The Exchanges

Q a venture fund. We leverage media to be the best investors. How does that impact my process? Through the media, I meet the world's most brilliant founders, and with each deal, I create an individual investment committee of three leading founders in that specific space, and I bring their collective minds to make the best decisions together. Would you say that is where my edge is congruent with my process?

A Absolutely. Fabulous. And, you know, other things you'd like to see in a, in a process that's good would be things that you're, that it's economically sound. Now, the fact that you're tapping these founders, they, they have some experience, that would be important. Um, the other thing to say is that your process should be allowed to evolve. And in some ways, I would say that there are mutable and immutable components. Immutable things were No certain standards you want to make, uh, maintain, and sort of objectives you want to pursue, but mutable is, hey, the world changes, and we need to make sure that we're updating our frameworks and mental models to accommodate that. Um, you also want to build in, uh, techniques to manage or mitigate bias. I mean, you mentioned that just a moment ago, and so it's interesting you said a group of three. Three is a really good number for decision making, and because it's a, it's an odd number, right?

AI assessment note: “Absolutely. Fabulous. And, you know, other things you'd like to see”

Q capital, you obviously see increased competition and increased pricing, which obviously then reduces the size of your outcomes. If you come in at 50, not 10, that's a very significant return difference. And what worries me is we're going to see this denigration of venture returns, much more to PE like returns. How do you think about that? And do you think that's fair for me to worry about that?

A Absolutely fair. Anytime you see capital flowing into something, you should worry about returns. That's just, that's like a basic rule. And, you know, if you look at long-term public market equivalent, so, so this is how academics are measured is public market equivalent for venture capital. It's actually been pretty good over long periods of time, but it's extremely episodic. So almost all the returns are earned in very short windows. One was around the dot com. One was actually what we just went through in 20, 20, and 20, 21. And now we're back. We're probably back down to sort of PMEs closer to one, right? So for venture, it's very episodic. So buyouts, by the way, have consistently been a little bit better than, um, private equity have been a little bit better than venture. Um, they're, they're much less episodic or dramatic, and they tend to chug along a little bit over one PME. So, um, Yeah. I mean, I think that you always should worry about that. And the other interesting thing is just taking a close examination at how companies are exiting. Right. And so what's happened is, you know, a generation or two ago, a lot of companies went public for a lot of reasons. Now companies are not going public at the same rate. Uh, these are interesting questions as to how to think about exits as well. So the whole complex should be examined pretty carefully. And, um, and, and by the w…

AI assessment note: “Absolutely fair. Anytime you see capital flowing into something, you should worry about returns.”

Q And when it's actually luck, But actually, it can make you a better investor, I found, because you lose your downside scenario planning, you see the best in things, and you're not fearful of losing your money where others would be. I guess the question is, like, does it matter, I guess, if you can attribute it to yourself and you become a better investor, I guess, does it matter?

A I don't know if it matters, but, you know, venture is particularly interesting. You know, one of the measures of skill, for instance, is this concept of persistence. Which is, you know, if you won yesterday, will you win today and will you win tomorrow and so forth? And so persistent activities tend to be indicative of skill. Interestingly, if you look across asset classes, the, the, the asset class that continues to have high persistence is actually venture capital. So the question is, why is that the case? And so it's a very interesting question, and I think there are some provocative potential answers to that. But one of them is this idea of preferential attachment, right? That once you could have gotten yourself, you could have made a few successful investments by dint of luck. But once those successes have occurred, People tend to preferentially attach to you as a venture capitalist. So you think a certain organization, certain, you know, great venture capital firms, that if you are a hot up and coming company, and there's a presumption that you, people can figure that out, you're going to preferentially attach to the big names on the venture side. And that, that becomes this feedback that allows the sort of top firms to sort of differentiate themselves from others. And what we know is that there's huge dispersion in returns in venture capital. So if you own the top decile…

AI assessment note: “one of them is this idea of preferential attachment”

Q process or just improve it in some ways? Like I said, when I had two people on my ICs, It didn't work honestly, Michael. And then when I had three, it was like product market fit of investment decision making, but I could have kept going with two and it just meandering in the way that it was. How do you think about when to change a core investment process?

A Yeah. I mean, to me, I, I think it's, you know, all this, you can do a lot of pre-work and get sort of best practices and, you know, three is better than two. That's a best practice. And, and by the way, five is, is not five is better than four. For instance, these odd numbers tend to be good things in terms of, and there's good data. Pardon me. There's good data to back all that up, but to me, the, the issue, uh, so, so that get that hygiene down, that process down, uh, in terms of the best practices. The other part that's very difficult is literally how do we update our views of the world as the world changes? That becomes the big challenge, right? And that, you know, the fancy term is to be an appropriate Bayesian, which is I have a prior view of the world as new information tumbles in, I revise my view in the proper direction and the proper magnitude. That is the very difficult thing to me. So when do you, when does, when does the world have to change? What is your process of change to reflect that? Um, I'll give you a couple examples. One example, certainly in, uh, we do a lot of work on this in public markets, very relevant for private markets as well, which is we've had in the last few decades, a huge rise in intangible investment, right? So companies used to invest in factories and machines and inventory, old fashioned stuff. And the accounting for that was a certain wa…

AI assessment note: “how do we update our views of the world as the world changes?”

Q markets in particular, everyone's like, I can't believe it. This company is, you know, four and a half X ARR. What is going on? And my question is like, is this actually just the new normal? And was it incredibly buoyant markets before that was unrealistic and irrational? And this is the new normal, or is this a down period? I'm not even sure if this is a down period.

