Andy Chen: The Convenient Cofounder Penalty

and you work for the cia and i work for the cia uh i need to be careful about what i say but um but i was in the cia and i was a nuclear weapons analyst for them andy chen has one of the more unusual career paths in silicon valley cia analyst plasma physicist The man who created Kleiner Perkins' legendary fellows program now launching his own fund, OutKast Ventures, with a new program matching co-founders who've never met. Strangers actually make better founders. I'm Scott McGrew.

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You say you're part of that. Well, how many venture capitalists does it take to put up with paneling? The person who's helping us the other day said to me, Andy, I heard you're a co-founder of the fund. I'm like, yeah.

I thought you were a construction worker. You know, I just love building with my hands. And two, it's got to get done. Like, you know, the group is coming here on Wednesday, so no time to waste.

Andy and his team have hit on the same idea that Alice Bentnik of Entrepreneurs First had noticed. founders who are strangers have a much better success rate. Well, we studied every single U.S.

IPO and acquisition over the last 20 years in the U.S., every single one. And what we were trying to do is kind of back construct what actually led to those exits when it came to the team, when it came to the founding team itself.

And it was just a whim that we wanted to kind of study this to get a sense of what it was. And we were very surprised what came out. You know, Silicon Valley says, that you have to work with a co-founder before starting a company. And what was very surprising was we found that if you didn't work with your co-founder before, the value of the company that you create is higher than if you did, which is very counterintuitive to what Silicon Valley says.

And when we kind of think about that for a second, it kind of makes sense. When you work in a company, you're probably doing the same thing. Like when you were in your job working at a big broadcast network, you were working with other reporters and like the entire industry of individuals. you know i was an engineer before coming to silicon valley and like i only knew engineers but when you start a company you need to have complementary skills that are different from what you do and you naturally don't get that when you work at a company together and so what you have to actually do is kind of step back and say what do i need that's different from what i what i cannot do that is needed within the company and go find that itself and you just don't get that by working with other individuals you've called it the convenient co-founder penalty that it is The convenience being that I already knew Bob.

We both worked on the fourth floor. So why not start a company? Hey, you know, we had a good time. We had good break room, you know, chats.

Like, you know, we had good vibes. But that doesn't make a good company. What makes a good company is deep trust that you build over time, is complementary skills, right? Is the same risk profile.

It's all these other things that you may not get in a company working together. Alice Bentig of Entrepreneurs First says she spends a lot of time breaking up founders. She says, I know a guy you shouldn't partner with, and it's the one you already knew. Same idea.

It's the same intuition, which is just because you like someone and that you work well with them doesn't mean they're going to make a good co-founder. And so, like, step back for a second and think about what is it that we're looking to build? What is it I'm looking to build with someone else? And what do I actually need?

You know, when the OpenAI team came together, you know, the founders didn't know each other. They had this idea, though, of pursuing AGI, and they said, who do we need to get? We need to get someone who knows the engineering side, the product side, the research side. And they assembled the team that was right for this.

You have a poster in your downstairs office of Lord of the Rings. The same illustration, right? It really is. Yeah, we are office.

For those who have not seen Lord of the Rings, explain why that is similar. You know, they had this mission, this quest, and they wanted to assemble the right team. And they thought we needed a dwarf. We needed humans.

We needed, you know, we needed the hobbits to carry the ring as well, too. And we designed our office with vignettes of people who are teams. And that was one of the vignettes that we thought was interesting to include. That's fantastic.

What about solo founders? What did you find out about that? So solo founders don account for many companies that have become wildly successful I think it 20 of companies in the last 20 years were founded by solo It changed a bit I think AI has made it It much easier to become a solo founder It is I think we going to see more solo founders in the future Right. I think Peter Walker published a report that says now a third of companies that are started are started by solo founders.

And I think it makes a ton of sense. Open Claw with a bunch of you know, Claude Cowork, you can do a lot with very, very little and even very low understanding of technical ability. But to build a long generational big company, I think that's different. That requires a team, especially when you look at 20 years ago, the time to IPO was what, seven to eight years.

