Platform Shifts, AI, and the Future of Consumer Investing

Speaker A: Foreign. Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. In this episode I had the pleasure of speaking with Mercedes Benz, who recently launched her own firm called Premise, after spending time as an investor at Lightspeed. We covered a lot of ground during our conversation, including how AI is transforming consumer today and in the future, what informed the thesis for Premise, which is the name of her and her partner Vanessa's new firm, and the state of VC today. We hope you enjoy the episode and don't forget to subscribe if you want more Venture Unlock episodes, straight to your inbox.

Speaker B: 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 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 A: Mercedes, it's great to see you and thanks for being on.

Speaker B: Thank you for having me, Sameer. It's wonderful to be on.

Speaker A: Yeah, this will be fun. So I usually don't start here, but I think your story is so interesting in all the different things that you've done in your career leading up to, you know, your fun. Now let's go back in history and go through your path of getting into venture.

Speaker B: Okay, so that starts very early. I'm the daughter of entrepreneurial parents. I had probably the luckiest upbringing you could have to have my job today. My dad's an engineer, my mom's an accountant. They started companies when I was younger. My dad started a video streaming company. They worked on our RFID company back in the 90s and 2000s. My parents used to work at Apple. So I kind of just grew up in the Bay Area around tech all the time. And I thought that's what everybody did when they grew up. I thought everyone talked entrepreneurship and ideas at the dinner table. I remember when we were younger, they would say, okay, so what if you had a pet robot? And it was talking, you know, what would you price it for? Who would you sell it to? Like, why? What would the kids use it for? Where would they buy it? And we would talk all of these ideas and then two years later Furby would come out and it was like, oh, that's what we were talking about at the dinner table the last few years. And they were like, yep, yeah. And that was just constant. So I had a really lucky upbringing. I. My dad taught me coding when I was in high school, VBA mostly. And I went to Harvard for undergrad. I started out computer science and then the great financial crisis was going on while I was there and I thought that was super fascinating. I ended up working with my Harvard professors at the Fed, both the D.C. fed and the Boston Fed in 09 on kind of price post crisis cleanup work and then worked at Goldman Sachs for a couple of years, did the asset management, the thing. Got to do a lot of public equities and commodities trading. And then in 2012 I was like, you know what, I want to go back to the startup world. And ah, back. Because of my upbringing, I worked at startups from 2012 to 2019. Lots of different roles in consumer frontier tech. I was the founder of my own company. Got to see everything from zero to a hundred million in revenue. I was leading really large teams, 100 people and P Ls of tens of millions. So got great experience and then I became a VC in 2019. And at that time I was thinking, this is a perfect amalgamation of all my experiences. Part finance, part startup. And you know, that was at Lightspeed. I got my shot from Jeremy Liu who hired me in 2018. I started in 2019 and just had a phenomenal experience there. Tons of investing. But that was really kind of the upbringing that led me here today. And so now that I'm going back on the entrepreneurial route again, it feels like another continuation of all my life. Points have just kind of led up to this.

Speaker A: Yeah, it's such an interesting sort of eclectic background that you've been lucky to have, you know, from um, the public side to working with the Fed to working at Goldman Sachs. And you know, I was, when I talked to entrepreneurs and I do consider people that are running funds, especially emerging managers, as entrepreneurs. You take all those experiences and it helps inform the type of firm you're building, the culture, what you're investing in. Talk a little bit about how those experiences informed the type of firm that you want to build with Vanessa. And maybe if we can tick off the culture, the thesis as two of those major points.

