Roundtable: NEW FORMAT: Why the Seed Investing Model is Broken

I’ve seen a lot of eras of seed investing in my life and career so far. My father, an incredibly active seed investor in the late nineties in the East Coast. He used to say, I’m the largest seed investor in the East Coast, which is kinda like being the smartest utilities executive. I used to sit in a ton of meetings when I was a kid in the late nineties and kinda watch the rise in the two thousand one crash. Did a bunch of angel investing myself through the next decade.

Know, ended up starting a seed fund with some friends, you know, in the last decade. So I’ve seen a few eras of this. And I think what was unique about the last era of seed funds, which really was the first time it got big and institutional, was this era where, really, the role of a seed fund was to kinda be the first step in a factory production line of startups that you popped out the back end 1 to $10,000,000,000 valuation companies pretty predictably. It was a factory system.

You found a company. You packaged it up. You knew what the Series A firms were looking for. You knew the Series A firms. You say, okay. We’re gonna hit these two metrics. We’re gonna pass you to the next line of production. Next line of production does their things, passes them to the Bs, pass them to the Cs, eventually pass them to Goldman Sachs, pop them out, $10,000,000,000 company, everyone makes That’s over because I think that was predicated it wasn’t just zero interest rate policy. There’s a bunch of things that was predicated on, but it was predicated on this idea that because of technology and things like AWS and platforms, that you could very predictably manufacture good companies.

Right? Not great companies. You weren’t trying to manufacture a Facebook. Every once in while, you get lucky. Right? But you could manufacture predictably the DTC companies, the companies on theme. You knew what people wanted. You pass it through the line. That’s over. Right? Because it turned out it didn’t work. Like, everyone got excited with these companies. All these companies got crushed once they went public. Right? They they are not good companies. The market doesn’t want you know? And we we were in plenty of them, right, along with everyone else.

So my view when I say Seed is dead is that I think the factory model of Seed, which supported massive scaling of it, is dead. And we’re kinda back to where we have been historically, which is Seed is a bespoke industry. Some people can do it well. It’s about being better at pattern recognition. There are certain things you can get right about it, and it will be a power law game where you’ll still have a few huge victories and a lot of losses. But, you know, the idea that you can sit there and just manufacture pretty good outcomes from Seed, think, is over and not coming back.

wants to take the bath on here? Well, let me I’ll take a bit of time, but let me ask Frank a question to to do it. I know that you’ve posted so many interesting tweet storms and how things are challenging and what’s going on in Venture now. And all of us actually are ex founders that have been doing this a little while. Is this really worse than like 2018, twenty nineteen, twenty seventeen? I only do SaaS and cloud. I completely hear Sam’s point, but there are elements that are harder, like these crazy valuations, the $700,000,000 caps on precedes.

That’s new. But the core investments, the core deals, I just feel like we just gotta hit a reset button and go back to the vibe before late twenty nineteen, and I think the model kinda works even if it’s bespoke.

The the way I would answer that is I think about the manufacturing process of companies the same way that Sam articulated it. You basically are trying to derisk companies in stages. So you put money into a company, and at the seed stage, it’s the closest thing to trying to get a writing sample out into the world. And the whole goal is to see what they can accomplish with a little bit of money. And I think what’s broken is what’s happened from that point forward. 2017 to 2021 era was the era of alphabet soup.

Right? So you had an a round, a b round, a c round, a d round, an e round, an f round, like extensions. So you weren’t derisking businesses systemically. You know, when capital was incredibly cheap and it was abundant, it almost it encouraged, you know, founders to actually invest in multiple s curves at the same time. It encouraged them to have more ambition to try to immediately jump to a great company instead of going through the stages of building a good company first. So I think if we hit the reset button, it’s about saying, look, there are four stages of derisking in the business.

There’s the C, there’s the A, the B, and then C is really private equity and connecting the dots to a profitable company, figuring out what an exit looks And if we get back to a much more efficient, you know, way of derisking businesses, which means that you will have a failure rate, you will have 20 to thirty percent failure between Seed and A, you will have 20 to 30% failure between A and B, That is the rude awakening for a lot of Seed investors and Series A and Angel investors who haven’t seen this environment before, that they think it just thing go up.

You know, valuation go up. Company get funded. And I think those days are over, where you have to get far enough fast enough, otherwise, the money isn’t going to be there.

I think these are all good points, but this idea that it’s all sequenced, right, and that these are products when I started investing in Venture in 2013, you know, it SaaS was much smaller. Right? But I knew these VCs that had offered b term sheets, the from Bessemer and Josh Stein from Threshold and the Excel team. I actually thought my job was to package my investments up. I would invest in a funky outsider company like Pipedrive from Estonia or Algolia from France or TalkDesk from Portugal.

No one heard of them. I felt like I had a couple jobs. Help them bring in a VP of sales, and then package this thing up as a product. Like, actually more so than today when the world was smaller. And I spent 30% of my time, and I’m not a schmoozer schmoozing with these guys. Schmoozing with Byron and Josh, and I would socialize like a plate of things. Here’s here’s what I got going. I got you like a search, I got this, you like contact center.

I don’t think that’s a bad thing even if the denominators like exploded, is it?

I mean, I just think that’s that’s called investment banking. And I I do think in the end of the day, like, I don’t mean, look, what we do that as a firm too all the time. Right? I just I gotta say that, like, when I look at our seed portfolio over a long period of time now, my own personal investing longer, the seed deals that have mattered have always been the ones that were hardest to package. They were not on the factory line.

