Has venture capital lost the plot?

Speaker A: Foreign.

Speaker B: Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. I'm your host, Samir Kaji. My guest today is Micah Rosenblum, Managing partner at Founder Collective, one of the longest standing and respected seed firms in the industry. With early investments in companies like Uber, the the Trade Desk and Coupang. What makes Founder Collective atypical to most successful firms is their decision to keep fund sizes small. In fact, despite their success, they've never raised a fund over $100 million in a market where nearly every one of their counterparts has scaled, um, up dramatically. In this conversation, Micah and I dig into why they've stayed so small, the data behind it, including the study his team ran on 25 years of venture capital exits that found that the median outcome of the top 500 exits over that time frame is about $2.7 billion. Micah is a two time founder himself and someone that I find to be a very clear thinker when it comes to venture capital. I think you'll really enjoy this one. Now on to my conversation with Micah.

Speaker C: Sameer Kaji is the CEO and co founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third party investments or securities are are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests or Allocate. Allocate or its clients may maintain relationships with or investment positions in guests, third parties or securities mentioned in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

Speaker B: Micah, it's great seeing you man.

Speaker A: It's been great to see you. Only thing better would be if you were here in New York in the 98 degree weather. But we'll do it remotely to start.

Speaker B: I think I'm gonna pass on that. Although I did get some of the New York heat and humidity just a few weeks ago when I was out there. Definitely a far cry from the Bay Area where it's so temperament here. But I always like to see you and you know, you posted a couple things that I found interesting which inspired this conversation and I think they're very topical. Before we go into those posts and dive deep into some of the observations you had in the insights, why don't we start with the early days of you joining Founder Collective in. I think it was a year, two or three.

Speaker A: Yeah. I mean to start, we really kind of built this firm randomly and not really out of our own experience. So as the name suggests, we're all founders. I graduated in 1998 in the, uh, height of the dot com boom, and I started working in Endeavor. They were an upstart talent agency, and

Speaker B: I thought that was the coolest job

Speaker A: ever that I got it for working with Ari Emanuel and Ari Greenberg and, like, movie stars and so forth. And then there was this dot com thing, and I was like, wait, that may be the cooler thing than even working in Hollywood. And my roommate and two other friends, we started a company, and that was really, like, the beginning of my sort of entrepreneurial venture career. Because one of our friends from college, Bill Trenchard, said, let me join your board. I can show you how to fundraise. We're like, oh, my God, this is amazing. You could be 21 and raise millions of dollars. Turns out you still have to build real value. That's a whole nother thing. But we bought the URL Handshake.

Speaker B: Com.

Speaker A: I wish it was the handshake of today, but we were early owners of that URL. And, yeah, we built services Marketplace, like Thumbtack or handybook. And ultimately it failed. It's a long story. We could talk about another day, but. But I just got caught by the bug. I was like, this is amazing. Like, we can build our team, our own culture. We can hire the types of people we want, and people worked night and day. That was good and bad, and we can birth a product that. That. That is like something new to the world. But we failed. And it was a, uh. I've been thinking a lot about this. I was, like, almost a bit depressed when the whole thing. You go from the top of the mountain to the bottom very quickly. And I think that I've. I, like, I think about that lesson often now that, like, things are fragile at all stages. You can be raising. And, uh, we raised $25 million for that company in two and a half years. And then I had, you know, barely a penny in return. And so I went to business school, and one of the first days of business school, I'm in a negotiations session against Dave Frankel, and we're like, we're in the grill at Harvard Business School, which is in the basement. And, like, everybody else is finishing and having a beer with her, and we're still going and going. And like, finally, I, uh, finally, like, he wipes the floor with me, crushes me, and I'm like, oh, man. God, I hope I never have to negotiate against this guy again. And he Drives me home because we, we both lived in uh, on across the river and, and he was so nice. I was like wow. Like we just did this intense fake negotiation and I kind of like this guy even though I lost miserably. And we sort of became friends and then obviously Eric Paley and I, who is a good friend and section made of Dave's. He and I co founded a business together. We became very close friends. Dave was our first angel. I did it again. It was much more capital efficient. We built a hardware software company based on some technology out of MIT and it was in Boston. And so I'd started a company in California, moved back east, thought I'd go back west and then spent the next 10 years in Boston. And through that there were a few observations. One was it was hard to raise early stage money in Boston. That was the beginning of when a lot of those funds were moving to the west Coast. People forget CRV stands for Charles River Ventures based in Boston. Now largely a uh, San Francisco based firm or Bay Area based firm. A lot of that was sort of going on at the time. And so the east coast was really low, you know, almost impossible to raise early stage capital. There were a handful of firms. So we saw that. The other thing we saw was early stage capital in general had started to dry up. It was just hard to do seed rounds. Thank God for Dave. Dave wrote a uh, six figure angel check into our company which we, we needed to get going because their VCs weren't playing in that they were barely playing in sort of seed in early A. And then we just, we saw an opportunity to build a fund that really now it seems trite and cute and everybody but like jeans and T shirts and former operators and less of a banker culture and less of a uh, like formal finance culture and more of a we've been in your shoes. And I know that now seems obvious but in 2012 when we sort of started ideating around this and Eric and Dave raised the first fund in 2012, kicked off, sorry, 2009 was the first fund. It really was unique. There really weren't Koppelman, maybe Clavier, a few other folks. And so I think we had a different ethos and a different kind of value proposition. I think we still do. I just think it's a much noisier market we can talk about. But that was really the DNA of the firm. And then the last thing I'd say, which we've kept, we like any operating company have said a few principles that we've Kept one is we are structurally aligned to founders. So our product is for founders. And that means the decisions we make as a firm go back to that value prop. Not for LPs, not for GPs, not for somebody else. But truly with the founder mindset or with the founder as the customer. The second thing is we've really preached capital efficiency. I write a lot about this in my LinkedIn post, but also just that more money isn't always better and that more money doesn't solve problems. And we've created stickers, we have pamphlets. I mean we really tried to hammer this message home that we're not against fundraising, but just that this view that fundraising is the goal is just flawed and we've seen more companies struggle because of it than benefit. And then the last thing we always talk about is weird and wonderful. I've got, we've got a whole bunch of you. I think you've been in this room, but we've got a whole bunch of plaques behind me. And look, we're in a baby toy company hotel tonight. Coupang was a Korean based ecom company. So like we have just seen that success is often weird and unpredictable and that's where we got to look because by definition the themes are too late.