Speaker B: Yeah, uh, what we want to build build was really largely informed by some of the gaps that we see in the market and as well as the decision on how we wanted to build a firm. Some of our guiding Principles are, you know, always be top, decile, always seek alignment. Everything must compound. We really want to run it like a startup. And rewarding originality, those are really important to us. I have a little post it note on my wall next to me right here that says live on an island. Originality stems away from the mainland. And that's how we think. We, you know, we're at large firms that where sometimes consensus is more so what drives the agenda. But we always felt that our original ideas and insights into contrarian areas were what drove a lot of the returns. And so we are thinking about that for ourselves in terms of how we set up things like decision making frameworks for example. But even more important was the gap that we saw in the market. We felt that also an originality is stemming from the type of founder that we want to back that we don't think others are backing. It's a technical founder who has insights about how behavior is changing thanks to the new technologies that have been advanced. So if you get just a technical person, you end up getting someone who's building technology in search of a problem. We've all felt that's kind of what VR was. I worked in the VR industry for a while. There's, and I always meet these incredibly talented engineers who have such depth on the primitives of the technology but can't describe really why a customer needs it. And then if you get just the people who understand the behavioral insight, who understand the problem, then you get sometimes a lot of influencer marketing people or marketing execs and not people who really know how to ship and build and iterate. And oh, that foundational video model is out of date, you know, after only six months or three months. So, so we're really looking for this unicorn. And we felt like when we said, you know, we want to invest in consumer, people didn't understand it. They thought it was soda and apparel and you know, things that people kind of classically, classically think of influencers. And when we said we want to invest in, you know, consumer technology, people still didn't quite get what we meant. They said, okay, so maybe an influencer who's built a consumer, you know, product. And so really we felt like we honed in on this gap of a unicorn that has become really our type of founder. And these people aren't being funded at nearly the levels that we think they should be. Last year only 6% of uh, BC dollars went to consumer backed companies which is down from 34% a decade prior. And so we find that it one, there's a terminology issue but two, there's really a issue where people don't know how to underwrite these companies before they have revenue. Once they have revenue everyone's on board. It's easy to write, you know, to analyze the cohorts but before then you really need to assess a low ah, touch, no touch go to Market Motion. And that's really what defines consumer by the way. Not like consumer's not a category uh, low touch, no touch go to Market Motion and product pull and product engagement metrics. And we just felt we were uniquely qualified to do that also given our backgrounds working in product and Vanessa's working as engineer as well to really identify and underwrite that founder profile and the engagement that they start to build in their product.

Speaker A: Yeah and we're going to touch on because you brought up a number of things there I think are deserve a little bit more unpacking. So one being consensus versus non consensus in venture today. The second is really the role of consumer products and consumer technology and how that's changed. You know 6% is a very low number when you look back in history. Some of the biggest companies in the world have been consumer in nature. You know whether it be the Facebooks of the world obviously and we'll get into what you're seeing from a shift standpoint with artificial intelligence. But maybe coming back to this thesis of you want to invest in things that are generally non consensus, they're early consumer has been relatively non consensus especially pre revenue. And one of the things that we always look at when we're evaluating or when I say we I mean at my company allocate is not just you know, the thesis but it's really the GP thesis fit. So similar to when you're looking at a company you have somebody that has technical chops that really understands plus somebody that has that business mentality to understand consumer. How does that then align with the way you built your team and maybe some of the conversations you and Vanessa had leading into partnering to make sure that you were the right group to be able to execute on this thesis?

