Eric Paley** [21:41]:

I agree with all of that, but I think I've seen lots of companies with, let's call it seven out of 10 on product market fit, become very successful companies. You know, I don't know how good HubSpot's early product market fit was relative to the value they ended up creating in the market over time, but I think they were very good at go to market. Right? So the real point there is there are companies that, you know, product market fits a spectrum. You need adequate, at a minimum, to do reasonably well. And obviously, if you nail it in the way that I think you and Michael were talking about, the product will just be ripped right out of you, and you're not going to fail. But I think what's tricky is those five to seven or five to eight scale product market fits. Where something's working, it's working nicely, but you are reliant on really good go to market. And when that go to market is not that well tuned, but you're trying to live up to these extraordinary valuations, you just accelerate, whereas you should actually be slowing down and fixing it. And not only do you accelerate, capital always has diminishing return of performance. So when you accelerate, you don't even get the same mediocre performance you had acceleration. You have declining performance as you accelerate. And the question is, what do you do then? Well, you just double down because you have all this money and you're trying to live up to all these expectations, and you don't wanna go to your board and say, we're in trouble. I wanna cut the company in half. This is where I would say 80% of the companies that get extraordinary financings end up living. Besides product market fit, the biggest risk to a venture backed company is bad capitalization. And we don't mean under capitalization. We mean over capitalization, and by the way, in many cases, just bad investors who think capital solves all problems. And we like to say capital has no insights. It has value, but it doesn't have insights. It doesn't solve your problems.

**Harry Stebbings** [23:18]:

Mike, do you not think there are many companies that just don't have business model fit? They have product market fit, but not business model fit. It could be a WeWork as well, but fundamentally, the business model isn't as good as one thing. It's all birds. The margins suck. Like, there are businesses that have product market and customer demand, but the business isn't good.

**Mike Maples** [23:36]:

When it comes to product market fit, I'm pretty strict. My view is that product market fit answers a very important but profound question, which is what can we uniquely do that people are desperate for? What happens too often is the product needs to be four out of 10 better for people to be desperate for it, but it's only two out of 10 better or one out of 10 better. And so like a lot of these companies that you're describing, I don't think they had business models that were good, but that's just an emergent property of the fact that they never answered the important question in the first place. When you say, what can we uniquely do that people are desperate for? That contains two things. One is do we have an insight? That's the uniqueness. And then we have to navigate that insight to the desperate. What happens too often is we overfund the company before we've identified the desperation. And so then what we do is we sell to semi attractive customers rather than customers who said, where have you been all my life? I would rather, it's kind of a thinking fast and slow kind of thing. I would rather go slow to find the desperate because once I've got them, I don't have to throw money at the problem of growth. I only have to syndicate the truth because I found people who truly are desperate for what I have, who value my advantage. And so to me in the zero to one phase, that's what I like to say to founders. What can we uniquely do that people are desperate for? Eliminate distractions. And if somebody wants to give us a bunch of money at a goofy price, I'm like, great, put it in a lockbox, but let's not breathe our own fumes here. Right? We don't have product market fit yet. The job is still the same. But fortunately now we have time. We're not going to run out of money. We're just going to run out of iterations, but now we have time. When you have product market fit, you know it. The feeling is visceral and palpable. And yes, I get that it's a continuum. But if you start to say real growth is the accelerated accumulation of attractive customers desperate for your advantage. It focuses the mind on who you spend your time with and what success looks like and what revenue chasing looks like that isn't valuable. And that's what I like the phenomenon Eric's describing. I think that the companies get in trouble because they get it, they get engaged in revenue chasing. They have to make some artificial number they promised to a VC and a spreadsheet. And so they go get that revenue any way they can. And they, they say yes to features that aren't additive to the strategy, or they say yes to customers who aren't going to stay with them over time. And next thing you know, you have a leaky bucket and you have a screwed up sales model and your unit economics go down. And it's because your marginal next customer should be increasingly attractive if you're you're getting product market fit rather than what Eric described, which is the reverse. A lot of times they become marginally unattractive.

**Eric Paley** [26:03]:

But but what Mike is saying is not something, in my opinion, that's very well understood among the people who are venture capitalists sitting on boards giving direction. I have had so many of our entrepreneurs say to me when I when I talk about the kind of patience Mike's talking about, they say to me, well, my other VCs are pushing me to go faster. And I always say, well, do they want you to learn faster, or do they want you to burn faster? Right? Because it doesn't sound like they're that interested in what you're learning. They're just upset that the lockbox that you should have created, that we also encourage the founders to create in these moments, that you're not burning that down faster because they think if you do, somehow you're gonna magically get them the markup they want and the glory they want and the story they want. But they're not actually interested really in the pivotal question, which is what are you really learning about what you can do for your customer? That's a real problem. Right? Because you're sitting on boards, including Mike and I are sitting on boards with people who are saying the exact opposite thing from what we're saying. And frankly, I think the advice is dangerous. And I go one step further, which is it has become the conventional wisdom of the industry, which is go faster. And what the hell does that mean? Does it mean learn faster, or does it mean burn faster? Right? It means What about blitzscaling? Isn't that the solution to every problem, blitzscaling? I think blitzscaling is this beautiful, beautiful idea of exactly what Mike said applied wrong in almost every context, right? Which is lean startup and the blitzscaling are all applied wrong. Right? You have true, true product market fit. Okay. That's a magical moment. I do believe Uber had that. And what I saw, you know, luckily being part of that journey as a customer, as a investor, it was incredibly competitive. Obviously, lots of mistakes were made, but the product market fit was extraordinary. And by the way, first mover did matter. Network effects did matter. You know, there was this incredible blitzscaling burden and an opportunity to go everywhere at once, which by the way has a lot of challenges too. But it makes sense in that context. The question is how many founders get themselves into that context?

**Mike Maples** [28:02]:

You have some scenarios where the product market fit is so strong and so obvious that the market will be satisfied. The Anne was involved with Lyft, right, while Eric was involved with Uber. Like, Travis is gonna raise a ton of money and go to every city in the country and every city of the world. And you're sitting here as Lyft. Do you need to raise a lot of money? You betcha. Right? Like the option to not raise a lot of money and be capital efficient is not available to you unless you're in a state of denial. Or like with Okta, we had product market fit. Microsoft was going to come in with our identity solution. The market was going to be satisfied. So the question is, who's going to satisfy it? And if you don't go fast enough to penetrate the market at an accelerated pace, you'll just get out muscled by the incumbents or by the person who's willing to do that. But the problem is, I agree with Eric, we got to a place in the industry where people thought blitzscaling was the answer every time. It's really not. It's an edge case for a very rare condition where it's clear that the market is pulling these features out of the market massively quickly, and somebody has to fulfill that demand the first.