The places we’ve made serious money have always been the places where we had a thesis at Seed that was super weird, and it was super cheap because it wasn’t a thing that was gonna be on the factory line and any firm could package and kinda pass to the Series A people. And then we were right. You to your point about mortality rates, I mean, we’ve looked at our portfolios recently, and it’s comical how low the mortality rates are. That’s obviously shifting in real time, right, and will go up.

It’s not clear to me in a world where, you know, you look at the failure rate, the overpricing, things coming out of the back end for all the middling homitives. I’m not talking about the every once in a while breakout. I’m talking about, like, the middling, you can manufacture it, SaaS or whatever. Right? If that goes away, then I think the entire staging system really breaks down. Right? And I do think we’re back to a game where venture capital is what it always was, which is find something really interesting that’s not everyone likes, that’s kinda off theme, and you’re right about some very different thesis, and then you make a thousand times your money.

Not, okay, we know what the playbook is, and everyone does pretty well. I think that’s what and I think the problem with that is if you don’t have a manufacturing line, then the LP stories get way tougher, especially at the scale we’re talking about. Right? You’re not gonna have a bajillion seed funds in an efficient market for seed. The story of, well, you should bet on us because we are really good at identifying weird shit, and every once in a while, we’ll make a ton of money, and we’re gonna also light a bunch of money on fire is a way less palpable LP story than what we’ve been running in the last decade.

Yeah.

I Yeah. Think, Sam, one of your partners, Will, who I spend a lot of time with, he said one of the flaws of the past few years is that everyone was trying to earn the right to do the obvious. Trying to earn the right to win these deals that everybody thought were good deals, and by the time you ended up pricing them, you ended up getting a pretty bad deal. Right? It it really wasn’t a good deal. So, like, the concept of breaking out of this world where there are a bunch of obvious interesting companies that can be built if you just execute against it, but you end up overpaying in order to do that, that’s a really poor risk return trade off.

And I think a flaw in the ecosystem is that pricing has slowly started to correct, but it still hasn’t corrected at the seed stage.

Yeah. In the end of the day, like, I think seed funds and seed investors, like, the model has to be selling very expensive money that when you’re right, you’re really, really right. And this idea that there was an efficiency to it, the market got big enough and whatever, and everyone was competing for the quote, unquote, I couldn’t I I totally agree. Like, that’s the breakdown of the factory. That’s the standardization that goes away.

own, or are you seeing something different? It is starting to ripple its way back from the public markets to the later stage rounds, and from there to the mid stage rounds, and starting to ripple earlier. I think what you’re seeing are more capital efficient businesses and business plans being built. You know, so they’re asking for slightly less capital. They can’t invest in multiple S curves at the same time. And I do think that the correction is occurring. It’s just happening slowly, because a lot of insider rounds are happening in order to extend companies to earn their way into their valuations while we go through this scene.

You know, what I worry about if there isn’t a correction at the earliest stages is that, you know, the de risking of businesses and the building of businesses is a multistage game. And just because it’s healthy for the first move doesn’t mean that it sets you up to make the other moves well. And if pricing doesn’t correct at the earliest stage, you’re going to have a lot of no bids, you know, at the Series A because they wouldn’t have gone far enough, fast enough for a Series A investor to come in and say they’ve earned their way into a significant increase in valuation.

And what a lot of founders don’t realize is that venture capitalists, a lot of them, would prefer to give a no bid than to deliver the bad news that we like your company, but guess what? It probably needs to be a flat round or a down round to the last round because you haven’t earned your way in. So you’re reducing the aperture of downstream capital if you’ve overfunded yourself at the wrong valuation early on.

For sure. But do you think founders care or listen? I don’t think any founders are listening to these terrific insights on Twitter. I don’t think that they are ratcheting back their valuation expectations. Very few are worried that when they do their seed at 30 post, that that will impact an A unless, like, you know, they execute to perfection. I can’t even convince a founder that’s true in 2023. I don’t

think it’s gonna happen on the founders. I agree. The seed world, the tantalizing prospect of a thousand x return, if you really believe it’s there, will get a lot of people in. It’s like cents on the dollar. Like, who the hell cares? I even do this. There are places like, you know, in history, there’ve been a few instances. My partners are like, we like the deal. It’s too expensive. I’m like, fuck it. I’ll put in a few personal dollars because, like, who cares? It’s so little money, and I do think it’s cool and, like, whatever.

You know, I do think it’s like that is the problem with it is that, like, it is a market, but it’s not fully a market in terms of how people treat it in a lot of ways. But I I will say this, like, we’ll basically no bid lots of stuff where we don’t see the huge asymmetry at this point. Whereas before, when the factory model exists, we’d be like, even I will admit, I said there are two types of deals we We did deals where we’re like, we have fundamental conviction from zero.

Hopefully, no one else does, which means the price is super low because, like and we love that. It’s in some ways, you’re hunting in the right ponds if the price is low. That’s the key indication because it means no one else is bidding. Like, that’s where we’ve made all of our money. Or I’ll be honest, even we got sucked into, there’s a factory model. We know how Sequoia is gonna buy this. We know what the markup looks like. We might as well plug into it. We have access.

And I think that, at least for us, that latter stage just kinda goes away. And I think a lot of good firms will do that. I think that’ll change what types of opportunities people go after. Those things will still exist to a point, but, you know, over time, slowly, these things will correct.

The fundamental flaw in the discipline is that those thousand x return companies only exist in areas where TAM probably is unlimited or TAM probably is, like, extraordinarily large. All of this generic advice going to founders, people are looking at them like they have an unlimited TAM for every single company, because I think the standard dilution concept is like a bunch of crap. Like, dilution is basically saying that your valuation is just a division exercise. You know, saying that this much money, therefore my company is worth this much.

