Wins Above Replacement: The New Way to Judge Founders

Speaker A: Foreign. Welcome back to another episode of Venture Lock. In this episode I sit down with Carter Ream, co founder of M13, to explore his journey from Goldman Sachs to starting a CPG beverage company to building now what is a bicoastal multi billion dollar venture platform in M M13. I've known Carter for nearly a decade and he sits on the board of the company I co founded called Allocate. Our conversation was a dialogue spanning everything from risk framing and asymmetric upside, the concept of companies needing both a microscope and a telescope during their journeys, and what he thinks most investors get wrong about founder value add. We also touched on how to make sense of what is becoming a very active and confusing venture market.

Speaker B: Samir 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 and 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: Carter, Great seeing you man.

Speaker B: What's happening? How are you doing?

Speaker A: I'm good, I'm good. I've been looking forward to this conversation and sorry we couldn't do this in person but this beats the alternative not doing it. So you and I have known each other for a very long time. We're going to get into the story of M M13, but I think a good place to start because you have such a unique story and I want to go back post Columbia. You're at I ah think Goldman at the time and you have this kind of fork in the road of being an entrepreneur or taking this job at Oaktree, so maybe let's start there and what you were running toward at that point.

Speaker B: Yeah, so my brother and I both went to Columbia as you mentioned. Neither of us knew what we wanted to do when we grew up, so we both ended up as investment bankers at Goldman. So I always joke around it could have ended up worse. I was on the deal team that took KKR public so one of the first private equity firms to ever go public. So I spent my entire two years working on that deal, was debating whether to go work at KKR or move to the west Coast. I decided I'm a palm tree guy and wanted to Move to la. So I took a job at Oaktree Capital in their private equity group. Conversely, my brother worked in consumer products investment banking and he was on a deal team for a 30 year old who was about to IPO a billion dollar company. And I always joke, now it seems like every 30 year old's about to IPO a billion dollar company. But 15, 16, 17 years ago, that was not the case. That 30 year old kid was this kid named Kevin Plank. Therefore, the company was obviously under armour. And so my brother got inspired by him, called my dad and said, uh, I'm leaving Goldman to start a company. And in fact, I persuaded Carter 364 days after I'd taken the job, three days before I was about to start, not to go to Oaktree. I always say if somebody like us left a place like Goldman Sachs today, they'd say, of course you're leaving to start a company. People have to remember 15, 16, 17 years ago, they didn't actually think we were crazy. They honestly just felt bad for us, like we were throwing it all away or something like that. So, yeah, so we, we left and didn't know what we wanted to do, but came up with an idea for a beverage brand which we would then kind of build up and sell a decade later.

Speaker A: Yeah, I'm always curious about, like the mental model that people go through. And there's one that feels very safe, which is going to Oak Tree, getting a W2 income, probably learning from really smart people, or taking this jump into entrepreneurship, which is wrought with so much uncertainty, so much risk. You've always talked about, like, this asymmetric sort of bets that you make in your life, like, how did this fit into that model that you now talk about a lot?

Speaker B: Yeah. So it's funny that's where you went, because that's exactly right. So I obsess about risk and probability adjusted outcomes. You've heard me say it a million times. I'm looking for asymmetry to the upside. Risk and probability adjusted. And so it's really funny, when I would tell people I turned down Oak Tree to start a beverage company, they would say, that's so risky. And I'd say, I don't think you're thinking about risk the right way. And I said, okay, let's play this forward. So if I go to Oak Tree for two or three years, I'm going to try to go to HBS or Stanford gsb. Right. And I will look strong as a candidate, but I look like a lot of other people. Another Ivy Leaguer who worked at Goldman Sachs and worked at a top tier PE firm. Now I said play out the other scenario. I go start a company and there's two outcomes. Either it will be successful, which is what happened and I never need to go to business school. In fact I've taught a case study on our company for 13 years at HBS or I'll fail miserably at it two or three years from now. And 16, 17 years ago if my candidate, if my application said I was a uh, Ivy League former Goldman Sachs investment banker who actually failed at a startup, I would be a shoe it. Right. Because that was a one of one and right. And so I talk, I use that example all the time because it was actually less risky, it seemed more risky. But when you probability and risk adjust that it was a no brainer. Right. And so I talk about it all the time. At um, M13 people say venture is all risky. And I say yeah, there's risk in everything we do. Right. When you walk across the street there is a risk that you could be hit by a car, but right. There's a probability. Adjusted chances are you're not going to be hit by a car. Same thing on probability. Do you know Samir, you or I have a greater likelihood to be an NBA basketball player than a unicorn founder. That's crazy. But that is what the probability would suggest. It's just simple math. And so that's one of the things that I think from an early age I was thinking about risk and we obviously think about it and obsess about it at M13. Every person that told me that was risky was not thinking about risk the right way. Right. Because that was the least risky thing I've actually ever done. If you play out the scenarios and play the game of dominoes for it.

Speaker A: I actually want to come back to this risk discussion a little bit later when we talk about M13. And venture inherently should be risky, but it's not always practiced that way. And I want to hold on to that thought for later. But as you, you think, think about, you start the company, you uh, ultimately sell it. I think it was maybe 10, 11, 12 years ago that it ultimately gets sold. And the natural sort of, if you look at more like expressible like this is how you would go, you'd probably start another CPG company, maybe you invest in CPG companies but you decided to get into venture capital. How did that happen of uh, from Goldman to potentially oak tree to starting a company that is a beverage company and then going into investing in Technology companies.