Speaker B: If we look back, I mean Obviously that was 15 years ago, roughly when you joined in 17 years since the uh, firm was founded. And at the time you're right, there wasn't a lot of people investing at seed. I mean you mentioned a couple of people, whether it's Chef Clavier. There's also guys like Mike Maples, like Steve Anderson on the East Coast, Roger Ehrenberg, there's a few people that were kind of doing it. That's right. The amount of capital at that stage was fairly minimal and it's still small in the grander scheme of things today if we look in 26 in terms of share of total dollars, if you look at C versus everything else and what I mean is real seeds, not the $100 million Frontier 100 million dollar round for Frontier Lab or 200 million around. I put those as non really seed companies. And as a result of that we have still seen a lot of funds being raised since then. In fact, I think back in 2023 we did a study and said how many funds or new firms are created between 2012 and 2023 in the US and it was like 2000. It was something enormous amount number. And many of your peers have actually gone bigger. So they might have started off with like $40 million funds but, but as a result of seed rounds getting bigger, more capital at the Series A round to be doing your pro rata, that $40 million fund in some cases is 3, 4, 500 and not really a seed firm. How did you make the decision and how tough was it to kind of stay at the current fund size which is still in that a hundred million dollar range?

Speaker A: Yeah, I mean our last fund is still sub $100 million. We think we like to say there may be some exceptions that we are the only branded seed fund that, that has stayed sub $100 million. Certainly we're probably one of very few if any that are on their fifth fund and still under $100 million. I, I think for us it wasn't so hard in the sense that like we knew we weren't in the fee game because the difference between 100 and even 200, yes it is materially more fees but like that wasn't how we defined success or meaningfully different in terms of like the incomes or the ability to do the things we wanted. We were able to do the things we want. We have to stretch like any other startup on 95, but we could do the things we want. I think our view was one the founders needed optionality. We think the lesson we learned over and over again. Eric and I sold our company for 95 million. We were about to raise a series B and thankfully we didn't. How would things have played out? I don't know. But I'm glad the financial crisis hit like a of lot, lot of things could have turned that into zero. And I think that is uh, my lesson across many startups is like there's so much macro influence, there's so much timing, there's so much randomness that you need optionality, you need flexibility and a small fund allows for that. A big fund forces a big outcome and it's much more binary and we can talk about the data behind that. So it comes back to multiples that just the law of numbers and the data shows it's easier to multiply a much smaller number than it is a much larger number. We can talk about that. I agree. The big funds are playing a different game. So and then I think I've never viewed success or ambition as a function of how big your fund is. To me it's all about performance and the satisfaction of my entrepreneurs. Those are the things I care about. Uh, and if I do Those well, my LPs will be happy. And by the way, we're large. We are collectively the largest investor in our own fund. So nobody cares more about the multiple than the partners. And so that's kind of how we thought about building the firm. In many ways, it's kind of the old way of building a firm, maybe more similar to the old benchmark, but very much aligned to our values and our ethos.