Now it's double that. It's almost 15 years. To go on a 15 year journey without a partner, without a team, it's going to be a long and lonely journey, right? It's like trying to carry a ring to Mordor and drop it in the lava fountain by yourself.

It's just not going to happen. I think the other thing that a competent co-founder helps is you see so many stories on the news of people who were not surrounded by people that told them no. who made terrible mistakes because nobody said, that's a terrible idea. And I think a solo co-founder that runs that risk particularly.

You don't have anyone to bounce ideas off of. You don't have someone to, on the other side, to say, keep going. And sometimes that is even more important, is to go, hey, let's keep pushing. Because what's the saying?

the people that failed are the ones that quit. Yeah. I was interested, elite schools produced more founders. We kind of expect that.

But not larger exits. Stanford, Berkeley, MIT, Harvard are common in people's resumes, at least in Silicon Valley and startups. But the median exits are about the same. They're exactly the same.

Like if you went to Bucknell University, you went to Iowa State, you had the exact same chance of creating as big of a company when averaged out as someone who went to Stanford. Obviously, because the numbers are higher at Stanford because of proximity and in Berkeley here in Silicon Valley, but the absolute returns is about the same. Experienced female CEOs outperform every other cohort in your data set, 3.5 billion median exit, 30% above experienced all male teams, though the sample size is not very big.

It isn't, but I think the adage of diversity matters, like having diversity of thought in your team matters a ton. So if I read your data right, it shows that like 80s-born founders rode mobile and cloud to the biggest exits. 90s-born founders logically are going to be the AI cohort. Yep.

And it is bigger than ever. I mean, when you look at the step change in valuation, so we basically, as a proxy for AI founders, we looked at all the private companies, right, that are not public yet, not acquired yet. And the valuation of these companies is four or five times bigger than the previous generation, if not 10 times bigger. I mean, it's like when you look at the last 50 years of companies, this era is incredible in the amount of value creation.

It was just two days ago, it was announced that SpaceX is acquiring a cursor for potentially $60 billion, right? It's just like four years ago, people were talking about Figma being acquired for $25 billion by Adobe. And that was like the biggest SACS exit in the world. Now you have this company that's only been around for four years or three years or something like that being acquired for $60 billion, which is, I'm pretty sure United Airlines has valued it that much, right?

And Ford is maybe $25 billion. It's just insane. Now, you didn't study startups that failed or were just mediocre. I mean, you studied exits.

So there is a survivorship bias there. There is a survivorship bias, but the data around companies that don't make it. I mean, there's, you know, for everyone that succeeds, there's probably, what, 2,000 or 3,000, maybe 10,000 that don't make it. And that data sort of ends up in the trash can.

It ends up, you know, nowhere. You have now, and you kind of hinted at this, you've looked at what happened, but what should a venture investor do differently Monday morning based on the data of things that you looked at that happened? How do we extrapolate that out in the future? How do we play the tape forward?

You know, I've always been very talent-driven in the way I've vested. I'm one of the few investors in the entire industry that has a recruiting background. I think I can count three, actually. and in early stage investing i truly believe and i think early venture in the 70s and 80s is you know when it first got started when you talk to investors that are that have come from that era they always say like teams what matters the most um and i think in the last 15 20 years vc has shifted a lot towards the idea of what is being built i think it's just more intellectual it's something you can talk about it's quantifiable in some ways in shape or form whereas the individual is like this amorphous thing but that's what matters and i think being very critical about who it is that is building this company who they are are they good for each other And is there a match between what they building and their backgrounds You know are they do they have founder market fit I think it's so-and-so.

Now match, that's interesting you just said that because we established that maybe the match is the problem. Yeah, if you don't have, so the order of operations, I don't think a lot of people start a company wanting to be a solo founder, right? But it's by default because they can't find the right co-founder. And so stacked rank, two founders that do well together is the ideal.

Then it's solo founder and it's the wrong co-founder. Yeah, okay. Right? You don't want to be in the wrong co-founding relationship.