Speaker B: You're telling me it's not obvious that the guy who used to deliver booze out of the back of his car should have a few billion of AUM M&A VC firm? But yeah, I think it's totally right. Right. So I think the thing about launching at the time a consumer company is it was the ultimate MBA case study. Right? Because by when we started the brand, we were literally delivering out of the back of our car for the first six or nine months. By the time we sold the company, we were at every major retailer in the country and things like that. Right. And so I think there's two types of founders that are incredibly valuable. One are people that have their 10,000 hours or their 20,000 hours. Right. You're a great example of that when we turn our attention to Allocate. And what got me excited, I think you were a one of one to start Allocate because you knew the space so well and that, uh, you could control the indicators of success that would get you up the J curve. So either 10,000 hours. The other type of founder, I think that's incredibly valuable depending on the space they're playing is kind of a generalist or Swiss army founder. Right. Because what I always say is we all want to celebrate and say, oh man, that company was just up into the right. Right? But my experience at M m13, we've been in the Cedar series A of 18 unicorns. We've been around so many great companies. And my experience is up into the right actually looks more like an ekg. Right. It's just like that. And eventually you just want to get up into the right. Right. Where the other analogy I use is when you look at a startup that ends up being successful, it looks like a swan. It's pretty and it's gliding in the water and everyone celebrates it. But if you know anything about swans, what's going underneath the water is they're kicking and paddling and fighting the current and everything like that. Right. And so when I think about it is we just got such a generalist experience, meaning you have to touch everything when you're a startup founder. And so you. I think that has served us well. Right. And the principles, like, you hear me quote Warren Buffett a lot and I quote, like what they would teach you at an HBS or Stanford GSB classroom. Combination of that with actually having to do it in the trenches, I think has allowed me to be very effective as I've guided companies forward. And the main reason we kind of shifted from Consumer to doing all tech tech stuff is I think the role of a venture capitalist is the role of a hockey player. Right. So my I believe in private equity. Some people will agree with this, some people disagree is you learn how to buy a widget factory in your 20s and every decade until they throw you a retirement party, you try to get a little more knowledgeable about how to buy that widget factory. Conversely, in venture, I think you're an ice hockey player. You're trying to skate to where you think the puck is coming. If you didn't get there in time, you try to skate to where the puck is going. And so there was a time, whether it was consumer or obviously we, we kind of did a lot of great DTC companies like Warby, Parker and Ring and we seeded all these great companies where that was an attractive space from a risk reward. Then we believe the risk had increased, the reward had it increased. And so we kept moving. And so for us, it was a very natural progression from consumer to consumer software and then keep moving. And I think you see that from all the great venture capitalists. They have a prepared mind. They're looking around corners, they're trying to go to where the puck is going. Because at the end of the day, our job is to invest in innovation and through cycles.

Speaker A: Let's go back. And I do want to bring it forward because you have four funds that you've already done over $2 billion in assets under management, invested in a ton of companies from traditional CPG at the very beginning to consumer tech to now, um, a little bit generalist from the standpoint of AI kind of is eating everything. But you've said to me many times, you know, you think about founders should be looking through a microscope and then at a telescope on the other hand. And when you were starting off M M13 with Courtney at the very beginning, what was the microscope that you were looking through and then what was that telescope and how much of that has actually turned out the way you thought?

Speaker B: Yeah, in four. It's, uh, not totally obvious what I mean when I say a microscope in one eye and a telescope in the other. For those listening, microscope in one eye means you got to get the stuff done day to day, right? You got to be so ruthless when it comes to execution. The telescope is to look out to understand where the world's going. I would argue in today's environment that telescope has never been more important because competition comes from two categories over. You think about the. I don't believe a whole lot is different in this cycle compared to past cycles. Right. VCs want to say everything's different, it's AI. I don't believe that to be factually accurate. I think what is fundamentally different about this cycle, because we said the same thing with cloud computing, we said the same thing with mobile, we said the same thing with the Internet. But what I think is different is the steepness and the pace of this curve. Right. If you had said a billion people would download ChatGPT and how much this has changed, that has clearly changed. So therefore, the telescope and playing a game at chess, I think, has never been more important for founders. I think the microscope for me at the time was everyone wants to talk about what success looks like. And people say, well, what was like the one or two things that you did that allowed you to be successful? And I don't think you can do one or two things and be successful. I think if you think about compounding is the greatest invention of all time, I think it's that, uh, every day and every week, you just get 1% better. Right? If you get 1% better by the end of the year, every day, you're 37 times better. And so the microscope is, you don't get to those next stages unless you're just ruthless on execution. Having said that, I always say, so then take the telescope. I always say that vision without execution is just hallucination. Or Thomas Edison said that. I borrowed that from him. But it's a famous quote, right? So when you think about it is then you need to look out and go, where's the world going? Where do I want to play? What are the shifts? Right. And then you got to get back to the microscope and go towards them. And so it's a difference to me, it's always about having that vision, but then putting your head down to go towards that. But I think what's different in this market versus press markets is you must have strongly held beliefs loosely. And what I mean by that is I always have a thesis, or I'll say my working point of view is, but the world is adjusting so quickly. You can have that set in stone. Hence you got to have strongly held beliefs, but very loosely, because things are changing so quickly.