Speaker B: When you talk about that, obviously that creates a lot of alignment, both internally in terms of what the philosophy is and your experience as founders, really kind of informing what you want to do. And from an LP standpoint, I don't think there's many LPs that would, you know, disagree with smaller funds have the opportunity to produce more alpha, and yet so much capital goes into the big funds which then have to deploy and get those $10 billion type of outcomes. And we look back in history and there's been some companies that have been very capital efficient and got to great outcomes. Let's say the trade desk is one. Viva is another one. Even WhatsApp didn't raise a ton of capital before ultimately selling for $19 billion. But more and more that model has started to break because you have Series A and Series B investors who are now investing at a 1 to $2 billion fund, sometimes even more than that. And the whole model, There is a 25 to $50 million check to start off, is just an option check for much more down the line. And so you almost start off with companies that you want to invest in that are capital efficient, but often don't have to go down this treadmill where because the market has grown, the companies that are successful are not capital efficient because they're pushed to take on capital. How do you reconcile the seed stage of capital efficiency knowing that some of these companies are going to go on to be not capital efficient, given where the markets are? And candidly, you see this too, where on, um, Twitter, everybody seems to drop a video around. We raise a Series A and it's a founder talking or a Series B, and it's 50 million. And it almost becomes looking at sort of your neighbor and saying, can I buy, Build a bigger home percent and in this case, it's really the size of the fundraise.

Speaker A: Yeah, look, it's a real problem. Why I say it's a problem. I think it's creating a sense among founders of, uh, keeping up with the Joneses. You're sort of alluding to that. It's like, well, my company went from 0 to 20 over a couple years, but like, it's not anthropic, so it's meaningless. I think that Psychology is awful because it's hard to go from 0 to 20 in anything. And. And I think it's created this funny psychology that isn't healthy. I think the other problem is recruiting gets really hard because you're competing against these crazy outliers that, by the way, we'll see what happens in terms of exits in the stock that these people have. But they can pay a lot of cash. And so it's created all this venture capital, particularly at the top, but even across the whole ecosystem, just makes it really hard for a good company to recruit engineers if you're not one of the top, if you're not a lab or one of those. So I think it's been tricky. I think what has changed in the way we think about it is our product isn't for everyone. If there are founders who are going to raise that $100 million seed round because they're shooting something into space or they just feel like they need, like that is not a good fit for us. And we probably won't take the meeting. I mean, we'll certainly engage with the founder and. But like, at the outset, we'll say, if you're raising 20 or 50 or 100, like, we're just not a good fit for you. And I think we've sort of thought more like a builder, like, who's in our icp, who's in our ideal customer profile, and if they're not. And so we have a market segment, I think there are still plenty of founders, we see them every day who realize this math and say it's hard and I don't want to sign up day one. I think the knock on this has always been, well, there's adverse selection. You're not getting the most ambitious. Look, I'll concede, uh, there may be some founders who do go on to build. Elon wasn't coming to us would have been nice, but he. But like, I will take those odds. My job is to find alpha and that that means I've got to find the limited amount of value there is in the startup ecosystem. I've got to. I've got to hunt for that alpha. And there may be categories that I just can't, you know, founder profiles, I just can't satisfy. And that's okay. Investing is all about, like, staying principled, staying in your lane, making the best bets you can in that domain. And so that's how we think about it. There's a quip. You probably hear this all the time. I'd be curious. I think you'll smile when I says, you got to play the game on the field. Got to play the game on the field. Everyone says that. And to me, I always smirk because I'm like, got to jump off the bridge. Like there's a little bit of this implication that like you're an idiot if you're not doing what everybody else is. And like to me, like investing one on one, if I've learned nothing from all those books I've read and my MBA is like, don't follow the herd. Like, if everybody's going, going right, consider going left. And yet what I, what I hear, when I hear play the game on the field is like everybody's doing, everybody's raising a bigger fund, paying higher prices. And look, to some extent we're a function of that. We, we operate in that environment. So there, there is that our average valuation has gone up. But I think our job is to find outliers and not just do what everybody else is doing. One of the ways to do that is stay small. If everybody else is getting bigger, then maybe the thing to do is actually try to be a little bit different and play a slightly different strategy. If everyone's deploying at 3x the speed, maybe we slow down a little bit or at least take a different approach or invest in a different. If consumer is out, maybe, maybe it's a time to look a little more a consumer. And so anyway, that's kind of how we think about it. Certainly very different than it was like you said 15 years ago.

Speaker B: Well, I do hear that all the time, which is playing the, play the game on the field. And a lot of it's obviously driven by incentives, right? People are incented to play the game on the field because in times like this, when you have an extreme bull market that then coincides with a super cycle, in this case AI, which I think you and I can probably agree this is the most transformational technology event that we've seen. You just have a lot of froth built into the System. You graduated 98, so did I. So you and I are exactly the same age. We went through the dot com bubble together. And so you kind of see the things and there's always things that definitely rhyme or going to be the same and repeated mistakes. There's also some things that are fundamentally different. Obviously the adoption of technology today is far different. The distribution of it is. And the top 1% of outcomes are going to be materially higher than the last super cycle. And you look at that, even something like an Amazon or Google Then you go to the Facebooks and the Ubers and now of course anthropic OpenAI SpaceX being materially higher. But the average valuation exit uh, like for a non 1% company hasn't really changed too much. It's still sub 100 but we're now underwriting as if all these companies are going to be the top 1%. You had this really interesting post and you went back I think 25 years and looked at or your team did alongside you around all the exits that were large and there were some really interesting things around the companies that are over billion, 10 billion even north of 100 billion if you don't mind. For those that haven't seen that, maybe describe a little bit what it actually told you. So maybe a little bit about the study and then interesting insights that came out of it.