You'd rather be solo, but ideally you'd rather be with someone else, with a team, because I think you build bigger companies, you get the IPO and exit faster. You build larger businesses as well too. There's a lot of reasons as to why that matters. despite the fact that there's more and more solo founders, but it's because the tools are easier to use.

Now, OutKast is the firm, Catalyst, which you've just launched as the program. An accelerator, you're matching people there, right? Sort of speed dating with a term sheet. Yes, it is.

It's a very good way to put it. I spent the last 15 years at Kleiner Perkins & Co. 2. And when we would pass on an investment, oftentimes it's like, hey, we think it's a small idea or maybe oftentimes it's the wrong team.

We think like, oh, this team's just not the right team. Or maybe we meet a solo founder and we go, oh, he needs to find a co-founder. You don't have enough of the skills to either build or sell this product. And it occurred to me one day, I'm like, why do we keep passing?

Why don't we build these teams? Like if we find the wrong co-founder, let's help them. Right, we know all the right people. Yeah, let's just bring them together.

We've heard some pretty good ideas. And so we would host these co-founder dating dinners. and over these single dinners where we would just invite people that we thought were excellent at what they did and say, hey, come meet other people. And we would notice at these dinners where people actually would meet their co-founder at these dinners and they would end up starting companies.

We invested in one, you know, so co-invested in one, founders invested in one where these people met at a single dinner. And so I thought at that point, what if we actually built an entire program around this? What if we handpicked the right people who all have the same risk profile, ask them to leave their job so they can focus on this. Come to a program that you can meet a bunch of other really like-minded individuals, all interested in the same area, whether it's enterprise or consumer or fintech or deep tech.

And hopefully some magic happens and you get a chance to meet your co-founder in this program. And then when you do meet that person and incorporate, we are your first check. Because we believe so much in the people that like, Even though the idea is a little bit more nascent, we're betting on you. Nascent idea.

Yeah. The company doesn't yet need to exist. Correct. Which is, you know, I'm still trying to get my head around.

As I mentioned, entrepreneurs first, it does much the same thing. But this idea that we think it's going to be something in the, you know, let's rewind, the ride sharing space. But we're not quite fully hammered it out yet. But you'd be interested if you've got the right team.

I think this is what matters. You know, when you look at, say, Decagon, well, the founders actually didn't know each other before they started the business. They actually met through an investor at a retreat. And the original idea for Decagon didn't actually start out as Decagon.

It was a model-y-eval company. And so, but I remember meeting him and going, wow, these are this really talented team. Like, individually and together, like, they're really sharp. They're really aggressive.

They can build a great product. And that's the kind of investing we do at OutKast, which is like the people are incredible. They have strong opinions around an industry, but they may not have quite figured out what it is that they're building. And we want to be a part of that story.

We want to back them because they're great and they will figure it out because they're ambitious. They've spent their career building great products and we want to back that. So I mentioned that you're just a few days away. By the time we publish, this will be well underway.

But you've got what, 60? The goal is to get the 60 in the program. And we think that's enough individuals and enough chaos. Yeah, you need enough potential.

In the density of individuals. And they all spend time in the program together. We have the office, they work out of here. We have specific events where they actually can kind of speed date and get to know each other.

We call it the shuffle, actually. It's a co-founder shuffle. And then we have other founders come in that have navigated this story. So Ryan King, one of the co-founders of Chime.

He never knew Chris, you know, before they started to chime in. So they actually met through a recruiter. And actually, Ryan, the CTO, didn't have fintech experience. But they had this idea that they came up with, and they built an amazing business that went public.

You have some experience doing this, but largely this is the first time. I mean, it's the first time for Catalyst. It's the first time we're doing it in a programmatic way. We've done this individually, you know, a little bit more manually.

by introducing people and they would meet their founders. This is just a much more efficient way of doing it. And it's also a very much so community-based way of doing it as well too because founders are spending all this time building their businesses and for them, I think they become stronger when they have community of other founders doing the same things. Will you be discouraged if nothing comes out of it Or are you thinking you know there just so much potential here There so much talent It an incredible amount of talent The quality of founders that we have we have a founder that built a billion dollar business coming in We have a founder that just sold his company for million We have engineers that have built billion dollar business lines at companies that are now worth $80 billion.