Speaker A: Yeah. So, I mean, that was, uh, one of the things I wanted to point out, which is like, it's, this is not a fixed telescope and microscope. It's always evolving. The inputs change. I mean, three and a half years ago, we didn't really even think about the application or the opportunity set. Uh, with AI, right. It was very early, even though AI has actually been together for. Been in place for a while, but not in the way it's being utilized now. So as you think about the evolution of the business, what were the things that you were tracking toward that helped you sort of modify the way you ran the business? This is not too dissimilar than a company, right? So like, as a company, we had a thesis five years ago. That thesis generally and directionally is the same as what it is right now. But the twists and turns of how to get there have changed dramatically. How does that translate in a venture firm versus like when you were running Vee with your brother?

Speaker B: Yeah, yeah. So as it relates to M13, we always say we wanted to build the venture firm that a founder would have built for themselves, right? And so we have about 35 people between New York, L.A. san Francisco, and we only have one person that has ever worked at a venture firm. Now that's either crazy as, uh, or as I say, that's by design. The reason that's by design is we didn't want to create a better vc. We wanted to create a different vc. And so I love kind of using fresh thinking. I always say you have to respect what has been traditionally done in the past while pushing the envelope and thinking about new mental models. Right? And so very much it's why, Samir, you and I, when we catch up, we always have such a good time, like sharing notes, because we run M13 just like you run Allocate, right? We. Some firms don't think of themselves as best in class companies, but we do KPIs and we do vision statements and we do all that. Yes, we have a collection of great investors who deploy capital for us, but at the end of the day, we're trying to build an institutionalized platform that helps our companies execute better and that acts as a flywheel where the bigger we become, the stronger model becomes. And I think one thing that you and I always talk about is in this market, we're all playing kind of a game of dominoes with a game of chess, right? And so the game of dominoes is you say, look, this is where I want to get. And how do you. What are the dominoes or the building blocks? Right. Founders always hear me say, brick by brick, there is no shortcuts, right? And eventually, so you think about a bonfire. People see the bonfire go, man, what a cool bonfire. What they don't realize is most bonfires were created by a bunch of little fires that started sparking and then they come together and then you see this glorious bonfire. And I think building a company is the same way. And so the dominoes is thinking ahead, the chessboard is going, okay, what's changing? So I mean, to your credit, Sameer, you always knew that private markets, there was a fundamental shift and a lot of tailwinds towards investing in private markets. You always knew that leveraging technology, you could remove friction in those and no different than Uber did for transportation. By removing friction, you expand the market. What you didn't know was that AI and therefore putting insights in this horizontal orchestration layer could further accelerate your business. But when you saw what chat, GBT and those were doing, not everything could be done at that point. But I remember you calling me and going, this is how our vision is evolving. Right. Because you go, all of a sudden it's from a, uh, I can expand markets by removing friction to I can fundamentally change behavior and allow people that they will not be able to invest in private markets outside of Allocate as well as they could if they had your insights in a product. And then kind of like in my swan analogy, you've kicked like hell to keep up with the market and the ever ending shifts because the things you and I talk about it from AI functionality on allocate today are fundamentally different than three months ago, six months ago, and definitely 12 months ago.

Speaker A: Yeah. And this is why the world is constantly evolving like we're evolving. The discussions we had three years ago, very different than the discussions we have now. And it always comes in our, in our conversations and even on the M.UM13 side. M13 is a very different firm that I met in 2017 and 18 when it was the early days and it was very traditional in many ways. And uh, yet you still had this kind of like I would say true north of how do we create something that has the ultimate service mentality toward the founder? Right. What actually moves the needle for the founder? And that's when you created the propulsion team, created people that, or at least hired people at the partner level that had been in operating roles. And we've talked a little bit about the similarities of going from operator to asset manager the way you run a firm. What are some of the dissimilarities and what did you have to unlearn as an operator and now investing in companies? Because I do think there's sometimes a downside of operators trying to insert themselves too much in certain cases. But maybe give us some of the learnings of like the biggest changes and adjustments you've had to make some good questions, Samir.

Speaker B: At the end of the day, I still consider myself an operator because I'm building the firm of M13. I actually view that as my primary job and being an investor is my secondary job. But in If I'm successful 10 years from now, I believe it will be because I built a great platform. No different than the LA Dodgers is a great platform in sports, or Goldman Sachs or Bain Capital or something like that. So I actually still consider myself a founder. Today I'm just building a venture firm and what we do is we deploy capital and then we work with founders to build better companies and hopefully increase the likelihood and probability of success. But then when you, if you use my investor hat right, I think one of the things is like, I can't tell you what to do, right. I can guide you, I can push you, I can push your thinking. And I think we've all had people around us or on the board. There you go, man. That guy, uh, he just has no idea what he's talking about, right? Because he's never done it. Right. Even if I were to say, oh, this is what I did it when I had a company 10 years ago, you would laugh at me, right? Because it was a totally different time. I think the, the biggest adjustment for me is. Yeah, is how do you. My job is to push people's thinking. Whether it's on investment committee of a deal that somebody else did. My job is not to tell the world class investors that we have whether they can do a deal or not do a deal. This isn't going to ask your parents if you can stay out on prom night. My job is to push their thinking. My job is to make sure they're looking around corners. And I think if I think about my conversations with you, Samir, a lot of times we agree, sometimes we agree to disagree, but we're always pushing each other. And I think that's the key. And one of the things I talk about, great organizations, whether it's what you do or what I do, they have different tensions among the team. And what I mean by that is, in a very positive way, I don't want people that all think the same. I want different prejudices and biases and experiences all coming to the table and, and I want that to push the discussion. I want them to push what's possible. Hey, Carter, this is what every other firm does. And I go, cool. I can understand that. Respectfully, here's some fresh thinking. And the answer, in my experience is oftentimes in the middle. But I think that's the key is the best companies have fresh thinking, but it comes from different archetypes, different biases, different prejudices and positive tension that leads to better outcomes.