Speaker B: Yeah, that's a great question. I mean we, I always said our partnership has to be one plus one equals more than two because otherwise we should just go be individual solo gps. It really needs to be that the intersection of the two people together creates far better ideas than what they would have individually come up with. And that key criteria for a partner in addition to having super deep trust and super deep foundation has really proved true so far for us. I have more of the, you know, Goldman Sachs, Federal Reserve financial background. She has more of the Georgia Tech computer science undergrad, worked in all technical PM roles for her first, you know, seven, eight years out of school. We the marriage of those two is what allows us to do and also both having very much so a product focused mindset is what allows us to see founders really in the same way and also to bring something unique to the table. So that's been a large part of the kind of partnership. I think another thing is we both have as former operators think about that value. I said everything must compound. We both want to run it like a startup. We measure our KPIs, we measure cost of acquisition of our founders, we measure the ltv for example when we are our sourcing funnel and how we think about building out our go to market on our founder side of the business there we really productize things because a lot of VCs throw events, it's one off but that doesn't compound and we're a small team. We need it to be bigger than just an individual event. And so um, what we did there was we actually created sub brands of different things that have nothing to do with the name of our firm. They were runner up names actually to our firm and we created sub brands so that it was an uh, entity unto itself. One of the problems we've seen when firms scale is that their brand dilutes and they get bigger and bigger and suddenly I won't say the name of a firm but you know, they have these side uh, programs and everyone's like oh, it's so easy to get into, you know, there to be a founder in their firm and everyone says they're a scout and everyone says they're a venture partner. It starts to mean less. We wanted to really protect that ahead of time and we take a lot of our inspiration from enduring large brands. If you think about Tiffany's for example, their silver bracelet is the entry, you know, brand to their larger catalog of products. If you think about Mercedes Benz, similar to my name but if you think about Mercedes Benz, they start with the C class or the E class before you build up to the G wagon or the Maybach. And so we think it's important to have that. So our access brands are our event series where we source and those are destinations in and of themselves. They have WhatsApp groups, they have websites and people are going to come to them because they've been referred and recommended by future founders who are really high quality. And so we Set that up intentionally from day one. That was not an idea I exactly came up with myself. And it's not an idea she exactly came up with herself. It was through the co creation of talking about the type of things we've seen that are important to us that enabled us to get here. We also said okay, we don't like to just do a uh, one off event, it has to compound. And so it's an event series that meets every month where under its own brand where you over time people who come to future events get priority if they've come to a past one. And we get hundreds of applications every month. And so that's a part of the compounding nature. Also if you refer people you get additional priority access to come to these events. That's also part of this self perpetuating loop. We think about it like we want to productize our network because one of the other things I believe about venture is your network really gets stale. I think the shelf life is probably like three to five years of a snapshot in time before that network is superseded by some other hot talent node. And we already saw that happen in operating. Our operating networks are uh, now at this point seven, eight years old. Those are kind of stale now. And now pretty soon our networks from our tier one VC firms are going to be stale in another three years. And it's a snapshot in time. So we have to start building the engine for fund two, Fund three and beyond. And that's why we really are being so intentional with how we set up this brand and subseries. There's a ton that goes into it. We also by the way spent like you know, 15,000 on it in the last six months and had like thousands of people apply. So we're very scrappy as well. But I think this is the type of thing that when I thought to your question of like why are we such good partners for each other and uh, what did we bring as values to the table? That one example shares so many different facets of it. The focus having to be all in technical engineers, researchers, PMs. That was also something that came from the co creation too.

Speaker A: You know what I really like about the uh story there is kind of this notion of like running a firm like a startup, right? And you know whether fund one could be like a seed round fund two series like you're continuing to build, it's not just raising a fund but it's building a firm. And in a world where the feedback cycle loops are so long like it is, you Invest in a company, it might be 10 years before you know, number one, if you're a great picker because it takes time to see those companies continue to mature. And so these interim KPIs to determine like directionally is what we do working is really interesting when you think about the different things that you're looking to solve against from a KPI. There's the sourcing which is network is a big part of like seeing the right deals within a thesis. There's the picking component and then there's. Once you see the deals, you have to win those deals consistently. Now maybe a non consensus feels it's, you know, it's easier to win those deals. But when you think about this event series and how you're tracking, do you believe that for, you know, seed firms sourcing or winning are more important or is how would you sort of define like what you're indexing on?

Speaker B: Oh yeah, that's a great question. There's a couple ways to answer this. I think the most overlooked role of VC is actually the exiting strategy and how you seek liquidity. So we'll come back to that. Sourcing, evaluating, winning, portfolio support are normally like the classic four people talk about. And I always think they forget about the fifth, the exit. I think that sourcing is table stakes. Like if you aren't sourcing, what are you looking at? You know, if you don't have a way to benchmark whether or not a deal is a good deal across thousands or tens of thousands that you've seen, that's also a big issue. I think the big firms actually, you know, a lot of them have specialized into sector teams and I think that specialization enables them to win most in terms of the eyes of the founder. Because when you're someone, we've experienced this as people who've raised money. When you get that view on the other side of this person understands me and they know what I'm talking about that is so powerful. That's one of the things that helps you win. And so I think a lot of the horizontal firms that have a broader mandate maybe at pre seed or seed, the area that you would struggle more with is winning because you are not able to like totally zone in and say I am the expert in, I don't know, X, Y, Z field. And oh by the way, here's like the 10 different thesis maps I've done on your sector. You know, you don't have time for that when you're looking at a ton of different categories. So I think that is where Maybe the earlier stages of seed firms fall down on the winning, that at the same time, if you get there early enough, it's less competitive and so winning is less important. You ideally want to be competing against time and the founder's timeline of when they have fully decided to go out and make themselves known to a broader set of people, uh, versus competing with a, uh, founder who's an established known quantity in the field, who is suddenly going to have a competitive term sheet right away. That's how I view it. At least I view one. We invest, precede and seed. And pre seed. Really, if you're doing it right, you should be competing against a founder's own internal timeline, not the market. And so there's a lot of opportunities I'll work on for months or years where I am judging the founder as having been in three different stages. One is the first phase is where they have not really even decided to be a founder. I just think they're high quality and I'm hoping that they will get there one day. The second phase is kind of the founder curious phase. And this is a really optimal time that you need to be seen as the one guiding them towards this journey. And that is a period of, you know, three to 12 months often time. Then there's the founder convicted and actually like launched, which is they've decided to go out there and do it. They may not have a team, they may not have the idea fully baked out, but actually both of those phases, if you get the timing of them right, are, uh, the area where you as a VC win and compete. And I think a lot of winning and competing is targeting that timeline correctly and understanding the signals and being the person walking the founder or the future founder down the proverbial aisle to the destination where you both say, I do. So that's to me, like, if you get it right, you can pull yourself out of these typical comparisons of competition or winning. So this is a long kind of circuitous answer to your question. But ultimately, yes, I think it's harder for seed firms to win if they've now got into the stage of they're competing with a known asset. So they should play a different game. They should play the game of competing with themselves.