And not every company is pursuing unlimited TAM or in large markets could drive a thousand x.

I totally agree, Frank. But I think the other way to look at it is, like, do you need the Series A firms and B firms? There are lots of thousand x with smaller TAMs. Right? If you’re just like, I actually am just starting a business. I need $3,000,000 to get it started. I need it. No one else is gonna give it to me. Let’s get it going, but we’re running it as a real business. You know, my wife started a business that does tons of millions in top line with $0 of outside investment.

I just had a friend over this weekend who blows my mind, actually. You know, when I always started my first company, we had excess space in Dumbo in, like, the mid two thousands. By far, the most successful company come out of that is a company called Muck Rack. Unbelievable success. And it was the team in the corner that actually took $0 of VC until very, very late in the game when they did a private equity price round. That does not need to be unlimited TAM. That will make generate billions.

The key here is, and I think it’s something that needs to be relearned in the venture industry, companies need to learn to make money at low levels of scale. Yes. Right? Either you’re in an unlimited TAM market where you can justify putting capital into the business and continuing to pour capital into the business. I think some SaaS companies, the TAMs are just gigantic when you look at, you know, the the markets that they’re actually serving. But there are lot of other markets where the only way to get a venture return is to be incredibly capital efficient and make money at low levels of scale.

But isn’t, like, this the greatest moment in history for that, even the platforms that you guys I mean, to me, that’s the most exciting play. I mean, to me, every once in a while, you get a let’s literally shoot for Mars, fuck it type play, right, where, like, you know you need more capital or whatever. But, like, I actually think the world would be much healthier, to your point about TAM sizes, if a lot of seed funds came around and started focusing on businesses that are great businesses that you can start and scale with revenue, with growth, with quality throughout, and capital raising just becomes an option, not a requirement.

But do you mean as part of that, the exits will be low, like getting your arms around old school exits of just 2 or 300,000,000? Are you suggesting VCs will have to get comfortable with that? I think that train has left the bar.

Look, I I think the answer is there are plenty of companies that I’ve seen in my investing career. They absolutely should have, and we’re in a great position to quickly exit for a few 100,000,000, and the gap to being public companies was so large. There it was never gonna be surmounted. And the reality is is, like, finance properly at Seed, that can be a great return if you get really good at it. I do think that in the world of, like, Stripe, in the world of AWS, in the world of a lot of other things, there’s a ton of businesses in the world which are, let’s call it, $1,000,000,000 businesses.

You know, you can start for a few million dollars and work on for a decade and be in a really interesting place. You know, those can’t be public companies. Right? And, like, trying to think about everything as an infinite TAM thing is a disaster. You know, most of the world’s businesses are small businesses. You know, even if you add up Facebook, Amazon, Microsoft, Google, there that’s a small percentage of the TAM of the world. Like and I think, actually, you know, the reality is focusing on the gajillions of businesses and spaces that have been left out for TAM reasons is exactly where to go with Seed investing.

The operative question is, how much can you learn for how much money, how quickly? Right? If I could learn everything about a business for a dollar and then know whether it was going to be a $100,000,000 outcome or a billion dollar outcome or a failure, like that dollar is incredibly well spent. And the problem is, a lot of the businesses during this last super cycle, especially towards the end, you actually didn’t get a lot of knowledge about derisking, and a lot of money had been invested in the business.

You know, if I look at the history of our 20 x pluses, and we have a few 100 x pluses, like, these were businesses that for very limited amounts of money were able to derisk the business so that you knew that you were on a path to something very big. And once you knew you were on a path to something very big, your capital strategy actually changes about how much capital you’re willing to come into the business in order to generate enterprise value for everyone and ultimately a return for investors.

The sloppiness was inserting a lot of capital into companies before you had cracked the code. That almost de facto ruins returns.

Maybe. But I think the reality mean, this is the way I would say we talked about it generically for a long time, which is seed investing is about derisking the one, two key bets, which they unlock a Series A. Like, there’s gotta be one or two CCs that you’re proving slash disproving, and then once you’ve done that, oh my god, you’re in a much better place for your next round and more capital comes in. I actually would argue that, like, that is what I would say is not gonna happen anymore.

It’s like the idea that you’re just derisking and there’s an efficient market downstream of you is a thing that I am no longer willing to consistently bet on. I’m much more interested in saying, for $23,000,000, start making money. Start something that is profitable. Right? And then get me to a place where, like, every subsequent capital raise is a thing I can do if the money is priced well, if I know what to do with it, etcetera, but I don’t have to do. With rare exception, don’t use your seed dollars as an experiment to de risk anymore.

The the experiment slash de risk should be actually having a business that works.

Can I throw out a Meta question, Harry? Maybe you could comment too, but to the group. Let me talk to you what I think the ultimate seed investment was, maybe not even SaaS, but SaaS adjacent, is The Trade Desk. The Trade Desk today is worth $40,000,000,000, $41,000,000,000. It was led by two true seed funds. Right? IA Ventures. Right? Well, I don’t know. Tell me, $4,050,000,000 dollar fund? And Founder Collective, a $20,000,000,000 fund? IA owned a little bit more, but let’s call them both. In a round and a half, they bought 20%.

I know they did distribute early, but let’s assume they they held to 40,000,000,000. They each own 20%. That’s 8,000,000,000 each out of funds that are smaller than 80,000,000. Right? So this is classic. I’m gonna get in at single digit millions. I’m gonna own 20% through two rounds with two great founders. And my bigger concern is that I think those are dead ish in seed. Right? Owning 1% is is still good. 1% of 40,000,000,000 is good. But that’s the classic seed that I think we’re griping about.

