Oct 10, 2022 · 1h 26m · news
Brad Gerstner: How I Pick Companies; Lessons from Warren Buffet; Chamath vs Gurley | E935 · 20VC with Harry Stebbings
0:00 / 0:00
▶ Watch on YouTube →
gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this landmark 20VC episode, Altimeter Capital Founder Brad Gerstner discusses how childhood financial hardships shaped his life philosophy, details his highly concentrated, thesis-driven approach to tech investing, and outlines how venture capitalists must adapt to the macroeconomic normalization of interest rates.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 15.7% of the talking time here. How this is scored →
Harry as informed peer 3.6 Guest teaching 3.4 Guest disagreement 1.6 Harry pushing back 1.9
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 16:14 Rejection of Spray and Pray
Brad forcefully rejects Harry's suggested strategy of index-like diversification across hundreds of companies, arguing it guarantees mediocre returns and neglects first-principles picking.
Hardest push from Harry ▶ 43:32 LP Structural Misalignment ChallengeHarry directly challenges Brad's LP alignment logic by pointing out that salaried LP staff face no downside risk and defaulted to backing mega-funds like Andreessen regardless of fund size dilution.
Biggest teaching moment ▶ 30:38 20% Risk-Free Rate Thought ExperimentBrad breaks down macro valuation dynamics by asking Harry how many investments he would make if risk-free yields were 20%, clearly proving how cost of capital dictates hurdle rates.
Harry holds his own ▶ 56:15 Deconstructing 20VC as an Alpha PlayBrad demonstrates high domain expertise by deconstructing Harry's business model, praising 20VC as a clever top-of-funnel media hack that grants Harry unique deal access.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Childhood Hardships, Mindset, and Fatherhood | 2 | 1 | 1 | 1 | Harry interjects early to connect Brad's childhood financial hardships with his own family background regarding downside protection and MS. Brad clarifies his father's lack of starting wealth and explains how those early struggles shaped his drive and insurance-policy legal degree. | |
| From Law School to General Catalyst | 2 | 2 | 1 | 0 | Brad recounts his journey from reading Buffett biographies in Indiana to law school, politics, and co-founding General Catalyst's early investments. Harry acts as a conversational prompter allowing Brad to lay out his career origin narrative. | |
| The Power Law and Secular Super Cycles | 4 | 5 | 2 | 3 | Harry challenges Brad on how focusing strictly on big existing markets accounts for new category creation like Airbnb or Uber. Brad reframes the issue, educating Harry on distinguishing market size from secular super cycles such as search, mobile, and cloud. | |
| Concentrated Portfolios vs. Spray and Pray | 4 | 6 | 4 | 4 | Harry puts forward a provocative index-like argument from another VC advocating to spray capital across hundreds of companies to catch outliers. Brad flatly rejects the idea, explaining how high-concentration first-principles investing delivers venture returns whereas index diversification dilutes power-law gains. | |
| Combating Confirmation Bias in Investing | 3 | 3 | 1 | 2 | Harry inquires how to distinguish a temporary bump in the road from a fundamental failure in a portfolio company. Brad illustrates with an early Snowflake follow-on decision and emphasizes the duty of board truth-telling over blowing smoke to founders. | |
| Price Sensitivity and Valuation Gravity | 5 | 5 | 2 | 3 | Harry shares his own reserve management mistakes regarding sky-high valuation step-ups, leading Brad to turn the question back on Harry. Brad breaks down Altimeter's exit discipline, which applies a 20% discount to pre-COVID ten-year average multiples. | |
| Interest Rates and Cost of Capital Normalization | 3 | 5 | 1 | 1 | Harry prompts Brad to explain why the rate of change in interest rates impacts venture capital so severely. Brad provides an intuitive thought experiment on a 20% risk-free rate to show how cost of capital shifts hurdle rates and pricing multiples. | |
| Chamath vs. Gurley: Investing in Uncertainty | 5 | 3 | 2 | 3 | Harry frames a crisp conflict between Chamath Palihapitiya's call to pause during macro volatility versus Bill Gurley's view that great VCs invest continuously. Brad jokingly sides with Gurley while explaining his framework of expanding and contracting investment apertures. | |
| Liquidity, Distributions, and Marking Down Books | 5 | 4 | 2 | 3 | Harry presses Brad on liquidity timing and critiques venture managers for delaying private portfolio markdowns. Brad shares his formulaic distribution rule and discloses recommending that Harvard's CIO mark down recent high-valuation growth assets by 50%. | |
| Fund Sizing, Economic Alignment, and Calculated Risk | 5 | 4 | 2 | 3 | Harry confronts Brad on the structural conflict between AUM fee-gathering and fund performance, questioning why LPs back mega-funds. Brad explains his 20% personal GP capital commitment and uses extreme sports inspection as an analogy for calculated portfolio risk. | |
| Recruiting for Alpha and Flat Firm Structures | 6 | 4 | 2 | 2 | Harry asks how junior VCs should navigate crisis-induced imposter syndrome and hiring errors. Brad praises Harry for building 20VC as an innovative media-to-venture alpha strategy and details why Altimeter avoids corporate hierarchy in favor of a lean analyst structure. | |