Speaker A: Yeah, something that we have thought about a lot, uh, and I go back and forth a little bit on this, but venture, even from 2018 when you joined to where it is today, is completely different. And it's hard to even know what is venture versus not venture. You know, for example, general catalysts don't Even refer to them as a traditional venture capital fund, but really private innovation finance because they have all these different type of products now. And ah, we're seeing that, you know, across some of the mega firms. And both you and Vanessa came from these larger funds in NEA and Lightspeed, which fundamentally are different business models. Can you shed the light on the difference in your mind or the business model of a big firm today that is deploying billions of dollars and the mindset that you, you need to have as a seed manager to win in a space where you're competing with not only other seed funds, but now increasingly the bigger funds where consensus founders, consensus sectors may skip seed to go direct to the big firms.

Speaker B: Yeah, I guess in terms of how I think about what different games we're playing, I think the largest firms, they have simplified the venture capital asset class question to what can I put a billion dollars in that will give me 3 or 5 billion tomorrow? And tomorrow is becoming in the AI world a shorter and shorter amount of time. There was a tweet that caused a lot of consternation in all of my VC manager chat groups which said something to the effect of why are we all doing this? Like, why are we all doing VC on hard mode? Just like find an AI company to put a billion dollars into that will be worth 5 billion in 12 months. And everyone could kind of stop and think about like, yeah, we all know there's a company like that would do that. And so I think at the latest stages the mega funds are playing a very different game. Uh, to me it almost feels like a new asset class entirely. They're not playing the private equity game, they're not playing early stage venture. They're playing a kind of short term horizon returns gain. But it's actually the IRR on these is pretty phenomenal. Their duration is more like pe, the IRR is more like venture, but it is highly cyclical. But the question is there's always something that is in the hype kind of growth category at that time and can you enter and exit quickly enough? So really where more the exit question has become more the issue for them. So then it's who are you, what are you doing from a secondary's perspective, what are you doing from a continuity funds perspective? How can you enter and exit quickly at scale and hypey, you know, fast growing categories is now the game for some of the larger ones. And that is really where I think the innovation is coming. As you know, more than probably anyone is all on the exit construction. So I Think that's very different game to your question about more competing on kind of known quantities. I mean, frankly I don't view myself as competing on known quantities. I have zero business being in Amira thinking machines round. Okay, that's maybe an extreme, but even still, you know, if you take your random person of the mill who comes out of uh, OpenAI or Anthropic and wants to raise, you know, 15, 20 million, I'm not in those either. Let's bring it down even to the ones who are doing raising 8 to 10 million at 40 to 50 post, which is becoming very common. I probably don't want to be in those either. So I do think there's a question of why would you as a seed manager compete for these things? I think most people have gotten very lazy on what constitutes a good founder in a world of more and more options which the asset classes exploded, the number of founders is exploded. You tend to rely even more so on signals and rather than on actual kind of substance. For example, like Ivy League degrees are signal versus substance. They ought, they tend to correlate and they tend to mean something good. But just because someone had that on their resume doesn't mean that they necessarily are good. It's a lot harder to spend the time to figure out who's really good. And that's the problem that I think we're running into now.