Speaker A: We've been saying this for years which is there's no question exactly what you just said, that the top handful of companies literally count them on your hand. The exits have gotten bigger and bigger and exactly what you said. You took the words out of my back. Google or before that Yahoo, AOL and now to SpaceX like that. I really never thought we'd see a trillion dollar company at least this quickly. Like I don't even think I ever I thought of economies being trillions of dollars, not single companies. So it is amazing and take nothing from Elon's responsible for two of them or like two of the top five. So like it is exceptional. But I think what we wanted to say was like over this period of time what was the median outcome of an exited company? An actual exit of the top 550 in the P. After doing the analysis we found the number hasn't moved that much. It's about 2.7 billion. Is the median value of an exited company the top 500. And so you sort of say to yourself if you're building a ah fund if that's the median like you know and you own 10% of that company, it's pretty tough to return. Even a billion dollar fund they it's pretty meaningful for a hundred million dollar fund you can, you know that's a couple multiples of a hundred million dollar fund. So that has sort of validated at least the hypothesis we had. Now I fully recognize a lot of these big funds and a lot of these LPs in these big funds the minute they hear median. And I've heard this on podcasts with Mark and Ben and other like of course we're not chasing medians. But to be clear, this is the median of the 500 biggest exits and there's 100,000. This was over 100,000 companies that have been started in the last 25 years. So just to put it in context, the probability of starting $1 billion exited company over the last 25 years is 10 times harder than getting into Harvard. It's about 0.45%. Meaning of this, 100,000 companies have been started in the last 25 years. 400 and some odd have exited over a billion. And Harvard's Undergrad is like 4% admissions rate. Look, I take nothing from the ambitious people who want to be the top 4%. I just don't want to build a strategy. It's hard enough to do what we're doing. I don't want to build a strategy around a handful of companies. We have over a dozen companies on that list of over 500. Those were not, you know, those were not easy and there was a lot of, as I talked about before, a lot of randomness, a lot of timing, a lot of luck. I think the founders would agree, like even founders of some of these massive companies. I think if you put the anthropic folks or the OpenAI, I think I've read this, they were surprised at how much uptake there's been. So even the founders themselves don't know that they're in the exceptions of the exceptions. And so that just leads me back to this idea of what is a sensible size fund given the data, if we say good outcomes are a couple billion dollars, can we build a fund where that exit moves the needle and I don't need to get into one of four or five amazingly crazy big companies. And just to your point about the big funds, I do think they're playing a different game, which is they can get into those companies much later. And so if those companies do shoot the moon, as some of them have, they pick up those gains. To me that's just a different business. Whereas I have to go in by definition before any of that exists, before product market fits. So it's harder for me to know which are the next SpaceX. Like I, I'm just trying to build just some exceptional venture backed companies.

Speaker B: Well, uh, yeah, Anyone actually that says they know what the next SpaceX is like, I would run the other way as an LP if they actually know those things. I mean you're taking your own thesis, you're obviously, you have your own methodology, like the type of founders, you're going to be very founder focused at the stage you're investing versus dusting off a spreadsheet which a lot of larger investors can do because these companies have turned over so many cards. The thing I struggle with, and I'd love to get your thought on this, is you look at the backward looking data and say okay, 2.7 billion is the median of the top 500 companies in terms of exit. Obviously when you get to that first layer of the top, top company question, it's like 25 billion, which you own 10% of a $25 billion exit. Two and a half billion. If you have a billion dollar fund, that's two and a half exit X which is. And some of the top firms are getting into those type of companies. One question I have is like when you think about big firm, this is all this thing. Big firm bad, small fund good. Some people say it the other way around. I don't. I think that's the wrong argument. I think these are just different economic models which we'll get into in a second. But is there anything that causes you a little bit of pause of is that 2.7 billion really indicative of the future? And the thing I struggle with is human beings just tend to be very linear. Like I never thought a company within five years would go to a trillion dollars and do 50 billion plus in revenue. I just never seen it. And so I'm not as an ex banker who also lent to companies during the dot com. I tend to be a little bit more on the conservative side and not fully swallow the blue pill. But at the same time I look at this new era that we're in with AI and I say, well, what is going to change over the next 10 to 20 years in terms of median outcomes of the top companies? Again, I think there's going to be a lot of expensive mistakes. But do a lot of the sins get, get solved? Because the power law is so amplified with that top 1% which instead of 2.7 could be 4 billion or 5 billion.

Speaker A: Yeah, look, I think that is the underlying logic of why the big funds are getting bigger and why LPs are chasing those few names. Only the future will tell. I don't know. Better. Your guess is as good as mine. Better than mine perhaps. But what I observe is over this long period of time the numbers have stayed. You even said like $100 million exits. We see them all the time. If I look at our portfolio, like thankfully we see a lot of those types of numbers.

Speaker B: Those are.