| Slaying the Money Dragon and Living with Eulogy Values | 3 | 2 | 1 | 1 | Harry leads Brad into a deep discussion on his personal relationship with money, maintaining humility in wealthy households, and managing ego. Brad outlines his family's annual global service trips and his commitment to living by eulogy values rather than amassing AUM. | |
| Quick Fire Round: Books, SPACs, and Burning Man | 2 | 2 | 1 | 1 | Harry runs a rapid-fire session touching on books, SPACs, investment advice, ByteDance, and Burning Man. Brad demystifies Burning Man as an open-source experiment in human organization free of central micromanagement. | |
| Altimeter's Gen-Transfer Future and Mutual Appreciation | 1 | 1 | 0 | 0 | Harry asks about Altimeter's 10-year outlook. Brad emphasizes generational transfer of firm ownership over becoming a massive corporate asset manager, concluding with mutual appreciation. |
Statements from this episode (40)
Gerstner: Having a chip on your shoulder puts chips in pockets
“I think there are a lot of people in Silicon Valley you know, and elsewhere as entrepreneurs that grew up, whether, you know, they're first generation, whether immigrant, whether they grew up poor, that chip on the shoulder puts chips in pockets, as they say, …”
Gerstner: Tiny fraction of VC deals generates majority of industry profits
“That's a tiny number of firms and a tiny number of deals that represent the vast majority of the gross profits that get generated in the industry.”
Gerstner: Average VC returns over 10-20 years underperform public market indexes
“And the fact of the matter is, I mean, if you look back 1020 years, average VC returns are not that compelling. In fact, they're worse than the indexes.”
Gerstner: Starting a restaurant takes as much effort as building Google
“And the truth of the matter is it probably takes as much effort, emotional and intellectual to start a restaurant as it does to start Google.”
Gerstner: Spray-and-pray venture strategies produce uninspiring index-like returns
“If you have a diversified portfolio across hundreds of hundreds of investments, you will have an index like return, which as we started off by saying, it's not very compelling in this category.”
Gerstner: Sequoia's early Figma investment yielded 100x while late-stage yielded 2x
“If you look at the difference between the Sequoia round in Figma or the durable round in Figma, right? It's the difference between, you know, having a hundred plus X outcome and a two X outcome.”
Gerstner: Proactive first-principles investors outperform passive trend-followers in venture
“The history in venture has really inured to the benefit of first principle thinkers, who frankly, rather than waiting for the founder to show up in their office, they identify what they want to invest in, and they go find them.”
Gerstner: Public market investing experience benefits venture capital investors
“I think being a public market investor is really a value add in terms of that type of culture when you're investing in a venture.”
Gerstner: An Altimeter software portfolio company missed its projections by 70%
“We have a software company, you know, where, where people, where they misplanned by 70%, right?”
Gerstner: VCs Must Give Honest Feedback Directly in Boardrooms
“I'm not being a good friend to the founder if I'm blowing smoke up their ass in the boardroom, and then the second they walk out of the boardroom, all the investors have a different conversation. Right? So I think that being willing to tell the truth as I woul…”
Gerstner: Funding Startup Pivots Requires Entirely New Underwriting
“Will you support me in the pivot of this business or not? But that's a totally new underwriting. That's a different question.”
Gerstner: Altimeter passed on pro rata rights multiple times in 2021
“Sometimes you know, we'll have to pass on our pro rata in those rounds because we think that the price, like we did many times last year, the price has just gotten too far ahead of itself.”
Gerstner: Interest rates dictate valuations like gravity affects physical objects
“Interest rates are to valuations, you know, what gravity is to the apple.”
Gerstner: Altimeter underwrites exits at 20% below pre-COVID average multiples
“Everybody on my team, for example, knows that we're applying a 20% discount To the pre-COVID ten-year average, right? So that is the exit multiple that we use.”
Gerstner: Investors will lose massive capital on low-revenue $1B+ software rounds
“Listen, these 1,000,000,002 1,000,000,003 billion dollar software rounds that are done with very little revenue, you have to assume a tremendous amount goes right. And then you probably have to assume an absurd multiple and everybody's counting on the greater …”
Gerstner: A 20% risk-free rate beats 70th percentile VC returns
“That's a higher rate of return than the 70th percentile in venture.”
Gerstner: Post-pandemic interest rates will return to pre-COVID levels
“So I suspect that the new normal is going to look a lot like the old normal, but we have to get through this period of massive uncertain and volatility so that you and I can underwrite to a predictable cost of capital.”
Gerstner: The 2022 growth stock crash merely returned valuations to 2020 baselines
“This is not a blood in the streets moment. It feels catastrophic because we have growth names that are down 40, 50, 60, 70% in the public markets. But look at where they are compared to where we were in January of 2020. For most of these companies, it's just g…”
Gerstner: Series C, D, and E Venture Valuations Remain Overvalued
“I still think that valuations are full. I think valuations in venture and CD&E are still overvalued.”