Speaker A: So I think you hit the nail on the head, particularly the bigger firms, which I do feel like they're a very different asset class than the pure play early stage venture where all of your exposure from an investor standpoint, an LP into a fund is going to be kind of seed in series A, maybe a little bit of series B. Whereas the big firms ultimately the entry point might still be series A, some cases C, but they look very different. And the calculus at those bigger firms is, and I've heard this many times is can I plunk 100, 200, 300, 500 million into this company? Some models that are capital intensive actually work well when you're dealing with that quantum capital. The thing that's I think challenged a lot of seed stage managers is if you go non consensus and when I say non consensus, the way I'm kind of roughly defining it, it could be a sector that's not particularly hot, it could be into a founder that's a first time founder. It could be a company that is well before traction is that the additional risk of downstream capital not being there. And so a lot of seed stage managers will do the consensus because you get the quicker markups, it's easier to raise that next fund. And that becomes this internal challenge of if I do non consensus what happens if the company doesn't take off right away? Is there going to be following capital? How do you think about that and maybe in your minds really work around that you know sort of reality.

Speaker B: Yeah, we call it gifted TVPI and earned tvpi. There's the folks that everyone's going to agree with and look obviously like Martin Casado had that tweet that went viral and also caused a lot of conversation on VC Twitter. I think it's a lot safer for your VC career to be consensus and if you don't have as much experience in venture you should always. Well not always. You should certainly do a good amount of your deals to be consensus early on to make sure that you have something there. You know I did a lot of non consensus when I joined Lightspeed. I opened our Latin America region and that was very much so not popular but I was able to find diamonds in the rough. You know I was able to find companies that I met pre revenue that are now doing hundreds of millions in revenue and you know worth billions. And so if you can find works but I think you have to have like anything a balanced portfolio around it. So we do have like internally a way that we think about earned TVPI versus gifted tvpi. Frankly we get a lot more excited about the earned TVPI deals for an investor for. I don't know if I can talk um exactly about the company we're investor in but so I'll skip that part but we, we we've definitely done some there where it's people who have no name, you know backgrounds, no pedigree but it's their metrics that show forth. I think downstream capital is really architected by mostly a couple of things. One, true metrics that people can rely on. Sure everyone will to call that the earns thing. Two is in addition to the founders pedigree. I think the founders pedigree by series A if they're not showing results doesn't matter. So if I'm investing at the seed I think that at least the person needs to have shown some type of market entry. And two I think it's really comes down to what does the downstream capital think of my taste. And so I think a better way to use my time as a manager uh is to cultivate relationships with the downstream capital that align highly with my taste and expose them um to my founders through a lot of kind of curated conversations. That is where I'm probably going to get any of the affordance I need in the gap between where they really are today and where they need to be for the person to mark them up. But I think increasingly, I don't know, maybe you're seeing this in the market. I'm not seeing pedigree get you multiple additional rounds of funding. I'm seeing it get you one round of funding.

Speaker A: Yeah, I think that's right. I think you can get the Series A with pedigree, particularly if it's a sector and the person has some kind of brand. And usually at the Series B you have to show some definable metrics that allow somebody to say, okay, this can be a company that is, that has at least the potential to return, you know, whatever a big, at that point you're dealing with bigger funds. So if it's not going to move the needle, they're not going to do it. And so the metrics have to be there. You know, one of the challenges, and I'd love to get your take on this is when you think about these non consensus, in many cases it's not always guaranteed those metrics are going to come really quickly. So if I'm looking at a non consensus founder, meaning that they haven't done this multiple times over with great exits, maybe the, you know, it's a company, particularly in the consumer space, it takes a little bit time to start monetizing. It may not even be the hottest sector. Those companies may need a little bit more Runway before they get to a Series A. How does your investing thesis inform portfolio construction? When it comes to, you know, ownership number of companies, you know, initial versus follow on capital reserves, we're going to