Speaker A: When you think about some of the folks, because you're investing often at the very early stages before things are obvious and we can talk a little bit about the market today, consensus, which seems to dominate everything and then where are those non consensus opportunities which seem to be decreasing because everything is AI? What are you looking for in the founder itself and how much of that is influenced by your time as a founder?

Speaker B: Yeah, yeah. I think I always tell people I'm a better operator because I'm an investor and I'm a better investor than I'm an operator. Right. Because in the early stages when we where we invest in the Cedar Series A, you're dealing with imperfect information. Right. By the time you get to series D or C or E, honestly any private equity trained guy or Goldman Sachs trained guy or girl can run that analysis. But in the early stages, you're looking at an incomplete puzzle with only a few puzzle pieces and you're kind of trying to go, can I see this coming together and forming a great puzzle or a masterpiece? Right? And so m, that to me is the key. People say he's a great founder. And I go, what do you mean? Like, and so what we say is we want founders that have a really high wins above replacement. So wins above replacement, it's a sports statistic made famous by Billy Bean in Moneyball. So what it says is LeBron James in his prime accounted for the most wins above his replacement compared to that. And so there's take a founder who will bust through walls and do whatever it takes. People say he's a great founder, he'll do whatever it takes. He's a great founder for certain ideas. Can you imagine if that founder archetype ran a financial services public company? He'd actually be in jail. He'd actually be the worst founder. You actually are not allowed to break the US financial markets. Right. And so when we think to ourselves, like again, to go back to you and allocate, if you had come and told me you were curing cancer, you are not a great founder to cure cancer. You came to me and said, I have my 10,000 hours in this space. I'm uniquely positioned to, I believe, disrupt and participate in the tailwinds that are going to the private markets and this is how I'm going to do it. So you had a really high winds above replacement for this Idea. That's why there are two or three other competitors of yours that no longer exist. I think maybe one or two have been swallowed up by you because they had the same idea. Because ideas are cheap, execution is dear. But you were uniquely positioned to take advantage of what the others saw. But you had the skill set and the 10,000 hours to go after it. So I think it's very nuance. The one thing I talk about with the team all the time is in the early stages of investing. You cannot speak in generalities. This is a, uh, once in a lifetime founder go. Then go deeper. This company could be a deca court. Explain to me how. And so when we talk about deals, I say every deal should be able to be laid out on a cocktail napkin. On, um, the front should be what my thesis is. My thesis was Samir is uniquely positioned to go after a concept with lots of tailwinds in terms of a shift tribe towards the private markets and X. And the back of the cocktail napkin has to be the meth. Okay. If Samir gets 500 RIAs to do this, based on this, I think he can create a $10 billion company. And so, yeah, I think we just think kind of uniquely in that respect.

Speaker A: And I really like this analogy of wins above replacement. I'm a big A's fan and, uh, unfortunately now until they moved to Vegas, but if you look back, I mean, they were able to find these undiscovered gems where no, everyone else viewed them as cast offs, where they were able to bring those people in. And if you look at the late 90s, early 2000s, it was a team that was winning 90 to 105 games per year. And when you think about wins above replacement, there are some exceptional examples like you look at if Jeff Bezos, uh, starts company, which, you know, Prometheus or Elon Musk or Travis Kalanick, all these guys are massive. High wins above replacement to a level. How do you work with founders based on their level of war? For example, wins above replacement. Do you treat the people that are super, uh, high war differently than the people that maybe have a great idea but are lower on the war side?

Speaker B: Yeah. Before I answer that question, it's interesting. Like take that example, right? What Travis is doing with Adams and what Jeff is doing with Prometheus are relatively similar, right? Similar thesis is it's interesting for everyone who's listening or you to go. Who has the higher war for that idea? Is it Travis who's obsessed about transportation for the last 15 years, or is it Jeff Bezos Right. And that's a great example. It's like. And then also we think about it all the time when we're investing. Do we have a high war? Like, I think, um, I was the perfect series A investor for you. I know what you're doing. I can push you, things like that. I would not be have a high war to invest in a company during cancer. Right. So we talk about war all the time in terms of founder fit, but also us as an investor fit. And then answer your second question. We've backed 12 previous unicorn founders in our last two funds. And, and so we're not backing people that quote, unquote, need help. We are, uh, tend to be backing some of the best. So I think you treat everybody the same. But what we do is when we invest, we say what needs to be true for this company to be able to get to their next round of funding and be able to scale. And obviously a repeat founder or even somebody like you, Samir, given your experience. Right. We're going to try to make an impact differently than we are first time founder. Right? First time, um, founder might be, hey, let's really spend a lot of time helping them with how to hire because hiring is one of the hardest things that everybody will do versus a unicorn founder. You might be kind of thinking about how you get into hyperscale motors, things like that. So I think for us, like as an investor who's very hands on and takes an operational approach with our founders, what is dictated is how we make an impact. Because again, we just want to kind of supercharge what great founders are already doing.

Speaker A: It's such an interesting framework because I think about, and there was a interview recently that Travis Kalanick did, and I don't know if you actually saw the interview, but he was kind of going through his time at Uber and obviously he went scorcher on some VCs. In fact, there was this whole Twitter thread around most VCs at, uh, negative value. And it's often because they treat founders the same regardless of sort of their war. Why is that in your mind? Why do so many vcs have this reputation with founders?