Speaker A: And they don't matter to the big funds at all. And I think they should matter. I think they should matter to the founders. They're life changing. The life changing money is still life changing money. You don't need trillion, you don't need those types of exits. So I think to founders, being able to sell your company, particularly if it's your first exit for $100 million and if you own a decent port. So I think that's still a truth that will matter in the market and will influence how founders think about it. And I think the other thing I witness on the field, and I'm curious if you see this is the average valuations are going up. Uh, ours has gone up a lot. Let's say they've gone up three to four times over the last decade or two. I actually think dilution is also going up. So I think this thesis that yes, the exits are bigger, therefore we're going to do better. I would question whether it could go the other way, which is everyone's paying higher prices by a multiple than at least a decade ago or two decades ago. And you would think as a result of that you would be owning more of the company. But actually it's. And they would be diluting less because the cost of capital is lower. I think the opposite thing is happening. I think people are raising way more money and they're giving out way more equity. And so that. And I can see it in our portfolio. I talk to my peers all the time. I'm sure you're outside like, well, some of them are even surprised at how little of a company they own by like series D or E. And they're like, oh my God, we only own. And it's like, I led the seed and we own 2%. You're like, there's been massive dilution.

Speaker B: Well, well then you're playing the game as everybody else because then you need a bigger and bigger exit to be able to return the fund. So think about $100 million fund. If you're in a company that exits for 500 million, which is a great exit, by the way, in today's world, it may not seem like that. If you read the news cycles, $500 million exit, you own 10%. That's 50 million bucks of $100 million fund. You're returning half the fund. If you own 15%, it's, let's call it 75 million. And that's a $500 million exit, which is not one of the biggest sort of exits out there. But the tension arises like when you're a big fundamental. A $500 million exit, where you own 10%, does nothing. It's 5% of your fund if you're a billion dollar fund. And so those founders then get pushed for more growth. And I'll give you an anecdote and you'll probably smile at this, but it was a founder that wanted to sell his company fairly early after the Series B, I believe it was, for $750 million. Great exit, life changing for this person who owned about 30%. But the VCs were trying to talk him out of it and saying, why are you selling? This could be much bigger. And the guy's like, look, this is life changing. And a $750 million exit is awesome. But we've kind of distorted things because we've seen these companies grow so fast, raise so much money, people start to think that is the way to do it. And I have a lot of concern about a lot of these companies raising so much capital because it's not just the dilution, it's the additional risk they're taking on. Because when you raise 50 or 100 million or whatever the round is, you're expected to put that money to work very quickly to generate growth almost at all costs. And that is a very risky thing that creates even more misalignment between founders and people on their board and also creates unnecessary sort of pressure to scale at a level that may not actually be good for the long term business.

Speaker A: Uh, 100%. I mean this is what we preach. And I had, I have a founder in here today. Good, great company. And like were just saying, and this is the conversation I have day in, day out on the founder side. And this is where like, I think the VCs get kind of like caught up in the echo chamber. Going from 0 to 5 is so hard. 5 to 20, still so hard. 20 to 100, really hard. 100 pl. Like, uh, every stage is hard and a new set of challenges. And so like this idea that like once you just at uh, the Series A, you just know and things just take off it. It's not grounded in my reality. And so the point is, at every intersection, at every like, stage, you gotta ask yourself, like, do we have the capacity? Like when Eric and I, I mean, we were a tiny little thing, but like, it was like, okay, we gotta sell this device to dentists throughout the U.S. which, like, we've gotta install it. It's hardware. It's like the cost of a car. Okay, now we wanna go global. Like maybe we could have done it, but like, at some point you, you look at the math and you're like okay, we're being paid for future value and, and we need a big partner. Probably like I, and I think a lot of people should be doing that analysis and don't. At each stage of the game. And look, I think Travis and the team at Uber at each stage was like no, we, this is working. And I um, even they burned a lot of capital but they needed a lot of ca. Like that was like a regional business with locations throughout the country. Nothing precludes us from doing those. And there are those companies where raising a lot of cap. Look, SHIELD is in. They're building hardware defense. Like that takes capital. I don't see any reason why funds like ours are. I'm not saying I'm um, opposed to those companies. It's just that not everyone has to sign up for that and that at each inflection point you can revisit the assumption of whether raising more capital, a higher price is the right move versus selling or, or trying to go to profitability. I mean the last thing I'd say is, and I think you tell me if you're seeing this too. The data bears this out. More companies are trying to get to profitability and are profitable. Like in the dot com days that like nobody was profitable. Even in the last generation of SaaS, companies like no one was profitable. And now I think there's a class of companies that I think are like more aligned to kind of what I'm saying which are like okay, we're not the hot. We're not growing at 5-20x but we're like a good business. But we think getting capital is going to be harder and we may be growing 80% year on year and we're going to get to profitable and like one day we'll wake up and we have a valuable business. I'm seeing more of that. I know that doesn't get venture capitalists jumping up and down but I think that's a recognition that not everything can be the top five.