**Harry Stebbings** [29:05]:

So many times on the show, people say, oh, we think it's a market that's big enough for multiple venture sized outcomes. And that can very often be the case, But the actual outcomes vary extraordinarily in size. Respectfully, Uber and Lyft are being very differently priced today. How important do we think market dominance is when we think about enterprise value investing today and how that leads our thinking when investing?

**Eric Paley** [29:30]:

This is sort of counter industry, but I'm not a macro markets investor. I just think in venture, we all want to feel like we're smarter than we are. By the way, there is no market analysis on Uber and Lyft. I don't say there was none because clearly the world went the way it did. But I don't think anyone who is good at market analysis could have predicted how that played out. And I'll tell you another story. With Trade Desk, one of the reasons of the reasons we didn't raise a lot of money was we were the last ones in and people just thought it was played already in the in the programmatic advertising market. But one of the reasons we didn't raise that money is Jeff always wanted optionality to sell the company for a couple $100,000,000 because he wasn't convinced he could build enough company gathering how was the That's a good story. No. But he really didn't know, and he wasn't sure. And he didn't wanna have all this capital stack that he had to satisfy that would screw up the value. The truth is, like, a lot of the very best things we've invested in, there were so many reasons you could argue the market wasn't that interesting. And I think the markets that are the biggest, if you really wanna do market analysis, they're unbelievably crowded. So then you get into, like, or how much of that market can somebody really take? So we get into this sort of a little bit of a threshold question of, like, is there a market? Like, do we believe there could be a market that is of any meaningful size? And then we stop and say, the rest of it, we don't know. We can sit around trying to feel really smart about this. It's a fact to Mike's, like, can you predict the future? I think a lot of VCs wanna believe we're in the future predicting business. I'm not in the future predicting business. I'm in the following people who have very, very clear points of view about how they wanna solve a customer problem business. And when they explain that to me, there's like this magical experience I have of, wow, they really thought deeply about this. And they might be right and they might be wrong, but they're doing a lot of things that make me think their NAF is right, and I want to go join them in this journey. And I don't spend a lot of time going, well, is it only a $3,000,000,000 market, or is it a $200,000,000,000 market? It's a very dangerous model that makes you talk your way out of what would you say was a market for Pinterest? You could either say it was all of the commerce in the world, maybe, or it's like a digital collection website. Like what? I don't know. Does it even have a market? I think it'd be easy to talk yourself out of that company just on that basis.

**Mike Maples** [31:39]:

And it relates, I think, to the prices people are paying in seed right now. So like a variation of what Eric's saying is some of these markets are so big, any price is justified in seed. I just don't think that's true. Like, not even close. And so I think even back to some of the ones that have worked, if you if you pay five and a half post for Lyft or like what did you guys do Uber at?

**Eric Paley** [32:01]:

It was actually, if I remember correctly, it was at about five and a half post as well. It's fourth grade.

**Mike Maples** [32:06]:

The old days of venture twenty twenty VC. So Ann bought 13.6% of Lyft for 750,000. Okay. Now let's say that you paid 20 post. You'd have to invest 2,700,000 to get the same amount. Let's say 30 posts. You'd have to invest over 4,000,000 to get the same amount. Now, how big is your fund? How many deals can you do? And if you can only do a fifth as many deals, you're taking five X the risk in terms of just the probability of getting n equals more than one outliers. Because like seed funds are like crazy, ridiculously risky. You need enough shots on goal so that if you have some skill, you can get some outlier results. But if at a given level of ownership, you're required to invest 5x more, you either have to have 5x bigger fund, which means you have a 5x bigger hurdle, or you have to do a fifth as many investments. Now your your risk is ratcheted. So That's

**Jason Lemkin** [32:58]:

been my model. Well, it took me a while to figure out. That means, as a seed investor, and I tried to do late seed. Okay? And there is a difference. Yep. At least half have to be win real winners. At least half. To make that, I'll do the 30 post. Right? The 20 post, I'll do it. But I have to believe there that with a relatively high degree of certainty, it will it will be successful. That's right. It has to be that increased. Half have to win. Half have to

**Mike Maples** [33:19]:

win as the investor half. Which which means it has to have been derisked. And and so, like, I look at it like price and risk don't just have a relationship. They have an almost direct relationship at seed. Like the higher price you pay, the more risk you're tolerating by paying that high price and the more risk takeout you should expect to justify that high price. But that's not what happening here. You know, you see companies with like two LOIs raising at 30 post. And like, you may make That's the problem. That's the problem. Right? Right. But you may make money on that one deal, but if you do a portfolio of those deals, that's a recipe for getting creed.

**Eric Paley** [33:56]:

I want to run a hypothetical for you for just a moment on Lyft, Mike. And I'm not intimate in the story, but to me, Zimride had raised $6,000,000 or to 30 post day one, and it was Zimride, right, it was a pretty big pivot that happened, And they were burning, you know, just run the math, the typical venture math of, you know, divide by $186,000,000 dollars, or divide by 24. So they're burning $304,100,000 dollars a month, and they're running out of money. And they say, you know what? We're realizing that we'd rather be in ride sharing. We don't really think this carpool thing is the right I mean, it was a different kind of carpooling thing, but it's the right approach. Let's go raise more money. Even today, would they find a market for capital? Like, for a company burning $3.04, $500,000 a month in the middle of a pivot with a 30,000,000 post? My instinct is like, no. Right? And I I think some of the reason why you can get capital in that moment is because there's room for investors to give you another shot because your burn rate's low. They can still come in at a reasonable price without trying to recap recapping companies that are not clearly worth anything yet. It's not a business anyone's in. Right? There there aren't investors. I mean, maybe insiders a little bit, but there aren't investors running around looking for opportunities to recap zero revenue companies. No. It's a different form of risk, which is the likelihood of success, in my opinion, goes way down for those companies, which is super counterintuitive because you're like, well, but they have more money at a higher price. Doesn't that make they're more more likely to be successful? And I don't think so.

**Harry Stebbings** [35:24]:

But I think that's why the theory based actually the most attractive place to be investing right now because many of them have been significantly derisked. But because of the markets today, the price inflection is actually significantly lower and less than it was. And so you can get your 2,000,000 ARRs, 3,000,000 ARRs with actually a lot of derisking done at 30 to 40,000,000. It's a lot better than it was for sure. It's a lot better than seed is right now where you can often pay 20 to 30 for none of that derisking. I'd rather pay a 20% bump for that extra derisking, wouldn't wouldn't we all?