Like, can we do trade desks today? Right? Because that’s your career. I mean, Rogers retired. And he had a few others in that fund. I mean, I don’t know what that fund was, but it was double digit x a long time ago. Right? Just a thought, does that exist? That

magical that magical seed deal. Right? In the last several years? Absolutely. But it didn’t exist in the factory model. Right? Like, I made a thousand x on our Solana seed. I have a company called Teamshares, which we put in our first check at Four Post that is now touching a billion and is a real company with hundreds of millions in revenue. I bought 20% of the company for $500,000. And those deals exist, but, like, the reasons those existed is because people didn’t like them then, not because they did like them.

Right?

But if those exist regularly, then Seed is the best. Even though it’s unpredictable and it’s hard to get information, it’s it’s epic. Right? That’s where you get your thousand x of those trade Yeah.

You just think you have to be willing to light a lot of money on fire along the way, which I think is, you know, the other part of it. To your point about sizing, the other thing is fund size. If you have a 50, even a $100,000,000 fund, you can make seed math work. But these mega seed funds, like, and all of a sudden, oh my god, your $2,000,000,000 return is only a three x, the math won’t work.

I don’t know. But on the flip side, think, like, you just gotta be good at picking. Like, no one said it’s easy. You only get so many bullets in the gun. The reality, Harry, on this is, like, I think the most depressing thing in the world is not being wrong. It’s being right and not making money. You know, being right to the tune of, like, having these epic outcomes and being like, oh, fuck. That was a one x returner of the funds? Fuck. Right? Like, that’s the thing that, like, is kind of the worst case scenario.

Right? Because those are rare and and hard to find.

Look. I I was looking at some data from Crunchbase just to figure out, like, what percentage of the entire venture world ends up becoming public companies? And it ends up that it’s a single digit number. And in fact, for some vintages, that number is 2%. For some, it’s 3%. Some, it’s 4%. But it’s not 8% or 10% of companies end up becoming public companies. So what you’re really looking about is, call it a one in 50, you know, has the potential to actually execute against a plan, be in a space that’s big enough to create the type of outcome that that the industry actually cares about.

But in the venture world in in general, like, you need an IPO able event or a a mega sale of the variety of a Honey or a Credit Karma to kind of make things work. It’s just small, so you have to be very good.

I don’t know. But does it have to be the case, Frank? So, look, historically, think it’s been directionally true. I think we got very everyone got addicted to this idea that you can manufacture $5,000,000,000 companies, not maybe 50, but five. But I mean, I’m very interested personally. I think the future is in these companies. There are a lot of companies you can put $3,000,000 into and get to a place where, like, you’re pretty sure it’s profitable, it’s gonna be worth a $102,100, and you have an option on something much bigger.

Right? Like, that’s kind of the thing that I think is most interesting these days, right, is like

options because But why is that a better use of time than finding the trade owning 25 I just I think it’s Why do you care about that seeming downside mitigation? Totally respect the smaller businesses. I mean, and I have both built media businesses. I mean, I’ve got one doing almost 30,000,000 on the side. Harry’s got a one doing million. I get that life. No all bootstrapped. But I why do you want optionality as a VC?

No. No. I guess the question in my mind is like, does building a $102,103 $100,000,000 company really give up the option value of building the 10 or 20 or $50,000,000,000 company? Think there’s a lot of examples at this point, right, in our history of people that build the kind of obvious winner, right, and do a really good job with it and then graduate it. Like, Squarespace, you name it. Like, Anthony’s company. Like, we can go down the line. And, like, I think people got into this mentality and it was partially because money was free and partially because of, like, Uber and Lyft and everything’s in Airbnb and blah blah blah.

I was like, the way to play home run derby is to start with the home run derby mentality. And I actually think it’s not like baseball. It’s not like by getting on first, you don’t get a chance to hit a home run, right, or a grand slam. I actually think in a lot of cases, getting on first is the best way to set yourself up for a ten year sprint at a home run.

I don’t think great companies are just manufactured. Great companies are built on top of good companies. Like, you have to get to good first Yeah. And then you can eventually get to great. And when you get to good, you can stand on whatever that mountain holds and look around and see what optionality you have.

But do you think founders care anymore, Frank? Let me give you an example. Harry and I were chatting. We chatted the other day about companies that are have infinite runway and are overfunded, okay, and are never gonna get anywhere. I only have one in my portfolio. The first time in ten years now, look, I don’t invest as often as you guys have, and I’ve done 25 investments over ten years, but I’ve done you know, I’ve invested 9 figures of capital, and I asked one founder in ten years for my money back.

Not all of it, just some. And you know what his response was? And I feel like this is very au courant. What do you care? His response back wasn’t why, or I need it, or I wanna keep going. It’s like, what do you there’s no respect for capital. And I’m not saying most founders are that blunt, but I see it again and again. But I don’t think founders care about whether the 10 x rule that I wrote same thing you I wrote it ten years ago, the 10x rule.

Right? You gotta sell for at least 10x what you raise. I said it hilariously and shockingly. There’s a lot

of, you know, anomaly or even some known public companies that are tech exits that are not even close to that. Right? Like, and it’s kind of comical.

What a waste of capital. Right? This farmification though has changed the mentality of founders forever. Whether we’re going back to farms or not, I don’t think founders think the same way they used to. I don’t think there’s respect for capital.