Speaker B: Well and it goes into this kind of distortion field that we live in right now and it's just amplified by sort of things like social media where it feels like companies that don't grow 10x year over year are simply not making it. And that's fundamentally not true. In fact I would say a lot of the companies within the AI space right now like they putting aside for a second, uh, I still question some of the ways people are calculating things like ar. Right? Are you really calculating in a way that is authentic but even the ones that are, I mean, there's a lot of risk in terms of durability as this technology continues to shift. You're right that a lot of companies that are non AI, let's say good SaaS companies, maybe some AI implementation, are not getting a lot of attention because their growth rates don't in any way rival what the AI companies are doing. So these companies kind of have to get to profitability or at least be capital efficient to be there long enough to kind of figure out when the capital markets come back for these companies. And it's really tough. And I think we have lost the plot a little bit, um, in terms of how companies are built. And it all comes down to people playing the game on the field, which is, I'm going to try to catch the tiger of the tail and try to get the next anthropic. I know some of these companies are not going to ever live up to their valuations, but it only takes one. And I think that's really hard when you look at actually the stats. I mean, how many companies have done over, gone over 100 billion? I don't know what the number is, but I would imagine it is a few hands. We can count all of them. Totally.

Speaker A: Yeah. I see it in the portfolio. It is few and far between. I'm grateful we've got a bunch that have, but the lion's share have not gotten over 100 million. Uh, like when you spend time with these founders, you realize just like how rare and how hard that is. And your point about the durability of revenue. We were just having a conversation and a colleague said when the revenue comes so fast and easy and goes right up, that probably means it may be just as easy for it to go right back down. Like, you're probably in a category that's shifting revenue very quickly. And so I think it's a very astute. We'll see. Like, we saw this in dot com, we saw this in crypto. If the money's too easy, that probably means the, the moat may be quite a bit weaker. Not in all cases, but. And I think jury's out on a bunch of these. And the other thing I'd say about the AI stuff and, uh, if you have a view on this, like I'm forming it in real time as I talk to founders. Like this founder that was here earlier today was saying, and his CTO is here saying 2x productivity improvement. I think they're pretty sophisticated, Measuring feature releases, quality of code, time it takes to ship 2x productivity increase. And I think that what we were talking about afterwards was like, but are these companies priced like it's 10x2x is amazing. It's the kind of goes back to the same thing we've been talking about this whole time, which is like, in absolute terms, these things are amazing. But like when you price it at this, uh, it's like 2x growth year on year is amazing. But in the venture land at the moment it sounds terrible. And so like, are we pricing these AI companies like it's a 10x improvement and forgetting that 2x pretty damn good. But let's, but let's price it appropriately.

Speaker B: No, I like the short answer is yes, absolutely, we're priced. And some of that's obviously the supply and demand of capital. You have capital going into companies that they're going to not only raise more, but the valuations then follow because the founder is only going to take so much dilution at these series C, series D rounds, even series B. And so if you look at the average round being 10 to 20% dilution, but the VC needs to put $100 million to move the needle. You kind of fall yourself into a valuation that's really high. That's pricing basically for a lot of things almost to go perfectly over a number of years, both on the macro and micro side. My view is like gravity will come back into play. It always does. I don't know how long it's going to be. I don't know if it's six months, two years, five years, three months, but it will come back. And we will look back on this podcast and say, okay, the winners were fundamentally and exponentially bigger. Probably bigger than you or I could imagine. There's so many expensive mistakes that were made, which in hindsight were like, why did everyone play the game on the field? It almost reminds me a little bit of 2021 where I kept hearing, got to play the game on the field. You got to play field. I want to go back to your point of that is like, what is the game on the field for you right now though? Because you kept the fun size small. What do you not participating in because you just don't believe in it.

Speaker A: Yeah. And sorry, one comment I want to make on the previous point and then I'll. I think it's also funny that it does feel like an industry that doesn't really get punished and maybe that's investing in general. But like, this goes back to your incentives point, which is like, if you're wrong, certainly there are some Funds that don't raise, uh, later or certainly a handful of many funds that may have to shrink their fund size but the punishment isn't very great. So the incentives really are go after the big guy, try to capture lightning in a bottle. And if you don't, oops, you get to. You don't lose your job, you don't. Your fund usually doesn't go away. Like I've seen very few. Usually when funds go away there's something else going on. It's not performance very rarely. So that also is like a strange set of incentives.

Speaker B: You know, it's funny that they don't get punished for a long time, but when they get one fund that is a absolutely grand slam, it mints them for like three or four funds where the people are investing behind. And we've seen that time and time again. It could be one company with one fund, but all of a sudden that manager is minted for several. And that's why I think again the incentives line toward hey, let's take these moonshots. Because if we get one, we're kind of made not only this fund but maybe for the next couple funds, right?