**Jason Lemkin** [35:55]:

Here's what I think about all these rules, the 20, the 15, the five post, they're all accurate. Right? 62 investments. But here's the challenge I always come back to, like and I know there's math and venture, but it's a business of outliers. And so a lot of these rules make sense on paper, but like, hooray, the series a is at 30 post instead of 60. But if it's not an outlier, it doesn't matter. Right? It it doesn't matter. And all these rules are so good, but do they apply to the ones you really wanna invest in?

**Mike Maples** [36:21]:

So, so Jason, here's the, here's the thing I would put out there. And I don't know if you guys would agree with me on this, but I'm, I'm becoming more and more believing this. I believe that the outliers usually start out at a low price because they're outliers, because they're nonconsensus and right. People tend to believe that the world is divided between low price deals with low upside and high price deals with high upside. I don't agree with that. I disagree with that. And so I believe that most outliers, it's axiomatic that they're going to be somewhat unpopular and strange at the time you had to decide at seed. Most of the great investments in seed investing have been outliers at a reasonable price. But what's weird is it's not because we negotiated well. It's not because Eric negotiated well with Uber or we negotiated well with Lyft. It's because we saw potential that others might not have seen. That was the market clearing price for a non conventional idea with a lot of risk. But to me, that is the job description of seed. Like, that's our job is to find those. If there's too many investors paying too high prices, I think we just have to deny the premise of those rules. So I think we have to avoid the tendency to wanna chase that because I just don't I don't think it's gonna lead anywhere other than just indexing startups.

**Harry Stebbings** [37:31]:

Can can I put you guys on the spot? Hands up first. I haven't stuck to that discipline always. I was like, I either deploy or I don't into good founders. Have you done the same, or did you stick to discipline?

**Eric Paley** [37:43]:

Yeah. So the way we think about that question, Harry, is, first of all, we do not focus on ownership. We actually think that's a very problematic mindset. There's a whole bunch of downstream issues, including, first of all, our mission's about alignment with the founder. And the whole ownership mentality, you can twist yourself in pretzels trying to explain some notion of how that's aligned to the founder, but I don't think it's aligned to the founder. Also, I think it forces you into a position where you really can't be a great collaborator with other investors because you always have to own what you always have to own. So it becomes a great excuse to sort of try to create a context in which you get to express your conviction with, you know, a fixed rule of some sort. But I think to a great detriment both to the founders and frankly even to returns for a bunch of reasons. We don't really focus on ownership. The other thing I'd say sort of on your point there is, you know, do we ever lose discipline on price? When we see a founder really want to work with, are we willing to pay more? For sure. Right? We look at price as one attribute across the whole decision making of an opportunity. So there are, without question, companies I would have invested in over recent years if they had not been priced so high. But given where they were priced, I just it just tipped me in the wrong direction. The risk reward of this opportunity isn't where we want it to be. Now will we ever regret some of those? There's no question. We're going to end up regretting some of those. But if every single time I like something, I was just prepared to pay things that I thought the risk return on was kind of crappy, I don't think that would have been a great way to express our work as investors. Right? So we are looking for, look, for where this company is right now and what they're trying to accomplish and us also feeling aligned in the journey. Are they priced appropriately? And we do index that to what's going on in the markets. But, yeah, when we look at something, we say, look, there's such a good chance at Series A. This isn't gonna be worth anything more than what the founder is asking for today. That doesn't seem like a very good risk reward trade off. And I don't think the founders often appreciate two things is how much they're turning off investors that might have been good investors for them, but even bigger, how much risk they're actually taking on their next round. What this round does in terms of creating risk for the next round.

**Jason Lemkin** [39:45]:

I think founders have lost all perspective on the risk they're taking in the next round. I I genuinely believe it's been venture has been so gamified the last five years, and everyone's to blame. Everyone's to blame. I just don't see raise one fifty, 200. It's just a even to the best founders, it's a number. Literally, smartest people I have worked with, it's just a number.

**Mike Maples** [40:03]:

It's just a number. Unsolvable, I think. You know? I remember when I was a founder and and I was raising money, people say, raise at a high price because if things don't go well, you're gonna be in bad shape. Well, you're like, I'm gonna be the one that wins. That's why I'm doing this. If I didn't think I was gonna win, I wouldn't do this startup. And so it is impossible to get into a head space that says, well, you know, this may not work out. Customers may not want what I'm selling. You have to believe even when you don't believe when you're a founder. And so I think it's hard to get somebody in the headspace of quantifying risk like it's an investment thesis. I think they either think they're gonna succeed or not succeed.

**Eric Paley** [40:37]:

For investors that a founder wants to work with, they will actually accept, you know what? I don't need to optimize. I'd rather work with this investor. I think it's a better opportunity for me than, let's say, some party round of investors or some investor that gave them a very high priced term sheet, but they're not excited to work with. You know, when I was graduating from college, my mom would talk to me about all these other kids that she knew around my age getting amazing jobs at Morgan Stanley or Goldman Sachs. And what she meant is, these are good brands and they're high salaries. And I was like, I don't know why you think that's an amazing job. Like, what makes it help me understand, because maybe I'll go pursue it if you help me explain if you can explain to me. Why is that an amazing job? But I think it's a lot of the same logic. Right? People who self select to realizing that those brands and those jobs are not what they're really looking for even though the salary might be higher pretty quickly realize, like, this is not the optimization equation that I'm chasing after. Now that doesn't mean there aren't lots of people I try to explain that to and they don't want to hear it. I totally agree with you. But there are a lot of founders who really do get that it's not the optimization they're most interested in.

**Mike Maples** [41:45]:

The distinction I would make is that it's less about do they believe they might not raise in the next round? It's more just like, hey, I I wanna work with Eric, so I value the advantage of working with Eric. I'm willing to take a little bit more dilution or lower price for that privilege. Right? Because that's, I wanna work with who I wanna work with.

**Eric Paley** [42:02]:

I just think of it as a different optimization. And getting out of this motion that the the only optimization that matters is the price of your round and the dollars. I think it's 20%.

**Jason Lemkin** [42:12]:

I think a great founder will take a 20% lower or delta term sheet to work with a high someone they really want to work with. Beyond 20, I think it may be mythical.