I think these things change over time. Right? You might be right that there’s a moment in Silicon Valley, whatever, a founder is like that. But, again, I just look at my friends who have started businesses they wholly own or put a tiny amount of capital into it and have scaled ridiculously. They’re happier. They’re way richer. Right? And they have a ton of option value into the future versus the people who own 10% of hot things, right, and are kind of, like, holding on to big corporate structures.

So I think that there’s a big opportunity, and I think what we’ll see is, yeah, sure. People will still hear the lore of certain types of venture, you know, want to raise at high prices, and they won’t care, and they’ll do their art project. I actually am very optimistic that there’s gonna be a whole generation of people who are like, oh, shit. It is a much better life to own 80% of a business that has 50,000,000 top line than on 10% of a business that does 500, right, with a bunch of VCs in it.

Right? And I think you’re gonna start seeing people being much smarter about how they wanna manage their time and their entrepreneurial efforts towards outcomes that are fucking much better for them and candidly better for venture capitalists. So, yeah, of course, like, the kids coming out of Stanford who, like, have this, like, I wanna be Elon Musk thing, like, I’m not gonna fund those people. Every once in a while, I’ll miss one because, like, I love the Founders Fund guys. They’re really good at funding exactly the right crazy.

Right? Like, I’m not gonna fund those people in general, but, like, I think it’s, like, too general to say it’s a founder thing. I actually think there’s just tons of entrepreneurial talent that’s gonna reevaluate whether they wanna be even the success scenario running a 1,000,000,000 penny stock public company if they win, right, with too much capital in it. I think the answer is everyone’s like, that’s actually a pretty shitty job.

The the fallacy in that point, and I agree with this. I’ve done it. Like, this idea of this, everyone that’s killed themselves for an outcome and only owned a little bit and seen the economics and said, oh my god, I wanna own my own $30,000,000 business I own a 100% of. The fallacy in that argument I’ve seen in SaaS is most found maybe I can’t say most because there’s not enough data. I think they fall behind competitively. I think that venture is not magical. I think venture has been abused the last few years.

Right? It has been abused to fund over hiring and massive teams that are not required. But you go through a phase transition as you scale maybe it’s not even till after 5 or 10,000,000, where if you don’t have capital, you can’t all be Atlassian or Qualtrics, and they fall behind competitively. And I think that’s the fallacy of the lifestyle esque business, right? Where media businesses are different, the information can be wildly more compelling today than before, but I don’t know about a $20,000,000 chip a payroll company that raised nothing when Rippling and Gusto and everyone was out there, maybe, in deal, maybe, but we could trick founders into a path

Here’s what Klaytn, this this goes from a barber, which is like Yeah. I mean, this is not meant to be aggressive, but maybe a little bit provocative, which is like, is SaaS a good place to be investing anymore?

It might not be. I just didn’t know anything else. In my initial investment memos, I wrote these were all terrible investments. My first Decacorn TalkDesk, I wrote in the investment memo, this will never be worth more than 150,000,000, and that is unlikely. Because $5.09, which was the comp, only worth 150,000,000 at the time. You know, maybe only B2C and fintech makes sense because that’s your only way to have a $500,000,000,000 company. Right?

Or there’s like a ton of other there’s a big world out there, and there’s a bajillion other industries that are great if you take the kind of approach of systematic building and profitability and option value. Right? I just think SaaS is a particularly weird race. You know, I’m not spending a lot of time on SaaS these days, I think, partially for the dynamics you’re talking about. Right? Which is, like, I like Parker and, like, I’m super psyched for him that he’s, like, pulled off what he’s pulled off.

But, like, that’s not a game that I feel particularly excited about playing repeatedly. I I would think about it

a little bit differently. You know, when you get proof, it means that you’re on track to build this magical business that the spreadsheet they gave you describes three or four years out. You feel momentum in these businesses, and when there is momentum, which by the way is real, like when things are going right, they continue to go right, and usually that compounds over time. So if you’re generating proof, that’s a good time to examine whether capital actually would be an accelerant. Now the problem is when you generate antiproof.

Right, the go to market motion is harder than you projected. Things are getting worse than you thought. You know, the trends are in the opposite direction. Sometimes the wrong answer is to put more capital into that business. And the problem with the past couple of years, especially at peak madness, people just looked at the top line and everything was a multiple of ARR. And they said, if you’re bigger, therefore you’re more valuable, therefore I can put more money into the company. But if it was harder to get that doubling than you thought, or it cost you more to get that doubling than you thought, you’re actually generating antiproof of the business.

But when money was free, if revenue was 2x, enterprise value was 2x, therefore I can put more money in the company and feel good about it. So I think we have to get back to actually examining these businesses for what they are, getting rid of the proximity bias of the founders, you know, figuring out how you can be a bit more agnostic as an investor and really look at the business and see if it deserves capital or not. And I think those are going to be, like, the best investments when you’re getting proof without anti proof.

You’re putting money into the companies that are growing, and things are actually working, the model is coming true. Darwin will do its job by limiting capital availability that I think people are going to start staring at these marginal businesses, and we’ll see what happens to them.

The YC thing in particular was if we’re talking about venture capital to factory, that was, like, ground zero for the construction of the factory. It literally was like, oh, venture capital and, like, how you raise money and form these companies is, like, this opaque playbook. It’s hard to figure out. You know, like, literally, here is playbook, and then here is demo day. We bring in a bunch of every investor. They did they did it up. They justify our 7%. We’re done. It’s packaged. It moves on the factory line.

