Feb 4, 2021 · 39m · 20vc
20VC: Why VCs Should Care More About Cost of Capital and Less About Ownership, Investing Lessons from working with Peter Thiel at Founders Fund, Why Liquidity Aligns Incentives Between Founders and Investors & Why It Is The Last Double That Matters in Ven
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In this episode of The 20 Minute VC, Harry Stebbings interviews Justin Fishner-Wolfson, founder and managing partner of 137 Ventures, to discuss growth-stage investing, customized liquidity solutions, and decision-making frameworks learned from Peter Thiel. Justin shares insights on portfolio construction, prioritizing cost of capital over ownership percentages, and how secondary transactions align long-term founder incentives.
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 30.1% of the talking time here. How this is scored →
Harry as informed peer 3.4 Guest teaching 3.4 Guest disagreement 1.4 Harry pushing back 2.6
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 10:19 Reframing Andy Rachleff's market vs founder quote
Justin explicitly rejects the conventional wisdom quoted by Harry, explaining that great founders can redefine or move into adjacent markets rather than being constrained by initial market size.
Hardest push from Harry ▶ 25:17 Challenging the size and timing of founder secondariesHarry directly challenges Justin's thesis, expressing blunt concern over early founder secondaries and pressing how $15-20M cashouts don't misalign founder incentives.
Biggest teaching moment ▶ 19:26 Explaining valuation multiples vs gross margin leverageJustin educates Harry on why applying blanket 10x or 40x revenue multiples to tech-enabled companies fails, walking through discounted cash flows and gross margin differences.
Harry holds his own ▶ 16:34 Citing Monte Carlo data on optimal portfolio sizeHarry demonstrates analytical expertise by bringing up specific Monte Carlo simulation data showing that 23 investments capture 84% of diversification benefits, pushing against standard 40-50 company portfolio models.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Justin Fishner-Wolfson's Background and Founder Journey | 1 | 2 | 1 | 1 | Harry brings up background facts about Justin's age at Stanford which Justin playfully questions and clarifies. The dynamic is welcoming and collaborative. | |
| Key Venture Lessons from Working with Peter Thiel | 2 | 3 | 0 | 1 | Justin explains key investment lessons learned from Peter Thiel, including the concept of the last double. Harry asks a clarifying question on the last double and agrees with the premise. | |
| Applying Poker Principles to Investment Decision-Making | 2 | 2 | 0 | 1 | Justin shares how poker principles like focusing on process over outcome apply to venture investing. Harry transitions smoothly into asking about One Three Seven's decision-making process. | |
| Founder vs. Market Dynamics and Market Expansion | 4 | 5 | 3 | 3 | Harry quotes Andy Rachleff on market versus founder dynamics. Justin reframes the premise by arguing great founders expand or shift their markets, offering Gusto as a concrete example. | |
| Rethinking Ownership Percentage vs. Cost of Capital | 5 | 4 | 2 | 4 | Harry quotes Brian Singerman and cites Monte Carlo simulation data regarding optimal portfolio diversification. Justin explains why traditional 20 percent ownership heuristics are flawed when potential exit sizes are massive. | |
| Building Ownership in Portfolio Winners Over Time | 4 | 5 | 1 | 3 | Harry questions extreme revenue multiples and opportunity cost of capital. Justin educates on the underlying math of discounted cash flow and gross margin differences between software and tech-enabled businesses. | |
| How Secondary Liquidity Aligns Founders and Investors | 5 | 4 | 3 | 6 | Harry forcefully presses Justin on concerns regarding early founder secondary liquidity and life-changing cashouts. Justin defends his firm's approach, explaining how secondary purchases are structured across multiple individuals. | |
| Updating the Employee Social Contract and Equity Options | 4 | 4 | 2 | 4 | Justin details problems with 90-day option exercise windows for long-privatized companies. Harry pushes back on whether the root cause is tax system policy or company options rules. | |
| SPACs, Capital Proliferation, and Market Returns | 5 | 3 | 2 | 3 | Harry quotes Chamath Palihapitiya on venture return compression down to private equity levels. Justin agrees on macro compression but highlights that top quartile firms continue to outperform. | |
| LP Fundraising and Advice for Emerging Managers | 3 | 3 | 1 | 2 | Harry asks about LP education during early fundraising and potential competition from primary VCs. Justin breaks down regulatory and structural reasons VCs don't do secondaries and offers long-term advice for emerging managers. | |
| Quickfire Questions with Justin Fishner-Wolfson | 2 | 2 | 1 | 1 | Harry guides Justin through a brisk quickfire section covering books, truths, SpaceX as a defining deal, and liquidity misconceptions. The tone is rapid and harmonious. |
Statements from this episode (26)
Fishner-Wolfson brought in the anchor LP for Founders Fund's first fund
“I ended up You know, bringing in one of the largest investors who ended up anchoring the first institutional phone.”
Fishner-Wolfson: The final valuation double drives the vast majority of venture returns
“And I think one of the other pieces that I really think is important is that it's the last double on the investment that matters, right? The first double, it's good, but really when you look at the absolute returns on investing, specifically in venture investi…”
Fishner-Wolfson: Investors must focus on decision-making process over short-term outcomes
“And I think the lesson from poker that I think very much applies to investing is to focus on process and not outcomes, right? Outcomes matter over a long period of time, but there's a lot of noise. And the better you can focus on making the process, you know, …”
Fishner-Wolfson: Investors must evaluate startup quality independently of valuation
“Like valuation matters. Right. And you don't want to let things like valuation sort of influence your decision on whether or not you want to be in the company, because that will lead you to investing That may not meet your bar because it's a quote unquote grea…”
Fishner-Wolfson: Great founders expand their addressable market by entering adjacent markets
“At the end of the day, you can't be bigger than your market, but you might be able to expand Expand your market by redefining it, or you may be able to move into adjacent markets, and therefore, the ultimate opportunity is much bigger, right?”