**Eric Paley** [42:21]:

I think it is a lot. The the other thing I was gonna I was gonna share on this, I was I was talking to another investor founder from the West Coast this past week who was saying, look, the advantage of a lot of money at really high prices is that's where the talent wants to go. And I think that's been true, but it's actually started to become a little less true. Because I think there's a lot of talent who realizes, boy, that's a big capital stack for a company at that at your phase. Wait. You all, really only have $5,000,000 and you're bragging about your 300,000,000 post money valuation and the 60,000,000 in capital you just raised? I'm not sure that's the best place for me to be. Some of this stuff is starting to shift a little bit largely because so many of these unicorns are gonna be, you know, unhurned or whatever the right term is, unwinged, unhurned. I

**Jason Lemkin** [43:03]:

think it's true for the seasoned folks, the folks that have been around for a while. I'll tell you, I've interviewed 10 or 15 up and coming first time head of sales recently. Okay? Align out of Decacorns and Unicorns with good outcomes. Every single kid wanted to join, whatever, a heptacorn or penta pentadecacorn. No kid. And I I put kid in quotes. It could be any age, but they all wanna go work at the Hot Stardom. Right? I just think it's the more mature folks that maybe view it differently.

**Mike Maples** [43:28]:

It is, by the way, this is, I think, another facet of what Eric was describing earlier, the problem of raising too much money, too high prices. It totally distracts you from the real question. Are we getting product market fit? If somebody's saying I can't hire a bunch of high priced prestigious people in my company, unless I raise crazy amounts of my crazy prices, you're answering the wrong question. If you have product market fit, you're gonna be able to hire at will from the best people all the time. But like, if you don't have product market fit, you have a first order question that you have it answered. And that's what the purpose of the round should be. That's who you should partner with, not based on nonsensical status seeking silliness.

**Jason Lemkin** [44:03]:

Or sophisticated folks. If you're new to the industry, everyone has to look for signals. As a new hire, as a first time, you've got to look for signals, And listen, we can mock a unicorn round or a deck around, but gee, I only get one job at a time, It's not like I get to make 20 or 30 bets as a first time out of sales. I've gotta look for signals. Right? So I do think these signals matter.

**Eric Paley** [44:22]:

This argues in favor to some degree of what you're saying, but at least I'll throw it out there as advice. If you're coming into a company as a senior executive and you you have a CEO who's bragging to you about how big their last round was in dollars and how big the post money was, ask to see the financials and compare those financials to what they're claiming in the vanity met in the vanity of financings. Because when you see that massive disconnect where you're like, wait, that's crazy. Like, this company hasn't done much yet. You're in a pretty tough place. That is a place that is probably not gonna play out the way you wanted to.

**Jason Lemkin** [44:55]:

I can't tell you how many VPs I interview all the time. From my own portfolio companies, like ethical founders, and I asked them, well, what do you what do you think of the metrics? They don't know them.

**Eric Paley** [45:02]:

Yep.

**Jason Lemkin** [45:03]:

I would say nine times out of 10. In the interview, I'm explaining Harry looks like he lost all of us. So Yeah. Have poor

**Harry Stebbings** [45:09]:

Harry, so I lost control of this thing. Oh, quite sure. Seriously, there there's a huge amount of these unicorns with these ridiculous valuations and a million in ARR. What happens to them? There's literally a thousand. So what will happen to unicorns that are doing okay, but they're never gonna get banned for that last round price? What happens to these hundreds and hundreds of unicorns that aren't there? I

**Eric Paley** [45:28]:

think the answer your question area is a little bit of a depressing one. One of three things are gonna happen to those companies. They're either gonna take the extraordinary amount of cash they got, cut their burn rates down, and figure out how to build real companies. And by the way, many of those will still never raise money ever again, but they'll build real companies and find real exits. They're going to find a kick save somewhere because they might have something kind of working and there's someone out there who's willing to buy it, but it's going to be for catastrophically low price relative to the valuation. They're just gonna go under because it takes them so long to realize that this extraordinary amount of money they raised is actually a liability, not an asset. And they're just gonna keep going because they're gonna think they can fake it till they make it, and nobody is ever going to fund them again. Again, like, if you're recapping a $100,000,000 revenue company at a $1,000,000,000 valuation, but it really should be recapped, people will do that work. But if you're recapping a $3,000,000 run rate revenue company with a $1,000,000,000 valuation, there aren't a lot of people who are willing to do that work. Right? It's just not work

**Jason Lemkin** [46:26]:

that people wanna do. Do you think these founders do you think of the thousand unicorns? I I that all makes sense. I I think a lot of them will will will quiet quit. Yes. Like, I raised 300,000,000, a billion. I can't see it, Eric. Great. There's a $200,000,000 exit and yeah, I'll get a carve out and I'll make some money, but I can't recruit a team anymore. It's too much work. Like I just I'm not gonna truly quit, but, you know, I'll go to Spain. You know, I'll I'll do whatever. I will work three days a week. Am I I mean, I just it's it's almost natural to quiet quit if the weight if the weight is too crushing, right, of expectations. I think some of them are actually gonna loud quit. You know? They're allowed to There'll be more loud quits too.

**Eric Paley** [47:00]:

See you. See you. I mean, I think it's a great era for giving money back. I really do. Like, I actually think that if you want to maintain your- Give it back. You wanna maintain your integrity and you don't have product market fit, you raise money at a crazy valuation, and you don't want to have this burden on your back for possibly years. And by the way, the quiet quitting thing doesn't really get rid of the burden. Maybe you don't day to day stress about it, but career wise, it's still sitting there for you. Giving back the money on your balance sheet makes sense in that context. I think that has to come from the founder. I mean, I think Yeah, that's the learning. Right? Relationships with their investors. There's a difference between, you know, an investor walking in the door and saying, I've lost faith in you. I want my money back. It's like when a founder wants to sell their company, you say, Yes, you should probably sell your company. VCs sound in the way are, I think, are nuts. I think similarly here, you know, there have been times where I would have loved somebody to keep going because I really think they would have found their way, and they just their heart wasn't in it. But I'm talking about when the founder is in honest relationship with their investors, they're talking about, look, We're in a tough place. I'm trying to figure out how how to handle this. It may be the right answer.