Speaker B: get in at consumer companies, this is already happening with real sizable metrics at much lower valuations and prices because of this and it with even with founders with less pedigreed backgrounds. Normally founders, I should say are in consumer are the ones that have less pedigreed backgrounds. It's the B2B founders with pedigreed backgrounds that don't have a lot of traction that are the ones where you kind of. It's like a yin or yang. It's almost like a uh, you know, where are you on the line? If it's a two by two matrix with pedigree versus traction, the less traction you have, the more pedigree you need and vice versa. And so our investing philosophy does take that into account. If we're going to be investing behind someone with nothing in their track Record they normally are bringing some metrics to the conversation. Pretty abnormal kind of asymmetric metrics. And that is then also reflected in the pricing. And so I tend to end up thinking it's the. No, but so it's a portfolio construction but I tend to end up thinking it's the founders without as much background who had real metrics were at much better prices that create the much better investment opportunity for me. But I will still have some of the other deals, the gifted tvpi where I'm hoping they're maybe going to raise the next round off of their pedigree. What number that shakes out exactly, we'll have to see. We have, I have, we have kind of a fun zero that we did. I would have to go and analyze it by those two to see how many fell into each. But yeah, there's I, I kind of think I know the split but I'll come back to you with the real number on that one.

Speaker A: Yeah, and we'll, we'll put it in the, in the pod notes afterwards. But yeah, maybe talk a little bit about, you know, when you look at these companies, especially consumer companies. I mean the consumer at one point was incredibly hot and then it became not hot for a number of years. And you know, for example, Kirsten Green had this great article around why consumer is undervalued right now and why more of these companies should be funded. Tell us a little bit about that thesis of why you think consumer is only is up 10% of total dollars today.

Speaker B: I think that there is classic loss aversion from consumer not producing as many returns the last 10 years. And that's real. I think that if you look at why that is, consumer waves typically come after new technology shifts. There was the technology shift of the browser in 1994. We got Amazon, ebay, Netflix. There was the technology shift in the early 2000s when upload download speeds increased and you got due to fiber optic cables and you got UGC content like YouTube, Facebook, LinkedIn. And then there was like the 2007, 2008 wave which we're all very familiar with. All of the companies that came after mobile and the iPhone and the app Store. And there was a lot from maybe 2008 till about 2014, 2015 maybe m musically or Discord are the last companies to come out of that cycle. And then there was kind of nothing for 2015 until now. I actually would argue that it some of it went to crypto, some of it went to a couple of other areas in terms of different assets captured the value of consumer. But let's say that nothing happened essentially for 10 years, that it makes sense why people would be pulling away. When investors lose money, they stop doing it. But if you look at what's happened the past two to three years, we have ChatGPT, Claude, Perplexity, all come out at the end of 2022, early 2023. So we should be on the precipice of another massive consumer technology wave. I actually think this one is going to be bigger than all of the past waves because one, the speed of adoption is faster, the market size is just a lot bigger today and the adoption's faster. ChatGPT went 0 to 100 million users in two months. And two, the margin profile of these companies should be better than the margin profile uh, of others over time as compute costs come down. Right now we already are seeing in the data that the team sizes, the OPEX side of the equation is much smaller. People at the Series a have about 25% less employees than they did in the mobile era or even like five years ago. And that's because when AI is writing so 75% of the code, you don't need as many uh, people on the team. And so if you're going to have an built in OPEX layer that's smaller and compute cost, if we think they're going to trend down over time, you're going to get much more marginally accretive companies. So bigger tam more marginally accretive companies. I think this wave is going to deliver five fifty $100 trillion companies instead of the past, you know what to $4 trillion cap that we hit. And when I look at that I say, okay, we're on the precipice of a new consumer wave that conditions that created past consumer wave are appearing and we have the possibility for much, much bigger companies than ever existed before. Those two things mixed with the gap makes me say this, this was kind of the mo. I think these moments in time only come a couple of times in your career and that's what got me so excited to jump out and start this firm.