Fishner-Wolfson: Entry price only matters in VC if overpriced by 5x
“Price doesn't matter unless you're off by five X, in which case then price is the only thing that matters.”
Peter Thiel invested $500,000 for a 10% ownership stake in Facebook
“Peter ended up investing half a million dollars for like, 10% of the company.”
Fishner-Wolfson: Strict VC ownership targets blind investors to bigger absolute returns
“Focusing strictly on ownership percentage really, I think, blinds people to opportunities that may be much larger, and they just can't get over the hump from a process perspective to make those investments.”
Fishner-Wolfson: Maximizing VC returns strictly favors investing in one winning company
“At the end of the day, the way to make the best returns is to invest in one company that does incredibly well. Everything else is basically pulling you down. That's clearly the correct answer if you're Only focused on returns.”
Founders Fund put $40M into SpaceX from a $200M fund
“And I think even Founders Fund, you know, I mean, back, back in Founders Fund too, I mean, SpaceX was a, basically a forty million dollar position out of a two hundred million dollar fund, and it was a rocket company.”
Stebbings: A 23-company VC portfolio captures 84% of diversification benefits
“And I've kind of, you know, run the numbers with a Monte Carlo attached to it. And you're like, actually, you know, like 23 gets 84% of the benefits of diversification. I think it is. And, you know, you only get an incremental seven or whatever it is for 40 co…”
Fishner-Wolfson: 137 Ventures targets roughly 12 core portfolio positions
“I mean, we run our portfolio to be sort of a dozen core positions for this exact reason, right? You don't want to dilute all of your good returns with a bunch of other noise.”
Fishner-Wolfson: VC ability to grow ownership stakes depends heavily on relationships
“I really think your ability to grow your position over time is heavily driven by relationships. And so if you have very strong relationships with the company, you can maintain and grow ownership over time. And if you don't, you can't.”
Fishner-Wolfson: Follow-on investment decisions should be dictated by cost of capital
“If you still believe that you can hit your cost of capital at those higher numbers, then you absolutely want to be writing those checks. If you don't think that you can hit your cost of capital at those higher numbers, then you probably want to be adding new p…”
Fishner-Wolfson: Applying 90% margin multiples to 40% margin companies causes losses
“You can't put the same revenue multiple on a 90% gross margin business with super high operating leverage as you would, you know, a company with 40% gross margins and less operating level. Like if you do that, you'll just never make any money. And eventually t…”
Fishner-Wolfson: Unprecedented 2021 tech revenue multiples will not persist long-term
“Are they going to be true in 20 years that everything's going to trade this high? That seems relatively unlikely.”
Fishner-Wolfson: Secondary liquidity leads founders to reject early acquisition offers
“And they will then, and I've watched entrepreneurs do this consistently, turn down acquisition offers that would put huge amounts of money in their bank account. And that's really ultimately To the benefit of the venture investors, because they really want to …”
Fishner-Wolfson: Founders change behavior once liquidity reaches complete financial independence
“I worry about people getting so much liquidity that they sort of never have to work again. And that number can obviously somewhat change depending upon who you are and your family and where you live and a bunch of other factors, but there's always something th…”
Fishner-Wolfson: Palantir stayed private for 17 to 18 years before IPO
“Palantir basically, you know, has been, or they're now public, but they were private for 1718 years.”
Fishner-Wolfson: Unreformed equity options will force engineers to hire lawyers
“I think if that continues to happen across the industry, we're going to break the social contract between, you know, companies and employees and end up with a situation where, you know, every engineer is hiring a lawyer to negotiate their employment agreement …”
Fishner-Wolfson: SPAC proliferation will lower deal quality and cause market bust
“So I think that's going to create an incredible amount of competition amongst the SPACs to get deals done. And then the quality of those deals will inevitably trend downward, which will then make SPACs, you know, look bad and they will then go away for a perio…”
Fishner-Wolfson: Top-quartile VC funds will continue outperforming other asset classes
“So, you know, you could still see compression across everything, but I think on a relative basis, you know, the top quartile of venture will continue to perform or outperform, you know, the other asset classes.”
Fishner-Wolfson: Regulatory limits prevent traditional VCs from doing secondary investing
“There's constraints on venture firms, you know, doing too much secondary investing because then they have to register as an investment advisor. And there's a bunch of regulatory overhead that comes from that, that people are trying to avoid.”
Fishner-Wolfson: Emerging managers are married to LPs for 10 to 20 years
“Venture as a venture business is an incredibly long-term business and that your LPs, you're effectively married to them, right? These funds are often 10, 12, 15 year funds. You know, you end up raising multiple funds, and so it's just very important to do busi…”
Fishner-Wolfson: 137 Ventures has backed SpaceX since 2008
“SpaceX probably wins this for me. I mean, it will probably be the investment that defines my career. We've been invested since 2008 back before there ever been a successful rocket launch. And we've just continued to build that position over time. And, you know…”
Fishner-Wolfson: 99.99% of public market stock trades are secondary transactions
“In the venture space, when people think of investing, they generally think about, you know, a primary investing round where you're investing in the company, and yet they seem to forget that in the public markets, 99.99% of shares traded are all secondary trans…”