Speaker A: And maybe arguably that is rational behavior because you're like, I got rewarded for doing that. And uh, so any. Anyway, I'd say the next thing is you asked me like what have we had to stay away from or not participate in. I think it's been challenging. I think what's been particularly challenging is that the really smart people are starting companies right now. Really smart people in our network at prices and valuations or round sizes we can't get comfortable with. And uh, either. That means the beauty of our fund is we can write very small checks. We've written as small as 100k but typically we write minimum 500k, 750 but we can write small checks. So in some cases we will still do that. But I've had to say to people I think are amazing, like I just don't have the ability to write a check behind you and, and everybody else is lining up and that's tough. And I think we may be wrong on a bunch of those. I also think we may be right on some of those. But I think my lesson from. And something we talk a lot about here, a little bit of lessons from the dot com days but just in general is amazingly talented and pedigreed people is not enough to build an amazing. Just just because someone like dropped out of MIT and is brilliant and written all the papers and all that stuff. Certainly that's impressive and maybe they've done amazing other things, but when the market washes out, it washes almost everybody out. Right? Like even the best of the best. And so we've had to like, hunt in the piles a lot more than we usually do. We've had to say no. I would say the top of the funnel is larger. And yet it's so hard to get things through because so many things have to work out. Price, the opportunity, the round size. I see people all the time uncap notes and this and that, things we typically don't do. And yet I kind of want to, to sort of play the game on the field, but it's not the FC strategy and I got to stick to the FC strategy. And so we're saying no to a lot of things. I think five, 10 years ago would have been priced or sized differently. We would have said yes to.

Speaker B: You guys have, uh, stayed incredibly disciplined. You have a very clear thesis. You all are aligned. Is there something about your thesis or something about your worldview right now within the firm that you're least convicted on?

Speaker A: Something about our thesis in general?

Speaker B: Yeah. Thesis in general. How you guys are viewing the market that you're the least convicted? Because I feel like you guys are very high conviction on most of the things you do in terms of things like fund size, the type of founders, what you think actually brings value. But yeah, well, this changing so much. And so, uh, I'm wondering if there's something that you guys internally debate all the time.

Speaker A: It's a good question because this point I was just making about the, the students. I think we're in a moment where there is an obsession with young founders and more recent like let's just say folks with less experience on the basis that, like dot com. But also in a positive way. I don't use that in the sort of pejorative way that they're more AI, uh, native and will understand how to build the next generation of great companies because they're sort of born with AI or came of age with these tools. Whereas the old folks like us, uh, or even just like, Even if you're 28, you might not be as native to these tools. We are investing in some of those people. I think. I think my gut tells me that building a company is still building a company and that like, you got to motivate people, you got to know how to hire really well. You got to have a little bit of that experience to do it. By the way, there's exceptions who, just like Zuck found Cheryl like some, the great ones figure it out and that will always be true. But I think that is a debate we have. And so I think it's like a little bit of both. Try to find those amazing exceptionally young people while not over indexing. I think like cursor and I don't know if it's lovable. A few of these like were examples of that. Like, oh look, the, the young founders can dream up something big very quickly. And I, I think that is true. But those two are very few exceptions. I don't want to build a fund based on those exceptions. But it's a debate we have and I think time will tell. What's hard is just like the feedback loops are slow and the data points are few and so hard. Hard to be too definitive about any of this.

Speaker B: Well, what ends up happening, of course, and you mentioned some of these companies, whether it's Facebook, Cursor, Snapchat, you know, started by really young people, great outcome. It shows that you can be young and build incredible things on a product side. Sometimes it's actually a competitive advantage to be a little bit naive in building these type of things. I think one of the concerns, and I wouldn't say maybe concern is the right word, but just truisms, is that it's all about pattern matching. And people see someone young and they say, okay, is this the next Zuck? Is this the next Right Elon when he was over at PayPal or whatever. And it's. If you actually look at the stats though, a lot of the successful companies are built by people in their 30s and 40s and sometimes even older. And so I don't think there is any one way. But as you know this market as well as anybody is pattern matching happens. You start to over rotate and that's why you see a lot of this stuff. I want to zoom out maybe at the very end and I want to come back to another post that you put together. And it really resonated with me because, and I'm going to read it, it says, I've been reading so many VC strategy posts that my head is spinning, which I feel the same. I'm wondering if we have lost the plot. And then there was a quote by somebody from NextView Capital that said, venture capital stopping one business a while ago.

Speaker A: We will.

Speaker B: We just keep underwriting like it's one. Explain what you meant by that, because I do agree with it. But I think it has a little bit of nuance that might not necessarily come through just the post, but what really Are that.