It is the purest part of the factory you could imagine. And, you know, as an investor, you know, we’ve stayed away from it for a long time, partially because there’s no signal in it because everything comes off the factory line looking exactly the same packaged properly. Well, it looks fine, but it’s packaged the same, you know, etcetera, etcetera. So the factory part is the dead part. Party rounds, rich tech execs, sure, there are lots of rich tech execs. And, like, again, seed investing is fun, and you get 50% of your money back when it fails.

Right? So the nice part about mortality rate being higher is you get your money back faster at 50¢ on the dollar, right, you know, as a tax write off. So, like, sure, that that’ll happen. People can team up on that, but I think that’s more about the capital side than in my mind than it in than it is the factory part.

You know, I have my own issues with accelerators about the type of advice that they’re able to actually give companies. And not just YC, but there are a bunch of different factories out there that might not understand the nuances of businesses like, we are fintech investors, and it’s a highly regulated industry, and you have to do things a certain way. And we find that some of the things coming off the factory, the hygiene about how they were built and what they learned during their period in the factory wasn’t necessarily the things or the order that they should be learning.

You know, they weren’t set up in necessarily the right way. A lot of the growth trajectory was in unscalable things in order to get the up and to right 45 degree chart so that you can package it for demo day. You know, so there are a lot of artificial things done in order to package it. To Sam’s point, it will come off the factory all looking the same. And a lot of that advice you actually have to undo, you know, if you end up funding the company.

So you end up overpaying and then having to undo a bunch of the damage. So I I just worry about, are the companies actually getting the proper advice for the industry they’re in, you know, from a generic factory doing hundreds of businesses a year?

Jason, how do you feel? One thing is I like to only invest in outsiders and first time CEOs on a two by two. Outsider first time CEO. And over time, the obvious lesson I’ve learned is you want to find really great CEOs. Right? And, you know, sometimes you’ll get an email from Frank or Sam and say, hey, this is the best kid I’ve worked with in seventy two years. Like, you know, okay, if you trust them, or Harry says he’s the smartest kid. If it’s outsiders and first time CEOs, you can only guess.

I enjoy the fact that YC is an IQ and drive filter. It is not perfect. There are folks in each batch of 200 that are not as smart as the rest or that are gaming the system. But above average, I know high drive and high IQ, I love it. And so I will enjoy that meeting. I will take that meeting. I will take a cold inbound that is worse than a traditional from a YC company. And the only and I don’t actually mind the 20,000,000 post.

It’s okay for my fund size, which isn’t even huge. What is hard today is that the rounds are too split up. And I’ve done two YC companies. One, I led the Seed Algolia. Hopefully, it will IPO next year. And another one I love that we did together, Harry RevenueCat. But I don’t think I could get those ownerships today with the fun style I have. That’s for me. I kinda have to give up on YC, not because I won’t pay or don’t love the signal. If there’s 84 people in the round, I there’s no point in me putting a $100 in a 20 post.

It just doesn’t get me the 100 x funds Sam was talking to. It doesn’t even get me close to one x, so I just don’t have the time to invest in I just don’t have the time at this point in life. Right? But I love the signal, actually.

In Venture, there are a lot of ways to make money, but you have to choose one of them and do it well. Accelerators, it’s very hard. Right? They’re crowded, and we don’t like crowded cap tables in general. We like when we have, you know, friendlies who have diversity of Rolodex or diversity of ability to hire or diversity of introduction they can make to different companies. You’ve gotta be very careful about who you’re assembling around the cap table and a lot of these party rounds. Like, and 50 people taking up a lot of room.

Do

Do they care? No. Why would they care? Yeah. This is the trade off, the paradox. Right? Seed investors might not like forty forty eight people out in the round, but if the c guys will the a guys will still do the deal, maybe the founders are happy with John Collision and Olivier from Datadog and, you know, all the other folks on their cap table. They they will respond to an email. In my ecosystem, it’s pretty amazing what one that, you know, a 10 or $100,000,000,000 company CEO will actually respond thoughtfully.

More than many VCs, frankly, who just say, good job. Good good job, kid. Good job, pal. That’s my favorite email. Good job. What’s wrong with good job? Good job. Let’s not say let me know how I can help. Let’s just simplify it to good job. I’m just go the thumbs up. The best use of an emoticon ever is the investor update thumbs up. If you have

Look, at the end of the day, there are plenty of people who do this seat. They don’t need help. They’re gonna do this seat on their own. Sure. A phone call here or there is helpful, and those people don’t it doesn’t matter. It’s just money. Like, we’re just selling them money. We have this thing, which is very different, I think, probably than, sounds like, Jason or Frank, you approach it, which is, when people sometimes ask Slow Ventures, they’re like, what do you guys do to, like, support founders?

And my answer is always nothing. Now that’s not actually true, but, like, when people ask, my answer is nothing because if you’re coming to me for help, my view is you’re almost by definition, or you’re saying I need help unless ever I want help, I think you’re a weak founder. And like, I want founders who are like, I got this. I got the plan. You’re money to me. Right? And then, sure, I actually do we will be helpful and there are things we do, but like, think I there’s a signal on how people think about that, and it’s very different.

Like, if you are really like, I got this, save the fuck out of my business, you want 30 famous people at a high price, go nuts. Like, it doesn’t matter to the Series A firms. Find the weird shit no one else can fund where the money’s expensive because the founder has a ton of conviction and wants to go for it, and you can see it, and you’re gonna be wrong a bunch, but every once in a while, you’re really right.