Speaker B: And yeah, it's a good, it's a good question. Yeah, I think I, I heard Travis say that, uh, he thinks that if Andreessen would have been his lead investor in Uber, he'd already be doing what he's doing with Adams. Right. And I think it's just, again, not all vcs are created equal. I think you look at someone like Andreessen Horowitz A16Z. They have had very good vision. They think big, right? They're famously saying, if a great founder comes to them and wants 100 million, they insist that they take 300 million. Things like that. And other founders, other VCs. I think generally speaking, venture capital as an asset class has a lot of institutionalizing to do. And I think a lot of VCs think that different rules apply to venture than private equity or other kind of very established asset classes. And I think we've all seen it. Not all investors are created equal. Right. There's so many tech companies that. You know, I saw something recently that was valued in over a decacorn and sold for barely a billion dollars and had some very smart VCs on the table. And I was just thinking to myself, man, how did those smart VCs not guide this? Better to lock in more value? But, yeah, I don't think Travis is totally, directionally wrong, for lack of a better term. I'll say.

Speaker A: Yeah. And look, I mean, a lot of people have actually jumped on that train, and there was a lot of discourse, and even Vinod Khosla, going back that said, uh, I forget what the exact stat was, but it was something like 80 to 90% of VCs, in his mind, actually don't add value, but they add negative value. So they actually work against the company's best benefit either, because the advice is not they show up on a quarterly basis to a board meeting. They want to. They want to pontificate because they want to add value, but fundamentally are missing the mark. And now the founder is running around looking at feedback that ultimately either isn't, um, aligned or they're forced to take on. And so I think, where do I

Speaker B: send Samir on allocate? How am I doing? What's my. Give me my. My report card in front of all your listeners.

Speaker A: Well, I mean, I think it's one where. I think the best conversations with your investors are ones where you can have them outside of the board meeting, when you're just picking up the phone and saying, okay, I have this problem over here, and you feel that the comfort is there that you can be vulnerable. And that's what we've always had as a relationship to which you're like, yeah, don't worry about it, or, hey, this is how you think about it. That's the type of relationship that's helpful, which is when I have a need on something, whether it's talent, whether it's fundraising, whether it's a, uh, go to Market sort of strategy. I can pick up sort of the Rolodex and you're one of the, you know, like if you look at the priority names I can call you and it's not. I don't feel like I want to be judged, but I'm going to feel like we're aligned in building the business together. And I think that's actually really rare. In fact, most people just move on from companies after a couple of years. And so I actually agree heavily with Travis now being on the founder side. That look, the, the delta between a great VC and a mediocre VC couldn't be as wide as it is right now.

Speaker B: That's the nail on, um, the head, um, the delta between good and great when it comes to VCs and is just so, so great because you think about something like private equity. Most people have followed a traditional path and so they've acquired certain skills to get to being a PE investor. Venture man. There are so many different ways to become a venture capitalist, not at all created equal. Like take Carl Alomar, one of our partners, right? He had built and sold two of his own previous companies. Then he took DigitalOcean and pre revenue to a $5 billion IPO. He reminds me today it's an $18 billion company. But yeah, he's totally right. He's totally unique, or not totally unique, but right, he's on the upper echelon of the type of board member that could help you hyperscale or get into ipo. Quite honestly, he's going to be able to guide someone on, um, towards an ipo, maybe better than I have, versus I've spent a lot of time kind of in the trenches. We always say in venture there's only two phases. It's trying to find product market fit and then it's hyperscaling. And so, right, we can spend a ton of time as a founder and as an investor and trying to find private market fit. And then at least at M13, right, we have so many operators. Since everyone's an operator by background, I know who to call on our team to go, okay, these guys are exploding. Let's bring in our head of talent who scaled DigitalOcean or CARL to talk to this company, which he did. We have a company in our portfolio that will remain nameless that in less than five years is getting wants to be IPO ready. Sure, I could opine on that. But instead I said, actually, let me just go grab Carl. Here's a guy that actually got a company ready for an ipo. Mhm.

Speaker A: Touching on that a little bit. Because what I've seen from you guys and from you in particular is when you don't know something, you don't pretend, you know, to just to pontificate a try to add value, say, look, it's not really my arena, but let me connect you with Carl or Lateef or anybody on the team that might have a different purview that could actually be helpful. And I always say for a lot of VCs, like 90% of the job is do no harm and then the other 10% is like, where can you actually accelerate things? And so on the 10% acceleration, it also requires you to hire the right people. Right. So you think about Carl, you think about Sarah, some of the folks that you've brought on. What are you looking for to ensure that there's consistency of that do no harm and that you are the type of firm that you sought out to build because it's not just you and Courtney anymore.