Speaker A: You know, it's, it's a really interesting time right now and there's a number of reasons. So if we look at the past platform shifts, I mean some call them super cycles, for example, and you mentioned mobile, the Internet, semiconductors. And you know, the belief I think is fairly consensus right now that AI has the opportunity and probably will be bigger than any of those things because it's really leveraging each one of those things. To be able to, you know, provide the application. And it's hard to believe ChatGPT just came to the public presence just a few years ago and now publicly reported north of what, 13 trillion. I'm 13 billion in revenue raising at a $500 billion valuation. Which is hard to grok when you look at companies of yesteryear, uh, which are just so much smaller even when they went public at the same time. When you're in these consensus times in the 90s, like the late 90s, we saw Amazon, we saw ebay, uh, we saw Google. Right. These are all like foundational companies that today are massive companies. But we also saw the etoys and the, you know, the, you know, the other companies that were not, you know, obviously, you know, that great. So how do you know in a hype cycle environment where demand for AI is so much more than maybe the supply of great companies to which there's more competition for these companies, like where you sort of navigate and pay up for certain companies because as you mentioned, they could be a trillion, five trillion dollar companies. So what are you seeing I guess within the consumer space that might be non obvious from a trendline perspective going forward?

Speaker B: Yeah, I think the thing we specialize in is underwriting the leading indicators of product market pull before it's obvious that these are companies that are going to be highly monetizable. The product market pull initial metrics are things like the average number of sessions per day, the length of this session, what constitutes a session. I met a AI founder the other day who said, you wouldn't believe. I met 100 investors for my series A and not only one asked me what a session is. There's any. He was building a consumer video foundation model and I think that there is expertise in being able to identify the leading indicators that lead to plateauing cohorted, flatlining, retention. And if you layer on revenue on top of that and you have revenue cohorts that are stacking, you're in an amazing place. But understanding that very early on this is the behaviors the user is showing in how they access your product within the first days, hours of usage. I always ask founders, what are you measuring in the first two days of their usage that tells you which cohort of retention they're going to fall into. And founders who are on top of things know this, they have a number, they have a metric of what they're identifying. So to me that is a large part of the answer is being able to underwrite that before and this is the like non obvious part of and maybe it's. If it was obvious to everyone, I think everyone would be underwriting companies this way. But I can't tell you how many investors I've met who can't even say the words I'm saying because they just don't have the language. And so there really is something unique and special about low touch, no touch sales. And, and the per like consumer is not a category. It's a purchase level of agency that someone makes when they pull out their own credit card or pull out their own name and sign in and give you my email. And there's ways to underwrite that lead to more successful companies than not. So that's part of it. I don't know if I fully answered your question there though.

Speaker A: Yeah, it's totally helpful to understand some of those interim metrics that speak to things like product market fit or product market pull as you mentioned. And those things are critical in, you know, being able to identify real interesting companies. But there's also this extension of the question that relates to the future and how do platform shifts impact how you underwrite for the future? And you know, an example would be mobile. Obviously created a huge company in Uber and Lyft, um, both, which wouldn't have been the case had there not been mobile and GPS on phones. Are there similar trends that you see in artificial intelligence that could really shape the future of consumer and what you're really looking for when you invest in companies?

Speaker B: This is something we always talk to founders about, which is like, how are you leveraging two things on both the product and the distribution side, the latest advances in the tech in the shift in order to get to market faster than say an incumbent would on the product side of the house, the question is what are the primitives of AI similar to how, you know, geolocation was a primitive of the phone, the camera was a primitive of the phone. That led to all of these massive companies that if you could understand the second, third, fourth order effects of how people's behavior would change. This goes back to what the thing I was talking about in the beginning. The technical founders with insights about behavior change. It's the behavior change around the new primitives of the new technology. And so there we are, uh, there's a whole bunch of things that we're going to be looking for. But founders that are able to incorporate and also deprecate the right models at uh, the right time is actually going to become a signal for how fast they're able to train things in and out as well as how fast there, as well as things like memory and context to inference and as well as like even their data sources. These are all going to become things on the product side that are much more indicative of they understand the technology and they're going to be able to build new experiences on top of it. I personally don't know where the experiences are, but that's for the founders to figure out. On the distribution side though, um, my strong suspicion is that the next cohort of companies that replace the mobile companies are going to be ones who leverage the new distribution channels being created by OpenAI. Anthropic perplexity. All of these companies are going to have app stores. Fiji Simo famously has been hired by OpenAI to run app stores and they're probably going to take a cut of it similar to how Apple did the older companies, Airbnb or Square or Uber. They're going to be more reticent to let a lot of their traffic go through those sites because that's just going to eat into their existing margins versus a new company who doesn't have any other option except to get to market that way is 100% going to take that opportunity and take that cost in order to get scale. And so we also are looking for founders who not only understand the new primitives of the technology and, and therefore what new product experiences they'll create, but also to understand how they will meet the users of the future where they're at. There's a stat that 73% of teenagers interact with the AI Companion multiple times per week. And this is already happening today and it's really that. And um, when they say AI companion, they're not talking about the OpenAI or anthropic chatbots, they're talking about the AI characters, the ones that have a personality that talk to them like they're your friend. And so when you think about that's going to become someone's primary interface, uh, to the Internet in the future, well then what would you build as a founder to distribute through characters? And how would you change your product? Is it that you have to build websites that are uh, agent only facing and the agents are crawling the data and presenting it back to the user? Or is it that you're inserting your ad in more character friendly language, you're describing your product as a character's companion, as a character's accessory? There's different ways you can frame yourself that will fit into these distribution modalities.