Sam, I’m with you totally. But Jason disagrees with me. In terms of that we can’t really help the best founders, I know almost no founders that are born amazing recruiters. I don’t know too many first time founders that know how to recruit a perfect VP of sales or a perfect VP of marketing, let alone a true VP of engineering even for a CTO. And I think that is an area you could add massive value. It’s seen in fact, I think that all venture firms have failed with their talent arms.

I think all venture firms that are seed into A, actually they’re just investing firms, but if they really want to do what they pretend they should do, at least half the head count should be recruiting. Not fake recruiting, not someone that doesn’t wanna work hard at a tech company and is phoning it in at a big venture firm. That’s the value we’re not that VCs aren’t delivering, like none. None of these talent arms really work. Right? They they don’t. That’s amazing. That’s what I’ve seen make the I difference.

Agree with you in theory. I guess in practice, like, I also would say that, like this is a classic thing. It’s like when people come to me they’re like, I need help recruiting. I’m like, go work with someone else.

I don’t think they say that. I think they say what they a founder will typically say is, I need a great VP of sales. Like, all come to the same conclusion somewhere approaching 1,000,000 in revenue. Right? And they’ll go out and find their own person, but if you can actually help them find that person that was actually the number one person at Rippling today that was there early, that match, or whatever it is, it’s a game changer. Seed firms all think they wanna be on speed dial.

That’s nice, but

I agree with you. I think sales is a particularly interesting one. I would actually argue in my life as an entrepreneur, I’ve never successfully hired sales. I think sales is incredibly hard to hire at startups, specifically because the whole nature of sales is like the people who want to go early are like anti correlated with the good people. Right? Because that is not how sales works. Right? Like in general, like the whole point, sales is coin operated. You wanna go to a place where the playbook’s super clear.

You just go fucking make bank. The people are like, oh, I want an entrepreneurial adventure and go early. Those people are almost always the worst salespeople. Right? So I think if you are a specialist at that and you can crush early stage sales, that’s a superpower. You don’t even need to have a venture fund. You can just take equity. Don’t put money in. Just take equity for for finding vanishingly small number of people that sit the I’m actually good at sales, not doing it, not just strategizing about it, and I wanna go early.

I mean, that alone is like a winning strategy. It’s certainly not one we have.

Do you agree? Can I understand, Konfio, is Jason is your thesis on that because everyone will be completely out of money as they’re gonna dump it because they just have to get out? No. No. No.

I think times are materially better than twelve months ago. Ignore the measurement point of 2021. Public markets are up 30%. Every public company is more efficient. Even me, I have five investments I’ve made north of 200,000,000 in revenue, growing 30% or faster that are now efficient. They’re ready to IPO when the markets say it’s okay, and they’re not going to IPO. They certainly were laughing six months ago, but if multiples stay here or go up, they’re all going to go out in late twenty twenty four.

Right? It’s 2023 is too soon.

The markets are not actually up. It’s the biggest players in the market that are up. Right? I think that’s like the big question is there’s a understand.

I might be wrong. Listen, I’m not I bet Terry five to one. I may lose this bet. I just feel like what we’re missing in all the ups, the drama, the craziness of the last four years, I mean, insane what we went through, right, is how many good companies got to 200,000,000 or more that are now, bless their soul, are now efficient. And I may have the timing all wrong, I’m too optimistic, but I think there’s 26 of them, which is one a week. I think there’s 26 good companies at 200 that can IPO in twenty six weeks in the back half of ’20.

But I may

I’ll take the under with Harry on this, and here’s what they basically say.

I don’t think I’m But I’m only going one to one on you, Sam. I want five to one on Harry. If if Frank and Sam take it, I’m just one to one, because I’m already $50 into this, so I’m not going a 100 I’ll go one

to one. Here here’s the basic theory. I I think the thing that everyone’s missing, this is again, like, again, I I could be very wrong about this, no one gives a shit about a company that does 200,000,000 top line and grows with 30% margins. Right? No one cares. It’s like easier to just invest in Facebook. Right? I’m being provocative, hear me out, which is like, I think this is, like, actually the big shift in the world, which is, like, take the AI theme. It’s, like, you wanna bet on AI?

Bet on Facebook. Bet on Amazon. Bet on Google. Bet on Microsoft. It’s so obvious, like, where to put public market dollars. Betting on, like, a $200,000,000 top line company that’s fine but has a bunch of risks and they’re in a market and they’re kinda small. Like, I don’t actually think that’s the future. And think it’s part of the reason why I think I see Home Run Derby or be small and nimble and be a good business and patient and have options is I think that’s the whole factory line thing is, like, the good businesses aren’t worth as much as people thought they were.

The great businesses are worth more. And so I just think that you’re not gonna see it because, like, no one cares

if you make $200,000,000 a year. I would say that Jason’s narrative is right. I think the timing is probably wrong. So I think there are a lot of companies that are kind of baking, and it’s just a matter of time. But I I don’t think it’s gonna be one a week in the back half of year. I think it will open up in the back half of next year and maybe the year after.

Oh, you’re gonna take the bet too. Right? You’re gonna go in with Harry. It’s three to one. You’re taking this bet too, Frank? It’s $10? Sure. It’s a fun expense. Glad I got a lot of exposure here, Harry. I got I got I got $80 of exposure here. I’m a little optimistic. Frank said I’m directionally correct. I’m just my timing’s too optimistic, and that’s quite plausible to me. That sounds quite plausible, but I’m a little optimistic. Does

it sound like the plausibility that the entire idea of a $200,000,000 revenue growing public company is bunk in the future? Is you don’t like that thesis?