**Jason Lemkin** [48:06]:

I offered to give money back as a founder, right, for my Series A when I wasn't sure. They said keep it. Right? Stuart Butterfield offered to give us back. I think my learning from Harry and Eric, you can't ask. You could nudge. Maybe you could send the link to this old article on Stewart, and and but but if you ask, like, in in for a million reasons, it doesn't work. Right? There's no point in asking. I don't think there's any point. Right? I

**Eric Paley** [48:26]:

actually would go as far as saying it's quite inappropriate because I think the the assumption of asking in a way I mean, maybe for the only investor in the company, but the assumption of asking away is this sort of notion as the VC, well, that's still my money. It's not your money. It's the company's money. And there are multiple parties to the table and stakeholders that need to be thought of. And so to be like, hey, I'd like my money back. You know, that's very different than like, let's problem solve. What can we do about where the company is? And here's a range of options. Right? And you could say, look, one of them might be, we send the money back. You gotta be very careful where you cross that line between I'm starting to act like this is my money versus I'm one of numerous parties, and I acknowledge this is the company's money. This is not my money.

**Harry Stebbings** [49:08]:

What if you're actually doing it because you're aware of the damage that will be done to them and if they don't, with the lead investors who would maybe not say good things about them, maybe not fund them in the future. There are cases where I've, like, been an angel before and I say, hey. I will probably give the money back. There's 60% left. I don't mind. You can keep it. It's, like, 25 k of my money. But, actually, way better to give back 60%, say we tried, it didn't work, but thank you for your support, and I'd love to come back to you when I do my next company, than run down a clock that you kind of know isn't running down and lose the big firm's money, kinda piss them off with lack of progress and losing their money, when actually you could have saved your most valuable resource, which is time anyway?

**Eric Paley** [49:48]:

I think the truth of the big firms is they barely care.

**Harry Stebbings** [49:50]:

That's they barely care. Right? Barely Yeah.

**Eric Paley** [49:53]:

I I think it is completely, in most cases, quite disengaged capital. Sometimes you need them to do basic things just to complete a sale or whatnot that is very important still to the founder. And you can't even get but this isn't everybody. There's some great funds out there. You can't even get them to sign off on documents. Right? Like, you have to call your other VCs to make phone calls to convince them to respond. I think we've had a period of quite apathetic capital where it's like, Look, become very important in my portfolio. I care. And if not, I don't care. And I think frankly, being in business with people who don't care, there are actually some upsides, but mostly it's

**Jason Lemkin** [50:28]:

not a great place to be. I have one of my top investments right now. Like, I mean, there's a few asterisks and daggers, but there's nothing not to love. Okay? Double digits in ARR, growing triple digits, A very multibillion dollar fund led the pre seed owns 15% of the company, asked 28 times to just show up to one board meeting. Just be an observer. Just come to a one board dinner we had a while back that was forty minutes from their home. Nuts. Nuts. Won't come to a very nice. Won't won't do anything. Nothing for 15% in the pre seed. Right? That's just it is what it is. Right? But to me, it's there's, like, nothing not to like about this company other than it might not be Snowflake.

**Eric Paley** [51:04]:

Right? This is also the big problem of the unicorn hunting. The whole business is outliers. All that matters is outliers mindset, which is anything that's not an outlier, you're irrelevant. But these are still people's lives. Right? And by the way, think in every one of lives, almost every one of our best companies, almost every single one, the founder founded something before that wasn't a success. Even if you say from a self interested standpoint, which I think is kind of lousy given how many employees we're talking about, how many individuals lives that they really care deeply, deeply about the company, even if you say self interestedly behaving like this, I think has a real cost. And it's one of the reasons people love Ron Conway and our industry always took such a long view of his role and his job. Instead of treating people like you just described, Jason, which I know you would never do, but it's we see this. We all see this, and it's appalling.

**Harry Stebbings** [51:54]:

Jason, do you not view that as your responsibility? You call up Liam Baxter and say, hey. Get into the board.

**Jason Lemkin** [52:00]:

I I tried four times. How how many how many emails and Zooms can you do? Especially if the great deflection is being nice. See, if they're a jerk, then there's a playbook. But if they're just nice, but I can't make the wedding hairy. Nice, but I can't. I can't. I just can't. I'm I'm off. I just think it's going to Eric's way, I think it's an interesting side of the times. When I started as a founder, you wouldn't I I would never see this activity. Right? You never seen someone own double digits of, you know, a top a top performing startup not even show up to one board meeting, but it's the side of the times. Can

**Harry Stebbings** [52:27]:

I just direct conversation? I do just wanna answer for for LPs that are asking this. Every LP is asking you. How should they view the prior vintage?

**Eric Paley** [52:36]:

Almost the entire investment world is a momentum investment world. And we all have our time, including I mean, I think of the big dollars. Sovereigns are also momentum investors. Why? Well, because any asset class that you see appreciate like crazy over even a short period of time, you start wondering whether you're foolish to sit it out. And so money just flows like crazy into these things. And you've got to decide as an LP, do you want to be part of that momentum investing pattern? And then go find the best momentum investors. And all four of us have an idea of some of who those folks are in our industry. And by the way, when you bet on those momentum investors, when a cycle shifts, they're going to get destroyed. The best performing fund of the .com era was the fund that had the worst outcome after that era. We don't need to name names, but I think most of us know that it was. And I think you just gotta decide. Like, do you wanna be a participant in the momentum? It's not that hard to figure out who's really good at that game. Or do you wanna work with people who have a much longer view? And then you've gotta figure out who's a fit for that game. There are good times to be buyers in our industry, and there are good times to be sellers. Rarely is it both. It's rarely a great time to be a buyer and a seller. 2021 was an incredible time to be a seller, and anyone who didn't see that was completely playing momentum. So you can't sit it out in venture for a whole bunch of reasons, and and I don't think very many do. But I agree with Mike. That was a go slow time because it was a lousy time to be a buyer. It was very hard to buy if you cared about what is intelligent buying. I I I joked. I I tweeted this, but I never felt more like a day trader in my life. We it was COVID. We're all sitting in front of our computers. We do pitch after pitch, just one after another after another, and we'd have no time to get to know anybody. They would just say, Hey, listen. I have a turf sheet. We'd love to work with you guys. Are you interested? By the way, the price is astronomical. What do you think? Felt like a day trader. I think there are aspects of this business, back to thinking fast and slow, which Mike mentioned, but there are aspects of this business where thinking fast can be very valuable. But I think the really good investing is not thinking fast. It's generally thinking slow. That period was not very conducive to that. Do we get a mulligan? Does anyone get a mulligan for that? I don't think so. Think it's indicative of what type of person you wanna be in business with. Because we could have another bubble, maybe we're starting it right now with AI, that goes crazy right now. And you might wanna be in business with the best momentum investors for the AI bubble Because there might be enough outcomes fast enough that there's real money to be made there. And you just have to decide, like, how do you think about investing as a LP? And then, yeah, you maybe don't punish the guys who had the crazy momentum because they got wiped out after that because you get it. Otherwise, you're just a momentum investor too, which is that's fine if that's what you wanna be. Said with a tiny bit of cynicism.

