The Exchanges

Q value ads and kind of reasoning behind founder collective, absolutely. Listen to the first episode. But I do want to discuss the transition into venture and what that means from the founder perspective to start with today. So I'd love to hear your thoughts on what raising VC money really means in terms of how it affects founders. Often it's quite a mystic path. So what does it really mean?

A Well, I think for a lot of founders at the beginning, there's probably too much emphasis on venture capital validating their business. Ultimately, your customers validate your business. Venture capital doesn't. It's certainly helpful to have some resources at the early stage for sure, but sometimes that can be false validation and can cause a lot of investments that are actually, from the company perspective, they're actually not great investments. So just very, very important to be finding validation through your customers, not let capital be your greatest bottleneck. It very rarely really is your greatest bottleneck, but many founders believe it is. Ultimately though, as you're trying to accelerate success, And prove more and more out and scale the things that are working. It is very, very helpful to have venture capital. And obviously as, as somebody who is in the business, I'm a believer in the product and that venture capital can be valuable. I just think it's often overemphasized. And what we've been writing a lot about lately is what the perils are of overcapitalization for most entrepreneurs, just getting raising capital, getting into the point where, where they can accelerate their business to some degree is so hard. That I think what I'm mostly talking about today is high class problems for most entrepreneurs. Few entrepreneurs get into the position where they have a …

AI assessment note: “there's probably too much emphasis on venture capital validating their business.”

Q In today's funding environment, we often hear about the increased runway that A lot of VCs are suggesting is necessary to kind of proof test idea points. Do you agree with this kind of 24 plus month runway founders should be shooting for, or do you think 18 month is still the standard and the safest?

A Yeah, I think the healthiest thing that founders could do with more capital is, um, drive a longer runway. I think the reason they often don't do it is because the capital sitting in their bank account, they have incredibly lofty expectations, right? They just raised it a hundred million post, and they know that next time they raise, they want to raise it at least to two hundred million pre or higher, and they, maybe they only have at that .6000000 in revenue run rate, and they feel like they have to get To fifteen million plus in order to achieve that two hundred million, right? And I'm just throwing around numbers, but just an example. And so they've got to aggressively go after the business. And it's all sort of these lofty expectations that cause the entrepreneur to make the marginal investment that doesn't really prove any value or paper over big problems in their business using capital that ultimately needs to be reckoned with at some point. All of a sudden, that's a really tough place to be. But I want to share with you, we, we, we did two pieces. The first one I wrote was about this challenge of too much capital when everything doesn't go right. And that's what you and I have been talking about, Harry. But the second piece we put out in tech crunch, I did with Joe Flaherty on my team. We looked at what happens with too much, with lots of capital, well-capitalized compan…

AI assessment note: “healthiest thing that founders could do with more capital is, um, drive a longer runway”

Q And what do you think then it was about your investment thesis and strategy that made it, uh, as you said, four times better? Do you think it was the alignment with the founders that brought in the great deal flow?

A Yeah, I think there are a few things. I think we have, um, a lot of, uh, insights into what we're looking for in these founders at the seed stage. Usually they don't have a lot of traction to go on. Sometimes they don't even have product. You know, their businesses are not that built out, but we have a lot of sense of what we're looking for in those founders, and that, that started with David's own Intuitions about what makes you a great founder. I think alignment counts for a tremendous amount. I think there's actually a pretty big returns benefit to investing at the seed stage, so I know some folks asked you to talk for me to, you know, to ask me about Parada, and we don't do a lot of Parada for a bunch of reasons, including we don't think In most cases, in many cases, Parada's aligned to the founder, because, um, the problem with Parada is you're always a net buyer of, of the founder's company, and they're always a net seller. And if the company's doing well, they don't need your money, so they don't need you to take Parada. And it actually causes problems with follow-up investors. And if the company's doing badly, very few people are eager to write their Parada check. So it's not that the founder gets an option, it's that the, it's that the investors get that option. And every option, That benefits somebody has a cost to somebody, and so we think that has generally has a co…

AI assessment note: “alignment counts for a tremendous amount. I think there's actually a pretty big returns benefit”

Q And how proud are you then when you look back at your funds? Sorry, this isn't on the schedule at all, but just hearing, hearing that, I have to ask you, do you ever sit back and look at your portfolio and go like, you know, wow, we've, we've accomplished an incredible amount, and kind of appreciate the amazing work that you've done?