You might be right. Here’s the thing. If you look at the Hubspots, you can do a 10 xer in the public markets. Like, there’s two ways to look at the IPO. Either I can either price it cheap and let me flip it, right, which I think is going be important the next year, right, is that we don’t do these Bill Gurley perfect pricings for a while. And then, hey, is this as good as HubSpot when it IPO? Do I have a shot at 10 x? Going to your point, actually, Sam, I think that’s a great bet if it has a chance to be worst case, I I lose a little bit of money.

I can write off some long term capital gains. Best case, there isn’t a ceiling to some of these folks. Like, the HubSpot’s, the Datadogs, I’ll take. So I’m optimistic. I also think o eight and o nine were like, I know VCs think differently. I think o eight, o nine as a founder was like 50,000,000,000,000 times worse than today. The world was ending in o eight, o ’9. And when we came out of this in 2011 and 2012, I know it’s not the same, but we bounced back so much faster than we thought.

And when I look at what Atlassian is saying, like, they’re bouncing off the bottom, and Mongo’s bouncing off the bottom, and other folks are seeing things improve, I know this is VC is something that I’m good at, but we don’t always know the slope of the curve in the early days. So I do think there’s a chance we’re never going back to 2021, but I think there’s a chance 2024 is better than it feels in our gut today. Like, I think we may be the

slope may be better. Just think that the future seems to me to be like Constellation Software style, like roll ups, PE, you order a bunch of things and get bulk up, slash. It’s the megadons or whatever you wanna call them because like Been saying that for decades. But it kind of is playing out. And like, I think that’s the thing is that you look at my business, you’d be like, there used to be this idea that like companies could only get so big. So, like, the reason you didn’t buy more Apple stock at a trillion because, like or at 800,000,000,000 because no one’s seen a trillion dollar company.

Now, like, there seems to be no upper bound and the biggest guys are crushing it. And so to me, as long as the biggest guys keep crushing it and retail and everyone’s like, I can just buy more Apple stock. Maybe that’s not the best example this week, but like, it’s certainly a safe bet.

You know, the beauty is in Venture, we can always just raise another fund. You know, the great thing is everyone gets to write off their 2021 fund. Right? The LPs aren’t even holding it against VCs anymore. So VCs have this special gift. You know, everyone everyone’s allowed one bad fund, aren’t they?

And that’s wrong. Like, they’re they’re fund they’re cutting fund sizes left and right, and they’re combining funds to bulk them up. I actually think you’re seeing very real repercussions, right, as people realign here. There have been many articles published recently about people dramatically cutting slash underfunding funds, combining funds to bulk them up because they can’t raise the vertical vehicles, etcetera. There is absolutely an LP pullback, and it’s very real and material. Now will Andreessen raise any fund? Of course. The scale is is definitely dropping.

Just one metric. I I looked at this before in 2019. The average SaaS company that went public absorbed just shy of 400,000,000 in capital, 390,000,000 in capital before they went public. Now, there haven’t been any IPOs for a while, and there’s a few down runs going on, but I have to assume when the engine revives, we will absorb 400,000,000 again per IPO, and that should reflate all these mega funds. Like, no matter what else is happening today, with venture being negative for LPs last year, and valuations being down.

There’s some raw math of how I think these bigger funds are designed to absorb that 400,000,000. Right? How can I put 200,000,000 of the 400,000,000 going into Datadog? That’s their goal. Right?

Yeah. LPs are waking up. I mean, we just completed fundraise and talked to probably 150 LPs. A lot of them are the same LPs that end up funding a lot of the funds. They definitely are waking up. Like, if you are a mid tier firm with good but not great results, like, they are consolidating. They are making very strategic choices about which funds they’re putting money into and which ones they’re not going to renew. They have, you know, very tough conversations about which emerging managers that they did fund that they’re no longer going to fund when they come back to market.

So I think this plays out over a number of years. It doesn’t happen instantaneously, which is why you might not be seeing it or feeling it. Also, lot of the funds aren’t coming back to market because they know that they would be raising off of a track record, which is depressed, because everyone is taking markdowns right now. So they’re avoiding going back to market. If they did go back to market, a lot of them wouldn’t be received very well. So there is a period of time right now where the LPs are awake, and they are rationalizing where they’re putting their money.

And the question is, like, if Jason is right with the IPOs, then money will flow back into the LP ecosystem once the IPO window opens up, and that might reverse course. But I think for a number of years, like, if you were a middling fund, you were gonna have problems raising cap.

Companies are trying to figure out how to make money at low levels of scale. The capital efficiency is coming back into kind of the decision making, you know, within venture world. Do you think not many people are paying attention to that? I think that at the earliest stage, they still think narrative is carrying the day, and I think narrative is going to stop at the seed when it used to flow through to the series a and even into the series b. So I think the trend is you can raise on narrative at seed and then its results starting at series a.

Sam, what do you believe that most around you disbelieve?

That’s a great question, but it’s I am very excited to fund a bunch of companies at five and under in weird things that are coming to me because no one else will give them money that are going to be highly profitable on the way up and create option value down line. Right? So it’s kind of a riff on what Frank is saying, but a different way, but like an earlier thing, which is like, that’s my jam. Like, I don’t wanna ever be relying on a Series A firm again.

I I wish my magic wand worked. Going back to Frank’s point, I would like to have more concentration rounds. I would like to be able to magically buy at least 10% of any seed company I meet that I want to invest in. That would be a gift. That’s my biggest stumbling block to investing, is like, I have to wait on too many deals where I can’t get double digit ownerships, and I just don’t believe I can make any money without it.

Well, it’s okay because you have 26 IPOs coming in the ball. Right?

So I wish I own 10% of each.