Speaker B: Yeah, yeah, I think it's just fundamentally different. Again, if you go back to earlier in the conversation, I said we set out to create an institutionalized platform. We didn't design, set out to raise funds. And so again, we are company builders. I said I think of myself as an operator first and an investor second. And so for us, it all starts from the way you. I always say the difference between good and great people is great people do consistently what good people do sometimes. And so for us, we obsess about our technology stack, we obsess about our culture, we obsess about our processes, we obsess about our agentic AI. And I think that's the key because that means consistency. And that consistency, I think, is the reason, you know, in the recent Dow Jones ratings, we were the third highest performing venture firm of the last decade in North America based on performance data. Is that like we obsess about just trying to do the right things over a long enough period of time. The thing that I talk about all the time is like Vegas. If you're going to go to Vegas and you want to play blackjack, if you have the best odds of winning, go to the gift shop, buy the little laminated card you, and sit for as long as you can at the blackjack table and just follow those odds. Yeah, we've all been at Vegas and somebody will say they'll hit the dealer was showing 6, but they'll end up with 21. And they say, gosh, I knew I should have doubled down. Yeah, that's the answer the answer is you absolutely should have doubled down. Right. That was an outlier circumstance. So what we always think about at the firm is let's separate the decision making from the outcome, because sometimes you're going to have outlier outcomes, uh, to the positive. Right. We invested in SpaceX at 15 billion out of fund one. That IPO price was an outlier outcome to the positive. But that's what you get when you invest in great companies that are market leaders from visionary founders. And sometimes I, uh, talk about investments that we've written down to zero. And I said it was the right decision, it was the right investment. This happened and this should not have happened. And it was an outlier. And so for me, it just starts with that consistency. And again, it's building a culture and a platform no different than if you're the LA Dodgers. Right. You have certain ways that you go about playing your game on the baseball field and that leads to better outcomes over a longer period of time.

Speaker A: Well, it's great that you bring up that because it actually reminds me of. And you probably, I don't know if you've read the book or seen the movie, but Annie Duke, who's a, uh, World Series of Poker player, and she actually talks about separating outcomes for decision making and, and focusing on process. How do you, what is that retrospective, uh, that you do like to be able to distinguish between was it lucky or was it the right process that can lead to consistent returns and more outliers? And these things are interconnected. It's not like everything is 100% luck or a hundred percent skill. It's usually some, some combination of that.

Speaker B: Yeah, yeah, we, one thing we talk about at the firm is One of our 10 principles is kind of be brutally honest in the short term and hopelessly optimistic in the long term. It's kind of similar to my telescope and my microscope. So we do retrospectives on anything and any investments that don't go right. I'm thinking about raising the bar. The other day we did a retrospective on, uh, a $2 million check. And I was like, gosh, we're going to do a lot of retrospectives because Game Venture is a game of outliers. And out of a $400 million early stage fund, but I love the team on a very modest sized check, which will a lot of times not be successful. Did that. And we just, we do exactly the same as that. We just separate out the two. And conversely, when things go well, we say, yeah, we got lucky there. Better to be lucky than good. I Always say chance favors the prepared or one of the things we say at the firm all the time is the harder we work we find, the luckier we get. But I think that's exactly right. We obsess about the decision making and then, I mean Samir, I think you probably thought when I walked into your office eight years ago and said I was going to build this differentiated venture firm with former operators with a focus on hands on execution, you probably thought I was, had a lot of puffery or type of thing. But I tell the team is you just got to wake up every day and execute. And whether it's my job or whether it's the founder job, if you just execute well enough over a longer period of time, again that's the poker, the blackjack analogy, the right outcomes will follow along the way. There will be outliers and. But the odds don't lie. Right. And so that blackjack analogy, that was an outlier. You keep just sticking to it, but you kind of got to respect the process. Right. Because you go well we got lucky there or that should not have happened. But you go just keep doing the right things, keep doing the right things. And so it's a belief that the right outcomes will follow.

Speaker A: Yeah. And you develop your own rubric of what that right process and how do you foster that right process through the right people decision making framework, structures, all, all the things that allow you to get into luck more often. And when luck hits, it's really a lot of luck versus a very small outcome. And that is where kind of the skill comes in which over long periods of time skill does kind of shine through. When you think about, you mentioned eight years ago and obviously we're now in a very different time where AI is everywhere. The amount of capital going into companies funds is as, is at an all time high. If you and I talked eight years ago and we said, okay, there's going to be three companies in the private markets valued over a trillion dollars within seven, seven, eight years. We'd have been like, that's crazy, right? Like now there's two for sure. One was SpaceX, which just went public. Anthropic, close to that. And OpenAI very close to that too. What is the game on the field today?