**Jason Lemkin** [55:12]:

But yeah. I I agree with that. But when I the thing about LP is a tough job. You know? It's it's it's so slow, and you have to have your own outliers. And and, you know, don't I think you could say too many times on 20 VC that you can't make money in venture unless you invest in the best managers. Right? And then the best managers, most of them peak, and then you end up investing when they're in their declining phases. And hopefully, they've built a team under them, but like, it's you might as well invest put it all in QQQ if you can't find outlier funds. Right? It's so hard. But what I would say is what I've learned from my LPs and it's a small base but they're good is listen you have to have a construct and if you don't allow us they're all going through some sort of mulliganism because otherwise you can't you can't survive. You've gotta take a batch and say this one's bad. And for many folks, it's not just that. The distributions have been awful. You know, if you don't give your if they don't give themselves a mulligan, they they may have trouble with their with their own sources of capital and their own jobs. So I think mechanism's gonna go up and down the stack because LPs have to survive too.

**Harry Stebbings** [56:06]:

Jason, you beautifully teed me off for one final topic before I let you go. You said distributions there. The question that I'm asking is what will crack open IPO windows? We saw ARM price way up on the first day. That was a surprise. I wasn't expecting that. We saw Clavier now go out there being priced at upwards to 6,800,000,000. What will it be that will crack the IPO window open again?

**Eric Paley** [56:29]:

So I I have a funny view on IPOs that I'm not I'm not sure is very popular, but I I think there's sort of this, first of all, this obsession with going public that is kind of unhealthy. Going public is not really what I think most people think it is. It's it's certainly a liquidity event potentially six months later or more for investors. It very rarely is for the founders or management in a meaningful way. So I think the question for the founder or the CEO or the management team in these situations is, do I see a very, very long road where I want to be building this business? And I'm really excited about or at least, do I believe this business will thrive over a very, very long period of time? And if that answer to that question is not necessarily, and you want liquidity, it's a great company to sell. Don't go public. Right? I think the SPAC craze was just a waste of everyone's energy, a bad idea. And I'm not saying there weren't any good SPACs, but generally speaking, it was a path for companies that were not ready to be public companies to go public because there were financial sponsors who made money taking them public, and there was glory. And then the next day, they were a public company, and they weren't really ready to be a public company. And by the way, being a public company, if you're not ready, is miserable. I think if you're a strong company, you can go public in almost any period of time as long as the market volatility is not insane like the great financial crisis. If you're really ready, you probably can go out in almost any environment. Certainly gets easier when there are other people doing it and getting good results. The other thing is who cares what the first day price is? I just think it's like this obsession that's just kind of silly. I think the reality is if you're gonna go public, it's because you think you're going to be able to build value over a very long period of time. Just because the market isn't friendly in the first three months, who cares? That should not be how these decisions are made. But, again, this is all part of the short term thinking of the people who get to benefit in the short term instead of the long term thinking of the people who really are the ones building value. So it's sort of like the builders versus the transactors.

**Harry Stebbings** [58:19]:

Okay. Let me put this back on you then, Eric. Stripe, in the next six months, if it were to, it'd be priced at 15 to 20 if you were to market as a comparable to Adyen. If you had your long term view of it being a $200,000,000,000 company in ten years, it probably should do that.

**Eric Paley** [58:34]:

Yeah. I I think if they have a long view in the company, who cares what the price was in a moment of time? It's just another example of why over capitalization, overpricing causes so many problems. But if you're a Stripe investor who got it at a 100,000,000,000, I don't really understand very well why you would be upset about them going public at 20,000,000,000. Either you well, hold on. I'm listening. I'm with you. I'm with you. I'm long. Because it's embarrassing or because you overpaid him your mom and son, but you're captive to that. That's a fact now. So the question really is, do you believe the company's ever going to return for you or not? But if the company's ready to be a public company, then sure. Like, you'd rather have access to liquidity when you want it than just have it be private forever. As if, like, private companies valuations are not going up and down anyway, we just don't see it. We just pretend. Despite the private companies are more volatile than public companies in truth, we, like, pretend they're not at all volatile, and somehow their valuations are whatever happened in the last round some months ago. I just think it's silly. And I think if you keep it at a 100,000,000,000, so let it go public at 20,000,000,000, it either will become much more valuable in your return, or you're gonna cut your loss at some point and accept the fact that it's ever worth that. But I don't understand this obsession of like, well, the day it goes public, somehow it has to be worth more than what I paid.

**Mike Maples** [59:51]:

It makes no sense. There's only one window where I think you could argue being somewhat short term makes sense. In venture, you get these acceleration period windows like, you know, late ninety nine, early two thousand, you know, what we saw in 2020, '21, '21, where companies are valued in ways that are detached from their fundamentals. I think a big part of success in venture for better or for worse is you have to have enough companies in flight at critical mass in those windows, number one. And then number two, you have to be smart enough to sell. And so as much as we loved Lyft and Okta, you know, in those years leading up into 2020, we're like, okay, we need to monetize these things, right? Because there's a lot of excitement about tech stocks right now, and these prices are really high. And so I think that it doesn't happen very often. It may not happen again for another ten, fifteen years. The next ten, fifteen years, it's companies I think are going to be much more valued on fundamentals and what they're really worth. But there are these windows usually last about eighteen months where the difference between selling then versus not is massive on your returns.

**Eric Paley** [60:56]:

Those are great windows for selling companies. I actually think the IPO inflation of those periods really has long term detrimental effects. It's very hard to work for a company that went public at 10,000,000,000 that today is worth 1,500,000,000.

**Jason Lemkin** [61:11]:

Very hard.

**Eric Paley** [61:11]:

It's all destroying for the whole company.

**Mike Maples** [61:13]:

Yeah. So the best VCs in 2021 were not doing that many deals because they were selling. The people that impressed me the most are those people. Right? And I know a few. I'm not sure they want me to mention who they are, but like, there's a lot of people I knew who understood what was happening and were like, right now it's time to sell, not to buy. And a few did it. Yeah. A very few. I've wanted to, I've like few. They were in some of the same companies as others in those same companies and their funds 5x better or 10 x better than than the people who made the same investment decision.