I mean, the potential is incredible with these individuals. And the way we think about emitting people into the program is, would we give this person a term sheet? Once they find someone, if we can answer that as a yes, then they're in the program because we're essentially committing to that. We were talking in the elevator up here that you grew up in Los Angeles.

Your early days, did you try to invent an invisibility cloak? You know, I joined a company that was doing that. And I was a key engineer involved. And it's a microwave radiation, microwave wavelength invisibility cloak.

And so it was something called metamaterials. And essentially think of it as a layered kind of soft and hard materials. And so when a microwave kind of particle comes in, it bounces off in a way. And it bounces off.

You essentially have this cloak around an object. It bounces off and all the way around to the back end of it. So it's almost like if you put a rock into a river, right? When you look at it, you see the water flowing around.

It's obvious. But if you're way upstream, if you're way downstream, you don't even know it's there. And that was the concept behind this invisibility cloak, and it worked in two dimension. And eventually, I think now, I don't know for sure, because it's been a while.

I'm sure it works in three dimension. And we wouldn't know if it did. You wouldn't know. It might be in the room with us right now.

You put a cloak over, you put this over a tank, and there's no way you can see it. And you work for the CIA. And I work for the CIA. I need to be careful about what I say, but I was in the CIA and I was a nuclear weapons analyst for them.

Which, you know, to every, I think, both genders, but to every, you know, young man or little boy is the coolest job ever. By the way, I used to work in the CIA. it's a it's a it's a role where it made me have so much empathy and respect for the men and women who work in the agency it is truly a duty and some of the smartest people I've ever met have worked there but no one's going to know their names you know they do it because they believe in what they do and they believe in the country it was an amazing time there.

And I was very, very privileged to have been part of that when Obama became president. You studied applied plasma physics. I suppose that's why you were working on the invisibility cloak. First of all, tell me what applied plasma physics is.

So plasma physics is essentially the cursor to nuclear energy and nuclear weapons. So I studied it because essentially I followed the best teacher I had, a professor I had. And I said, you were by far my favorite professor. His name is George Tynan.

He ended up becoming the chair of the department. I think he's a dean now of a university. And I said, you're amazing. I want to work with you.

What's your field of study? Placid physics? Great, I'm going to do that. Why applied?

So applied is the easier version of plastic physics versus theoretical physics. And I was not nearly that good. and so um you know i'm i'm kind of a gear guy you know i love building with my hands i'm usually working on my car on the weekend or like building something i was building the office before you came here and so uh applying it was always much more interesting to me and so that's why i studied that and i follow the people and if you look at my my entire career from my first job to my second to my third job.

And now to what we do within Catalyst, it's all around following the people. I've always taken a bet. I've worked with people because I joined them and I took a chance on them because like, you're the smartest person I've ever met. And I just want to be around you.

That's what brought me to Riviera in Silicon Valley. I gave up a career, an opportunity to work at Lockheed Martin and Boeing because, you know, Mike and Alia Riviera were the smartest people I've ever met at the time. And I said, I just want to be around you. And it brought me to Silicon Valley.

It taught me how to recruit. And then I went to the CIA because I was recruited in, I had to. And then was about to go to business school when Kleiner Brickens reached out. And when I met John Doar, I mean, and Mary Meeker and Bing Gordon and Touchline, like lights out.

I mean, the smartest people I've ever met. John basically is the Michael Jordan of investing, right? He invested in Google and many other great companies. And when I left Kleiner to actually start this fund, I met Thomas and Philippe because I thought they wanted to invest in my fund.

And then they kind of turned the tables around me and said, why don't you join us? And by far the smartest people I've ever met. And I took a chance on them. They took a chance on me.

And now we're building the contract for taking a chance. Andy Chen, OutKast Ventures.