Speaker B: Yeah, so it's so funny, right? Because I heard you kind of tee it up earlier in the conversation. You said it's so different, everyone's flocking to a handful of compounders. Right. Open a nine, uh, anthropic, things like that. But what's so different about that because eight years ago we would have talked about Airbnb, Uber, Pinterest. It always happens, right? Again, all I think is different is the outcomes will be bigger and they will be there faster, right? Yes. Like, and so last cycles, $1 billion company will probably be a $3 to $5 billion company in success. And Uber was $100 billion company or Airbnb in the last cycle. And this cycle's version is a trillion dollar company. It's only. And it happened faster and bigger. Right? I think that. So I am of the opinion that we've seen this before. It's just more magnified, shorter time frames, bigger magnification. Right. We went from running like a, uh, Indy 500 car to an F1 car. Very tight calibration. A few seconds is the difference between winning and losing type of thing. And so I remind my team of that because I don't think different rules apply. I think for us we focus on three things. At M13. We say discipline, right? Everyone loves a frothy market like this, but these are the hardest markets to deploy it, right. It's actually a lot easier to avoid, like deploy closer to the bottom of the market than the top of the market because you make your money when you buy, not when you sell. And therefore you have a larger margin of error. So we got to be disciplined, right. Two, we have to obsess about the value layer, right? So take what Travis is doing at Adams. He's doing food transportation and mining. Now food and transportation makes so much sense. He has 100,000 hours in the space and they're interconnected. If he wants to bring down the price of food delivery to just slightly more than a home cooked meal, he has to get everything right from how the food is cooked in automation to how it's delivered to, etc. But why mining? Mining is because he wants to get exposure to AI. He wants to get exposure to chips. So he's choosing a value layer that is mining because of that. Right. And so again, the skill of a VC in this market is not to know that AI will change the world. My housekeeper today told me the same thing. She knows that, everyone knows that, right? The value is, where do you get that value layer? Where's the best risk and probability adjusted value layer to kind of invest behind? So take one of our fund. Two companies for M13 just exited for just shy of a billion dollars and in less than five years. And it was a 21 year old kid who was using AI and technology to disrupt 911 call centers. Not a totally obvious play, except totally obvious if you think about it, because 911 call centers were designed to work with analog phones. And do you have a home phone anymore? So, yeah, totally obvious to me, not obvious to everyone else. But the positive of that is he had very little competition. He just had to execute. He wasn't fighting off competitors every single day. Or Polymorphic is a company we have that general catalyst led around behind us. It's a fantastic founder who's using AI and technology to disrupt local municipalities. Everyone's going after, uh, big government. He goes, you know how many towns there are in this country that still use pen and paper? And I can get them to pay me 4 cents per resident. Let me do some quick math for you, how quickly that adds up. And we saw it a general catalyst. And so I think, and so I think there are a lot of, to me, similarities to every past cycle, today's Anthropic and OpenAI or last cycles Uber and Airbnb. And so. But I think the, the other thing is, what's different about this cycle is in the last cycle you had innovators competing with the innovators, right? So it was Travis versus John Zimmer, Evan versus Zuck. In this market, I think you have innovators competing with innovators who are also competing with the most well funded startups we've ever seen in our lifetime, anthropic and chatgpt, who are also competing with the 10 largest tech companies on the planet, who I would argue for the first innovation cycle I can remember in my lifetime, have the unfair advantage. Right. Google has the talent, they have the capital, they have the data and things like that. And so what I keep telling the team is they'll say, man, that company, we should have done it. It's raised some frothy round. And I just remind our team we are in the very early innings, maybe the second inning, I don't even think the third inning. And I'm convinced as quickly as some of these companies rise, they will fall because it is going to be a battle for the ages in terms of where the competition's coming from and things like that.

Speaker A: Yeah. And I think because we're so early, we're still trying to figure out exactly where the value capture long term will happen, what remains durable versus not. And it's too hard to know, but yet a lot of companies is particularly that are AIs hypergrowth companies. They're getting valuations very quickly. Rounds that are happening again, like 2021, where it feels like three to six months elapses and a, uh, doubling of valuations, sometimes even more. Now there's more progress happening between those two sort of rounds than it did in 2021. Given we've seen revenues go from like 10 million to 100 or 100 to 600 million. Now, again, margins still are under question and what this looks like in the future. But when you think about where you play and firms like yourself, where you're running firm funds that are about 350 to 450 in that kind of frame, you look at the big platforms out there, you named one in general Catalyst, and they're raising fund sizes, whereby at the end of the day, the Series A is an option check to be able to pile a lot more money into those companies at that Series C, Series D, Series E, where even someone like Andreessen, we talked about Adams, they put a billion dollars into, then that's not a token check. That is a massive check to a degree we've never seen before. Where do firms that are right in the middle, not quite small, like a seed seat stage, which might write a million dollar check, not quite the hyperscaler sort of firm where that, uh, 30 million at 400 million, who cares? Because if it works, I'm going to put several hundred million in. What is the game for you right now and how has that changed over the last few years?

Speaker B: Yeah, I mean, I think, I always say in pe, I think there's three, four, five flavors of pe. You, uh, have the big names, you have mid market, but it's relatively the same game. I always tell people venture is like 31 flavors or Baskin Robbins, right? Where everyone has to play the game that the product that they have suggests they play, right? So when someone says to me, oh, you can never miss, I go, um, no, that's the multi stage guys. And like you said, they can never miss. They can never miss an opportunity for a company that can carry hundreds or billions of dollars of capital to the promised land. And that's because people on this phone call or listening to this podcast gave them money and they have so much money to deploy, they need those vessels, right? And so like you said, when they come down and compete with us at Series A, they're not thinking about like for us at a $400 million early stage fund 5, we obsess about alpha, right? And so we have a bar of, uh, certain return thresholds we think we have to beat. We have to believe that any core check, the base case, can return half the fund, right? Which is very different. And so versus the big multi stage guys, they're just a market index at this point, right? They're a market index for innovation and conversely some emerging manager, some hundred million, they're playing a totally different game as well. So the game that we play in this market is any we rank 30 checks of fund. We always say when you're constructing a portfolio, you have to respect diversification first and power loss second. So you need enough shots on goal. Then you got to find five to seven companies and you have to have conviction and plow as much capital into them, right? So when you look at our fund, one that is marked above 35x, our largest check we wrote out in that pool of capital is marked at 600x. And our third largest check, which was Space X where we had over 150x was our third largest check. We're very proud of that because not only did we pick great companies, but we had the conviction to go after them and size the check appropriately. So when we think about what we need to do in this market, we got to write 30 good checks per fund to find five or seven outliers. We then need to try to get signals a little faster than the market and buy up as much ownership as we can. In this market, one point of a company will be a lot of proceeds, right? Because we just talked about the companies getting bigger and we need to find companies that are five to $10 billion and they can return the fund one or two times over. Now I've seen some great Twitter action about the rise of the trillion dollar company. I love that that was propagated by some very large multi stage guys that need trillion dollar companies because mathematically that's the only way they can have venture returns, right? That's not the game we play. And I always tell people there is a risk. Like we all want to take enough risk, we all want to find outliers. Again, I believe we have taken enough risk to be in the Cedar series A of 18 unicorns. Mean we have taken the right shots on gold and the right amount of risk. But there is a danger of taking too much risk, right? Think about Sammy sosa and Mark McGuire. Let's keep going with the baseball. So I'm not going to assume everyone's a baseball fan, but they both set the record for the most home runs. But Sammy Sosa, who played on my beloved Chicago Cubs because I grew up in Illinois in a town of 800 people, he would either hit a home run or strike out, right? So when you actually look at his wins above replacement. It wasn't actually that great as a baseball player. Right. Because he would either hit a home run or zero. Mark McGuire on the other hand, would hit a lot of home runs, but he would also eke out a lot of doubles and triples. Right. And so you got to think about it when you're playing in a portfolio. Like I would argue if you think about my check and Allocate, I made the point that I thought you could build a $10 billion company, but I made the point that risk adjusted. I think it had asymmetry to the upside because the business model and success compound and has a long term that is very different risk reward than if I were to back a founder trying to cure cancer that general that that person might cure cancer or it might be a zero, but much more binary. So there's no way you can tell me my investment, the Series A and allocate had the same risk as potentially backing someone to cure cancer. And that's where I think again, VCs just go, everything's risky. And I go, man, that's just a, uh, that is just not true. There are, there's spectrums of risk, there are spectrums of probability, adjusted outcomes. My job is to think about our portfolio, get the right mix of exposures. Right. And then obsess about that. And so it's different in this market, but it's honestly totally the same. We've, we've like invested through cycles.