Speaker A: Yeah, I mean I just, I found myself like reading on Twitter and LinkedIn and elsewhere over and over again about the strategy and the, the nature of VC and like if you go back when we started or sort of the history of vc, it was like a bunch generally males but like a bunch of guys investing in companies and it was like that simple and it usually on Sandhill Road or thereabouts and like a pretty simple formula. You got into great companies and you had a great fund and if not. And I think that, I think Andrew and sort of that pure set of uh, funds kind of changed the narrative a little bit and said hey, we're going to build a media empire and different products. And then I think a little bit of this is sort of like self reinforcing loop where other people were like we're going to hire recruiters and we're going to. And some are going to be big and some are Lifecycle and some are going to have accelerators and some are like. And I think just the explosion of permutations of this but there's a little bit of like the echo chamber of like are people thinking more about strategy than just picking good companies? And like that uh, just kind of got me going and it's what got me to write the post. I'm guilty of it too. I mean this whole, our whole podcast is like analyzing vc. But I think like VC as an asset class that's talked about is like a relatively new phenomenon. I mean I remember pitching to Kleiner Perkins which was the, the primo them and Squit back in the day and like no one really knew. Uh, like I talked to my banker friends in New York. I mean like they were not. It was like a small little like that's cute. I don't think they could name any of the partners. Certainly none of them were public. I mean if anything a lot of those names who've done exceptionally well. Most people, unless you study venture, you've read some of the books, you wouldn't even know those names. And they're literally like the legends of our industry. And so, and that's changed now. Like everyone's like an influencer. And so uh, some of that is just like the nature of business has moved this way too. Like I see Blackstone on Instagram now, which I never like half these Blackstone guys didn't have LinkedIn pages back in the day. So clearly things have shifted. But, but I do worry we've gone too far. Like it's the sort of like VC as the Sexy business that everyone's talking about. And as opposed to like at the end of the day we are investors and our job is. And maybe sitting in New York you kind of are reminded by that because you see other investors who like, okay, either you generate a return, like doesn't all this stuff is cute. But like at the end of the day you got to generate an irr. And I feel like we may have over rotated a little bit as an industry on that.

Speaker B: Yeah, well, there's so many things I wanted to unpack and maybe in a very concise way. But you're right, I mean veterans to be a very small asset class where you know, you look at back in 2009, even when founder client, this is coming off GFC, there was like 16 billion raised by funds. And today that's like a week. And in fact it could be one venture fund that raises that injuries and raises 10 billion in their last fundraise. And it has become a little bit more mainstream. Although I would make the case that not all of it is really venture capital. It's just private technology finance, given that these companies stay private longer. But I do wonder about this thesis and some of the strategy. I think it's more who is the icp? Is the ICP the founder or is it the lp? And oftentimes in seeking differentiation, you create all these things. Oh, I have a scout team and I have this and this. And it's really to be able to raise capital, but may not actually go to the core of what you need to do, which is source, pick and win the deals that you want to get into. And I think that's what I'm used to is like at the end of the day it comes down to those kind of three key things.

Speaker A: 100%, 100%. And I think, I think in a world where some of the big firms have kind of taken a lot of the oxygen out of the room, everybody's like a little bit chasing. It's the same thing we see on the startup side like we were talking about. And I think people are forgetting like at the end of the day, play your game, stick to your knitting and do a good job and don't worry about everybody else so much. But sometimes that's hard to do. I uh, think it's particularly hard to do in the Bay Area where you go to a soccer game with your kid and everyone's talking about their fund or their valuation or how much they raised or how big it's. There's a little bit less of that on the east coast, when you focus

Speaker B: on too many vanity metrics versus the things that matter and fundraiser at the end of the day or simply the ability for somebody to take on capital to build a business, it's not the. It's not the plot. Right. That is not what you're trying to get to. You're trying to get to building a great company with durable revenues, hopefully profitable and having a great exit for your sort of employees and yourself. Last question just to kind of tie this up is it's been 17, 16 years since you started investing. Obviously you were a founder before. What is the one thing that you got the most wrong about venture investing coming into this?

Speaker A: I think I've spent a little bit more time on the what and not enough time on the who. And I think the who what is making this entrepreneur excited about this entrepreneur opportunity. What is going to make them walk through walls to make this happen? It's very hard to tease that out. That is where pattern recognition.

Speaker B: But that is.

Speaker A: I love sitting in meetings with my partner Dave, because he's very good at kind of like understanding, almost like a psychologist, like what's driving this human being. And I think some of it is being an mba, some of it is it's easy to latch onto the business and like spend hours and hours diligencing the business and then like at the end being like, oh, who's the entrepreneur? I wish. And I'm trying to correct my brain and remember, spend time with the human. It's. It's why Covid was really tough for me because I didn't get to sit down face to face as much. It was a lot more transactional. I'm enjoying the human side again and trying to spend time with people. That's the biggest lesson learned. Which is sort of obvious, but harder to do.

Speaker B: Yeah, it's really hard. It's an important lesson because I think especially at your stage, it is who's the team and who's the person what drives them? Because all the other stuff like you can talk yourself out of deals, but I've also looked at all my angel investments and the best performing ones were when I really believed in the person. And I just said, I'm gonna give you money. But this has been a lot of fun, man. It's always great talking to you. Congrats on everything you guys have built. You built a great reputation. We're just excited to, ah, continue to work with you guys. So thanks again.

Speaker A: Thank you.

Speaker B: Thanks for listening to another episode of Venture Unlock. I hope you really enjoyed this conversation with Micah. Uh, if you'd like to get Venture Unlock content straight to your inbox, go to venture unlock.substack.com and sign up. Um, or head over to Apple Podcasts or Spotify and subscribe. Thanks again for listening.