A Um, So it's been a great experience, right? I work with two of my best friends, and we're having a lot of fun, and we're working with great founders, and it feels like it's working. I think there's a lot of humility in this business that people probably should show more. I don't know if everyone feels comfortable talking about it, but, you know, just because those companies are doing well doesn't mean my most recent investments are doing well, and we take our lumps every day, right? And, you know, we're in a business where You can only lose one extra money, but you can make many, many, many hundreds of multiples on some extraordinary outcomes. Um, and yet we take those losses every bit as hard, maybe even harder than we, um, enjoy the, the multiples of gains in terms of how it affects our day to day. So I feel like we're working hard, uh, and struggling through how hard it is to build companies in 90% of our portfolio. And then there's the 10% that just does amazingly well, and it's really fun to help those companies, and we do get involved, and we do contribute to those, too, but they don't really need us very much, and so I think this, you know, and I'm also well aware that we're in a particularly good period in venture capital, and just because, um, the portfolio looks really great on paper, and we feel really good that we've, you know, given back all the money our investors…

AI assessment note: “I think there's a lot of humility in this business that people probably should show more.”

Q And so you wanted to know then, for the amount of money that you put in, is it enough to make it matter? With the exceptions of, you know, your Ubers, is it not hard to see how a fund makes a significant return from investing a smaller amount like the 200,000 dollars?

A Yeah, so, ok, so we are, you know, as investors in Uber, and we didn't write a very big check, I think that current value alone of that small check would be, um, very attractive to any venture fund of any size, even though our check that we started with was small, the current value of it would move the dial on any venture fund in the world. But your question is, even if you take out that type of outlier, I would first protest slightly, because I would say, Um, ultimately we are, in many ways, an outlier's business, and most venture funds are driven by outliers, so I, I don't know that you can take outliers out of any fund and not make that part of the conversation or, or, uh, look at venture correctly.

AI assessment note: “ultimately we are, in many ways, an outlier's business”

Q Can I ask you a question? At what time is the transition between a bearable burn rate and a burn rate that is too late to be cut?

A You know, I think the hard part here is it's hard to give an exact formula, but every time you make a cut in your business, it's pretty painful, right? So at the end of the day, you know, cutting five percent of your team is still painful. Cutting 20% is even more painful, right? And it's not so easy to cut things like office space very quickly or major contracts that you have outstanding with suppliers or whatnot. And so cuts are hard and cuts always hurt. And when you're, when you're burning ahead of what the Most people don't start addressing that until they start running low on capital, and that's a very, very dangerous thing. So I would say, you know, be more thoughtful as you're scaling up so that you're less likely to need to scale down. The whole idea here is not to be incredibly conservative. It's to really pressure test your assumptions and what validation is driving your investments in the business.

AI assessment note: “it's hard to give an exact formula, but every time you make a cut”

Q I'm going for it, but fuck it, why not? Um, it's Friday evening here. Biggest mistake in terms of a company that you should have sold, but didn't, and held.

A This is gonna sound corny, but our relationship with the founders always come first, and I think because of that, I don't spend time Thinking about it that way, and RLPs could criticize me on that, because they should say, well, are you really an investor first? It's so important to us that we not be transactional, that for me to sit here and sort of criticize one of our founders, because we should have gotten out of ditch their company faster. I mean, if I was a stock trader, it'd be an easy question for me to answer. I think as terms of like the integrity of what we try to do, it's, um, I think it'd be a hard one to answer for me. I mean, I, I, again, I think There are seed investors who definitely think of themselves much more like as investors would be very comfortable answering that. I don't know how Mike takes it.

AI assessment note: “I think it'd be a hard one to answer for me.”

Q I'm going for it, but fuck it, why not? Um, it's Friday evening here. Biggest mistake in terms of a company that you should have sold, but didn't, and held.

A This is gonna sound corny, but our relationship with the founders always come first, and I think because of that, I don't spend time Thinking about it that way, and RLPs could criticize me on that, because they should say, well, are you really an investor first? It's so important to us that we not be transactional, that for me to sit here and sort of criticize one of our founders, because we should have gotten out of ditch their company faster. I mean, if I was a stock trader, it'd be an easy question for me to answer. I think as terms of like the integrity of what we try to do, it's, um, I think it'd be a hard one to answer for me. I mean, I, I, again, I think There are seed investors who definitely think of themselves much more like as investors would be very comfortable answering that. I don't know how Mike takes it.

AI assessment note: “for me to sit here and sort of criticize one of our founders”