Speaker A: Yeah. The more things change, the more they say the same. And look, I mean, uh, this whole concept at this time is different. Sure, fundamentally things are different because the world is different right now. But some of the behavior signals that happen where supply and demand get imbalanced, people are frothy, deployment starts crazily, like it usually doesn't end well for a lot of people. But there are, there's the other side which every single year since the beginning of time, there's always been companies of significance that have started every single year. Now they just happen to be bigger and it's. The issue is when the capital gets too far ahead of that, that's when it becomes tough from an economic return standpoint. I got asked this question and maybe this is a good place to end. Someone asked me, are you excited or are you anxious right now? And I said, look, I'm both really. I'm um, incredibly excited. I think AI is going to be the biggest transformational agent we've seen probably since the railroads, in terms of how it affects pretty much Every industry in the entire world, our lives, things like that. But I am anxious about what I'm seeing. This game on the field and some of the lack of discipline, the behavior, the arrogance, the hubris. And it doesn't feel right for someone like me who's been in venture and I've seen this game play out. What are you most excited about and what are you most anxious about right now?

Speaker B: I'm excited mostly because I think we've done a very good job of being disciplined in this cycle. It's been hard, but when I reflect back, same thing, look, we all had to do that Same exercise in 20, end of 2021. You're looking back at your portfolio. You go, oh, I wish I could get those two back. Right. But it needs to be one or two. Not like, whoa, right there's. I, uh, won't name names, but I can name some very big name funds that you look at them today, you go, man, you just lost your discipline in that froth. And you just when the tide went back in, whatever the expression is, something about having your pants down. Um, so I'm excited when you hit it right in this market. Like, we have a company we don't talk about, but it will do over $1 billion of trailing revenue, 10% EBITDA margin in its third year. That just wasn't possible. So your wins will be rewarded more handsomely. And then I'm anxious about, worry about being too greedy in this market. Like we, as a venture firm, we have about 30, 35 large institutional investors. I always tell them I will always sell too early. If that's something you're not interested, don't invest with me. Right. We have 60 exits over the last five years. For every dollar we've deployed, we've returned 60 cents on the dollar. I will always lock in profits too early and return them to my LPs because I live rent free with the Warren Buffett expression, which is, the richest guy I know always sold too early. So I think that's what would make me anxious for a lot of these frothy names is do not be too greedy. Because what goes up, my experience tells me they might just come down.

Speaker A: Yeah. Well, the two emotional states that kind of guide investment behavior and decision making is freedom, fear and greed. Right. And M, unfortunately, too many investors basically ping pong between the extremes and during times where things are really nervous, like they do nothing because extreme fear and during times like this, it's basically deploying at a pace and they shouldn't be deploying and this actually goes on the LP side too. So I have a lot of friends who are LPs for Inventure for the very first time and you look at their portfolio and you're like, you did a million in 2019, a million in 20, 28 million in 2020, and then nothing in 22, 23 and 24. Of course that never works when it comes to like venture investing, but I think it's just something all of us have to kind of guide to. And this has been a fun kind of conversation. Congrats on everything you've built since the first day you walked into my old First Republic office in 2017. It's been a great ride and really excited about you guys continue to build and all the help you've given us.

Speaker B: Perfect. And Samir, I want to put you on the spot on this podcast. They can you can commit to building a Decacorn. Is that where we're going with Allocate?

Speaker A: I think so. I think that's exactly what the the mission and ambition is. So let's do it.

Speaker B: All right. Thanks for having me.

Speaker A: Thanks for listening to another episode of Venture Unlocked. I hope you really enjoyed this conversation with Carter. If you'd like to get Venture Unlocked content straight to your inbox, go to ventureunlock.substack.com and sign up. Or head over to Apple Podcasts or Spotify and subscribe. Thanks again for listening.