Speaker A: Yeah, it's so interesting to think about how much is going to change and you know, again, going back, not only have we seen this platform shift, but this platform shift is moving quicker than any other past platform shift in terms of adoption, in terms of changes. And it's always fun to kind of future cast a little bit and say, okay, what does the world look like three years from now, five years from now, ten years from now? Which, you know, we all get paid to do in some respect. And it's just, it's astounding how quickly things are happening now that we've looked at the future. Maybe we'll end with a question. Since now you've been in the venture seat for seven years, what's the one thing that you know now that you wish you knew back when you started in vc?

Speaker B: Trusting your gut. When you meet incredible founders, there's very little you can go wrong with when you know that you've seen. I mean, we've met thousands of founders, probably 10. I've met tens of thousands. I'm sure you have as well. When you see a founder who just split spikes in a couple of areas, or any area really, that is so rare and distinctive that it stands out to you and you say, that was a strange conversation, that was different. You probably should just trust your gut and back them. I've made my most expensive mistakes when I had that feeling immediately in the meeting and then later on as I tried to post, rationalize the numbers or this or that and explain it to my colleagues and eventually get whittled down to, oh, it's a competitive market, there's a lot of people, you know, uh, that was always a mistake. I always famously say, Adam Guild from owner is one of my famous mistakes in that regard. Just absolute magic when I hit it off with him and he's, if you've ever met him, super unique founder who deservedly his company has been marked up to reflect that. Ah. And nowadays they still have. I'm happy he'll still send me founders even though I passed on. He'll still tell founders that, uh, I'm a great consumer investor they need to work with. But yeah, those mistakes are expensive. You know it, you feel it in the moment. And this is why. Also, I think part of the reason of being so excited to go to a kind of single trigger decision making model is that once you've built that intuition in your gut, you need to be able to act on it. And there is a period which you don't have it and you probably should be in a place where you have a lot of checks and balances. So I'd say for the first few years of my venture career, it was very healthy for me. And then later on, it starts to become less so.

Speaker A: Yeah, yeah. It's something I hear a lot from VCs in terms of trust your gut or trust your intuition, which, you know, there was a story I had Mike Maples on and he told the story about Justin tv. So Justin Khan, which became Twitch, which, it was a weird thing, didn't, like, didn't really make sense. And if you brought it to a committee, they would probably tell him not to do it because it didn't make sense. And any business rationale and like, what is this thing where, you know, people are following around it, uh, obviously became a really big exit for them. And it all came down to trusting his gut, you know, with the founder itself. And going back to this comment of single trigger, meaning that you or Vanessa can make a decision on a company based on your own feeling and conviction without having to get consensus. And I think in the early days, getting consensus is a good way to learn and pressure test your ideas and get that pattern recognition. But I do see increasingly, you know, people wanting to do things where you have to have a framework where you can trust your gut, make the deal. And, you know, remembering what I've seen is like, you can lose one time your money if you're wrong. But the act of a mission, meaning not trusting your gut, could mean losing out at a 10, 20, 100, 200x type of return on a single company. So it's definitely, you know, it's a definitely sort of great learning. This has been a lot of fun. Mercedes, thank you for being on.

Speaker B: Thank you for having me. This was really fun.

Speaker A: Thanks so much for listening to another episode of Venture Lock. We really hope you enjoyed our conversation with Mercedes. If you'd like to get new Venture Unlocked content straight to your inbox, go to ventureunlocked.substack.com and sign up. Or go to Apple Podcasts or Spotify and subscribe. Thanks again for listening.