**Jason Lemkin** [61:46]:

Curious everyone's thought on these IPOs. Right? Going to some of the points. I actually think myself, I've made maybe five investments that are seed that are now at 200,000,000 decent growth and efficient. They're all B2B. Klaviyo is going to be worth, I think, close to 10,000,000,000. Everyone's planning and there's a variety it's just part of life. Right? My concern is that multiples remain mediocre, right, for all but the best. And if folks that are doing $202,150,000,000 that there's nothing bad about them trade at six times revenue, seven times revenue. So on one level, be it. Right? But the cascading effect, I think, on venture in B2B hasn't been yet been felt. I don't think that's been felt. And if great ones are worth sub 2,000,000,000, I actually think a lot of this model's broken. And I worry we're gonna have heartbreak coming if multiples don't reflect. And maybe it's all interest rates and zerp and dirp and warp. But I think these are all great companies. But I'm like, god, if these are if these are 1 point x billion, people aren't gonna wanna do even the 3 or $400,000,000 rounds. Right? This is gonna cascade all the way down the stack. I think these good ones are gonna IPO in the second half of next year. I I I have a lot of money with Harry that it's an IPO week in the second half of twenty twenty four. I just worry about the multiple. Is that in order to return to normal there, Jason? We say like, oh, they need to. Even in me, I hope they're all worth at least 10 x. I'm a bit of 10 x kids since I started as a founder. 10 x, 10 x, 10 x, but the markets are at six x. Right? Unless you're at the snowflake datadog level, they're at they're at six six x. It's not a great multiple. I I think the danger

**Eric Paley** [63:12]:

is we get this very fixed mindset of what, like, the world's supposed to be. It's supposed to be a number. And I think the reality is the world is a pretty big range. Mike used the word before a probability distribution. The world of the probability distribution, there isn't a number. Right? Like, I I think a very healthy way to think about the value of a company is and this sounds crazy, but it's you're going for your series whatever, series b, and you say, look, The value of this company should be somewhere between 80 and $150,000,000. That's a big range. But that's actually the reality. And by the way, it's true in the public markets. You know, it's like you take a public stock and, you know, what's a fair multiple for a healthy SaaS business? There isn't a fair multiple like it's a fixed number in a moment in time. Interest rates change. The market change. Right now, the risk free rate is five percent. It's a pretty real number. Right? And so I think the idea that there's a singular right is what's wrong. Right? And I think the reality is SaaS multiples for good companies are probably five to 15 times. It's a huge range. You gotta kinda get out of your mind. I'm not not you specifically, Jason, but all of us, like me too, that there's, like, this singular number. And then the crazy thing even within that is people love to extrapolate the number as if two companies are exactly alike, and no two companies are exactly alike. So people start throwing around these things. They're like, well, there's no way a company could be worth more than 12 x right now, ARR. Well, if it's growing faster and it's more pro and it's profitable and it's sure. It probably should be worth more. Right? And and so I go to some of my SaaS companies that are having a lot of challenges, and they're convinced that VC should pay exactly what the top quartile is in the market. And you're like, I don't know. If you wanna look at comps, you're probably bottom quartile of those companies. Right? But nobody wants to hear it, and everyone wants to sell. You know? Like, you know, it's a sales y mentality, of course. We all should be, to some degree, try to lean into our best attributes or whatever we can get. But I just think a healthier way to look at it is there's a range, and there's a probability distribution, and the market's going to move up and down and build intrinsic value. That's the biggest thing I try to say to our Focus. This is all the sideshow. Valuation is all the sideshow. The dilution isn't even your financing. The dilution is how you use your burn rate. That is where all the dilution lives. Are you creating value from that burn rate, or are you are you compounding negative value from that burn rate? That's the whole game. Intrinsic value, focus on that. The rest of it, you can't time markets.

**Harry Stebbings** [65:30]:

They're gonna do what they're gonna do. I'm aware of time. I do wanna finish on on a bet. Me and Jason quite like that, especially when I win as many as I think I will do with his optimism on IPOs. So what bet will be like to place? Is there any that comes front and center to you? I would bet the last

**Eric Paley** [65:46]:

few years will be one of the biggest disconnects between TVPI and DPI for venture funds in venture history. I But don't know if anyone else will take the other side of this. I don't think anyone will take the other side on that. It's amazing how many LPs I talk to who still are not there, and how many VCs I talk to who who argue with me on that. There are definitely people on the other side, maybe not this group.

**Jason Lemkin** [66:06]:

That derivative one could be I'd I'd like I'm usually trying to be pissy, but the pace of hiring next year, I think, will outpace anything anybody expects. I think I'm worried about public multiples. Right? It is my number one worry. I actually don't think venture fully makes sense in B2B at co I generally don't think it works, but I think the reacceleration that I see in cloud is happening so quickly. And Salesforce just said today, you know, they laid off 10,000. They're hiring back 6,000. Samsara just crossed a billion. They said they don't have enough sales capacity. They're hiring salespeople as fast as they can in a billion of revenue. This reflation's happening everywhere even with interest rates. Right? Even with everything. And I think we're we're not predicting what that j curve or that that logarithmic curve is gonna look like next year, and I think it's gonna change everything. I think everything's reflating because cloud spend didn't take a pause. Cloud spend is still growing at double digit rates. Right? No matter what happened with our our portfolio companies. Something around hiring or acceleration. I think hiring I think I think average hiring will be, like, 20% in public leaders next year. I think they'll be hiring 20% or more. I think layoffs are so far behind us. 20% or more, I think, the average public company will hire next year. Will anyone take the other side of $10.

**Eric Paley** [67:16]:

I think the hard thing for me, and I don't know, I just judging from my I just like Mike over the years, I bet it's similar. I'm so not macro in the way I make decisions or do things. I actually don't have an opinion on Jason's question, and I think there are a lot of people who would say, well, embedded in your job is the requirement to have a point of view on that. And I actually don't think embedded at all in my job is is the requirement to have a point of view on that. So it's a it it's very interesting to me. Even just, like, listening to you a lot, Jason, over the years and recently with Harry, I actually always enjoy hearing the macro view. Like like, it's one of the reasons why, like, I've gotten to know Seth Klorman a little bit. It's like, I'm super interested in people who look at very broad swaths of what's happening in the economy. We should have a very micro view of how we do our jobs. So I don't have a I actually don't have an opinion on that.

**Mike Maples** [68:01]:

Yeah. For me, the job is sort of like, you know, when you're in the Galapagos Islands and you spot some finch with a weird looking beak that nobody's ever seen before. That's kind of what Eric and I try to do. Right? It's like bird spotting. You're not like, it's not very macro. It's like these companies come one at a time, and it's the first example the world's ever seen of that company. And we may never see one like it again. And it's like, that's the filter we've got to have tuned to volume 11. And the macro market's gonna do whatever the macro market's gonna do. Spotting those companies early is kind of the it's just a different type of intelligence, if you could call it that.