Gerstner: More Tech Value Created Over Next Decade Than Prior 10 Years
“The secular curve around value creation and disruption, all data moving to the cloud, ML and AI applications like that, there will be more value created over the next 10 years than over the last 10 years.”
Gerstner: VCs must distribute shares unless projecting 3x-5x returns over 3-5 years
“So for us, when I think about distributing is, do we still have venture returns left in this over a reasonable period of time? And if the answer is we don't see a three to five X over the course of the next three to five years in that deal, then we're obliged …”
Gerstner: Most of Altimeter's $6B LP distribution in 2021 came from Snowflake
“Most of that distribution, right, not all, but most of that distribution was Snowflake.”
Gerstner: Snowflake will eventually surpass its peak market valuation
“The truth of the matter is, I think Snowflake will be worth a lot more in the future than it is today, and even more in the future than it was then.”
Gerstner: LPs should mark down 2020-2022 late-stage venture portfolios by 50%
“I said, I would take everything in your portfolio that received a valuation over the last two years, over five hundred million dollars, and I'd mark it down by 50%. What do you mean? And I said, well, if I look at the average gross stock in the NASDAQ, it's do…”
Gerstner personally provides 20% of the capital in Altimeter's funds
“I'm 20% of the capital in altimeter.”
Gerstner: Venture capital funds of $10B or more cannot generate alpha
“Deploying a ten billion dollar fund or, God forbid, a fifty billion or a hundred billion dollar fund like Masa tried to do, right? You already know you will not generate alpha in that. You are getting the beta of the global tech industry when you're investing …”
Gerstner: Institutional capital has permanently increased venture capital supply
“This is going to mean that we have a permanent increase In the amount of capital that exists in venture capital, a permanent increase and pension funds went in.”
Gerstner: VC returns will compress as the industry scales
“The industry is going from highly fragmented to much more industrial scale. Returns are going to compress.”
Gerstner: Portfolio diversification is a myth that fails to mitigate risk
“I think diversification in many ways is the greatest myth perpetrated on the investing public. The idea that risk mitigation is the equivalent of diversification.”
Gerstner: Altimeter invested over 30% of its debut fund into Snowflake
“Our first fund VC won hell. I couldn't even raise it. I was 20 or 25% of the fund. And I put, we put over 30% of that fund in Snowflake at a point in time that the world thought we were crazy.”
Gerstner: The bottom 20-40% of tech and VC workforces dilute results
“I would say the vast majority of organizations, ok, and I'm talking from Facebook and Twitter, all the way down to, ah, GPs. They would be well served, right, to be much smaller, to be essentialists in the people that they have. Because it's very likely that y…”
Gerstner: Altimeter could double AUM with same team size
“We could manage twice as much money as we're managing today with the exact same team, because this game is about picking the right ideas, making good decisions, thinking clearly, having conviction.”
Gerstner: Altimeter analysts will be fired for unvetted FOMO pitches
“If you are an analyst who walks into my office with an idea a day because, you know, Johnny Mac down the street did the deal, like, you will be fired. Right? You better come in prepared, not with Dribbble, but you better have done your work because we're going…”
Gerstner: Altimeter was launched with under $5 million in capital
“When I started Altimeter, I started with less than five million bucks. My, I couldn't even convince my friends from HBS to contemplate being my partner in this thing, right?”
Gerstner: High-status individuals almost universally surround themselves with sycophants
“The number of people in life who surround themselves with sycophantic others who are their yes people. Right tell them what they want to hear afraid of speaking truth to them. Like, it's almost everybody at a certain level. Right, because you can afford to do …”
Gerstner: SPACs Forced Innovation in Bank IPOs and Direct Listings
“They have forced more innovation, innovation in the traditional bank IPO. They have forced more innovation in the direct list market.”
Gerstner: Silicon Valley Investors Are Driven by FOMO Over Independent Work
“People love to take signal, follow others into deals because others did deals. It is very hard to resist. And I would say young analyst associates partners in Silicon Valley are filled with FOMO and follow too many others rather than doing their own work.”
Gerstner: Not writing a bigger check into ByteDance was his biggest mistake
“Not writing a bigger check into ByteDance.”
Gerstner: Altimeter will grow by only 5-10 people and transfer majority ownership
“We may be five or 10 people bigger. The incredible partners and young people around here will have even more responsible responsibility doing all the things that we do today. I mean, in the fullness of time, I want to see Altimeter have an incredible generatio…”
Shorts cut from this episode
▶ BILLIONAIRE'S Biggest Investing Mistake 🙅♂️ #shorts · 20VC (@11:23)
▶ Billionaire explains high interest rates 📊 #shorts · 20VC w (@11:23)
▶ How this BILLIONAIRE keeps his kids grounded 👨👩👦👦 #sh (@1:08:39)
▶ Billionaire's BEST Investment Advice 🤑 #shorts · 20VC with (@1:20:10)
▶ How to answer this billionaire's interview question? 🤔 #sho (@56:54)