**Eric Paley** [68:34]:

And then add to it, it's like an eight to fifteen year journey with that company. So the market's gonna do a lot of things over that time. Right? It's gonna go do all kinds of crazy. I think the weirdest thing over the last fourteen years I've been doing this is that the market was largely straight up into the right for so long. There were little blips, the debt ceiling defaults and the markdown of American credit. But those things lasted a few months, and then boom, market just kept going until late twenty two. So I just think of it as like build intrinsic value, the markets will go up and down over time, and you're gonna get exit windows eventually. And some of the best things we've done, they've just taken a really, really long time. Like, Seat Geek was a 2010 investment. I think it's a great company. Dave led that for us. I think it's gonna ultimately have an amazing liquidity event for investors and for anyone who wants liquidity. Does that need to happen anytime soon? And are we reliant on the market for that to happen? Maybe the timing of it, but I don't think we're fussed that much about the timing as long as they keep doing what they're doing. The other crazy thing to add to it, just sorry, I just can't help myself, is like, so many times in my venture career, illiquidity has been helpful. Right? In the sense that like Thank God. Yeah. It right. Like, if you'd ask me to make a really analytical judgment in that moment, should we take more chips off the table? I might have said yes, but we couldn't. And then the company just kept building value. Right? Where another example is we were very slow in the way we exited The Trade Desk because we were board members, and we owned a lot of the company. We felt a lot of responsibility. I was a board member, and we were a very large holder as a fund. That was a gift. That was yeah. Now I don't know what we would have done if we didn't believe in the company, so it was, like, aligned. Right? We really believed in the company, and we felt a lot of responsibility. Eric Piped, how much was your position in The Trade Desk worth? It is public. We owned, I think, 12 and a half percent of the company at the IPO. So it was a big number.

**Mike Maples** [70:22]:

And was a big number.

**Eric Paley** [70:24]:

Well, it's a much bigger number today, and we definitely did take liquidity before recent times.

**Jason Lemkin** [70:28]:

But yes. Your LPs think you sequenced that properly, just for our 20 VC because we always hear this behind the scenes. They think because, you know, you you didn't you didn't distribute it all. I mean, you're on the board. Right? Do they do they criticize you? Do they have any feedback on it? Mike

**Eric Paley** [70:41]:

and I both were lucky to have a relationship with with Weather Gauge, and once said to me about actually Uber secondary. He said, you're probably right to get some secondary. And he said, but accept the fact now that you're wrong, because you're either wrong you didn't take more, or you're wrong that you took it. But just if you get over the idea that you're wrong, you'll you know, it's probably the right decision. And I was like, dealing with, like, what does it mean as an investor to think about right and wrong? Right? And I think our investors, look, they were so happy with that story of that company from start to finish and the way it went down. The company burned $7,000,000 before going public. And a lot of them held for a very, very long time. We've never been criticized except for people just trying to express their preference on these situations, whether they'd rather get cash or stock. And the reality for us is people have you know, it's just different people want different things, and we just have to use our best judgment about how to handle it.

**Harry Stebbings** [71:33]:

I'm going for it, but fuck it. Why not? It's Friday evening here. The biggest mistake in terms of a company that you should have sold but didn't and how?

**Mike Maples** [71:41]:

Yeah. If anything, it was selling too early. It would be my regret. So I sold some of my Twitter stock when it was valued at, a little over 1,000,000,000. And at the time, I'd invested in the prior company Odeo, which did work out. Ev gave me the money back, but put it in Twitter. And then it rides up to a billion valuation. And they couldn't decide who the CEO was going to be and the fail well was happening a lot. And I was like, I'm pretty pretty seriously in the money on this. Maybe I should sell some. And, you know, this was kind of in the early innings of Web two. There weren't, you know, biggest exits so far have been YouTube at close to 2,000,000,000. And so I sold some of my Twitter stock at a billion dollar valuation. I I regret that. I, that was a failure of imagination on my part. Part of the learning from that was when a company has product market fit, that's a rare thing. And when they have strong product market fit, that's an extremely rare thing. It's like, don't underestimate how important that is relative to all other things. Jason?

**Jason Lemkin** [72:36]:

I've only had I've had $3,000,000,000 cash exits and zero IPOs in ten years. Hopefully, I have some IPOs next year. So I'm not and I've had once good secondary I passed up, but I've never sold a share. And the selfish reason simply and maybe this is a bad way to think about it as a GP, but, like, I'm not the most successful entrepreneur investor, but I'm not, like, terrible. Like, I have a few nickels in the bank. If the founders are any good, I'd rather double down. Like, worst case, I'm even. Worst case, I'm down 20%. Who cares? But look at The Trade Desk. I mean, billion IPO to 40,000,000,000. We cover this. Like, it's not that it's limitless, but I'd rather and I don't even want the capital. I don't wanna pay the taxes either. If you can't hold, I certainly don't want cash. So I'd rather just I'm a multiple, not an IRR guy. And if you're an IRR guy, think there's a lot of games to play, right, because you wanna optimize it. But I'd rather just keep throwing it in the middle as long as possible. And I think more likely than not, it's gonna work out for you, right, if you're at scale. If you're north of 50, 100,000,000 in revenue, the founders aren't gonna quit. Just worst case, you lose 20 or 30%. It's not the end of the world. Right? They've never sold a share. Maybe I will, but maybe that's down to everyone does. But and for what it's worth on the listen. I've only been doing this ten year, but I asked all my LPs this question. Back really recently, I had an out a potential secondary that would have been material. Right? And they have no distributions last year, and they all said, yeah. Just just leave it in. Right? They just leave it in. So I'm sure LPs are a different story, but I went around and my anchors, and they all said, just just leave it in and so leave it in. Right? People want even today, my learning is people want it. They want an outlier fund.

**Harry Stebbings** [73:59]:

This panel has not lacked energy. That's what I will say. I've loved doing this. Thank you so much for putting up with the the terrible moderation, which I clearly failed at here. But you've been fantastic. So thank you, guys. It's been fantastic.

**Mike Maples** [74:13]:

That was fun. Yeah. And we the four of us need to hang out more. This is fun. Fun conversation. Very fun.

**Harry Stebbings** [74:20]:

What an absolute blast. And if you wanna see the full video of that incredible discussion, then you can check it out on YouTube by searching for 20 VC. But before we leave you today,

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