A You know, it's very interesting, Harry. I, I, you know, you mentioned COVID before, just to dwell on that for a moment. I think COVID, um, was a huge challenge for a lot of companies, right? In other words, there was, for many young companies, there was demand pull forward. Uh, and by the way, if you don't have a seasoned, well, even if you do have a seasoned management team, it's difficult to manage through these things. And then you had sort of a regression back to more normal patterns. And so it was a very difficult period to measure, manage through. And by the way, even like You know, world-class companies like Walmart and Target, you know, which have really good invent managers and so forth and lots of data. They stumbled through, you know, Amazon. These guys all stumbled through this, right? And they're still kind of coming out the back end of it. So just to be clear, the COVID, you know, a one in a century type of event created a lot of management challenges. Now, the flip side is when you talk about valuation, there are really a couple issues that are important. One is inequities. We have this idea of, of implied duration, which is, you know, when am I getting my cash flows? And for a lot of younger companies and more growthier companies, the cash flows don't come for until many years into the future, right? So we're paying for the future to some degree that creates sen…

AI assessment note: “So it's a 240 basis point swing in real interest rates. When you have long duration”

Q a venture fund. We leverage media to be the best investors. How does that impact my process? Through the media, I meet the world's most brilliant founders, and with each deal, I create an individual investment committee of three leading founders in that specific space, and I bring their collective minds to make the best decisions together. Would you say that is where my edge is congruent with my process?

A Absolutely. Fabulous. And, you know, other things you'd like to see in a, in a process that's good would be things that you're, that it's economically sound. Now, the fact that you're tapping these founders, they, they have some experience, that would be important. Um, the other thing to say is that your process should be allowed to evolve. And in some ways, I would say that there are mutable and immutable components. Immutable things were No certain standards you want to make, uh, maintain, and sort of objectives you want to pursue, but mutable is, hey, the world changes, and we need to make sure that we're updating our frameworks and mental models to accommodate that. Um, you also want to build in, uh, techniques to manage or mitigate bias. I mean, you mentioned that just a moment ago, and so it's interesting you said a group of three. Three is a really good number for decision making, and because it's a, it's an odd number, right?

AI assessment note: “Absolutely. Fabulous. And, you know, other things you'd like to see”

Q No, that, like, do you, does it change how you assess people?

A Well, yeah, I mean, this is another one where, uh, this is that the Buffett, you know, likes to say, or I, no, actually starts with Peter Lynch, I think, where he say, you know, when, when the, When a business, a challenging business and, uh, and you know, when a business and management, so if a challenging business and brilliant management, it's likely the business's reputation remains intact. I think that was a good example, which is I really liked the CEO, but I, uh, the business itself was challenged and, and the reputation of the business remained intact. So that's a good, that's always a good lesson is that even great managers or even thoughtful managers, if they're managing a very difficult situation, uh, Will have a difficulty, uh, doing well.

AI assessment note: “even great managers... if they're managing a very difficult situation, will have a difficulty”

Q I love that as a distinction. You said before, as kind of a follow-up to that one, my natural kind of question was, why does putting yourself in a position to enjoy good luck, what everyone obviously wants, why does that put you in a position to lose?

A Yeah, I mean, the first thing is, I'll just say that there, there are like a bunch of aphorisms about luck, you know, luck is where preparation meets opportunity, or the harder I work, the luckier I get, and I don't really find any of those very appealing, candidly, if you, if you accept my definition of luck, right, um, because, and another way of thinking about it is that, you know, uh, skill is what's in your control, and luck goes with out of your control, so by definition, out of your control. Now, that said, Harry, I think that, you know, what you're picking up is on something like this. You say, oh, I, you know, My friend won the lottery yesterday, right? And we'd all agree, I think, that that was lucky. Now, you would not be in a position to win the lottery unless you buy a lottery ticket, right? So in a sense, you have to be willing to lose in order to potentially win. The fundamental question it all distills down to is, is it positive expected value or negative expected value, right? So, and, and investing by and large should be obviously positive expected value. Playing lottery by definition or gambling is a negative expected value. It's a consequence. People should be, you know, that they should do it for fun if they would like. And for other, there may be other psychic benefits of it, but just in pure monetary pros and cons, it's going to be a negative game.

AI assessment note: “you have to be willing to lose in order to potentially win.”

Q And when it's actually luck, But actually, it can make you a better investor, I found, because you lose your downside scenario planning, you see the best in things, and you're not fearful of losing your money where others would be. I guess the question is, like, does it matter, I guess, if you can attribute it to yourself and you become a better investor, I guess, does it matter?

A I don't know if it matters, but, you know, venture is particularly interesting. You know, one of the measures of skill, for instance, is this concept of persistence. Which is, you know, if you won yesterday, will you win today and will you win tomorrow and so forth? And so persistent activities tend to be indicative of skill. Interestingly, if you look across asset classes, the, the, the asset class that continues to have high persistence is actually venture capital. So the question is, why is that the case? And so it's a very interesting question, and I think there are some provocative potential answers to that. But one of them is this idea of preferential attachment, right? That once you could have gotten yourself, you could have made a few successful investments by dint of luck. But once those successes have occurred, People tend to preferentially attach to you as a venture capitalist. So you think a certain organization, certain, you know, great venture capital firms, that if you are a hot up and coming company, and there's a presumption that you, people can figure that out, you're going to preferentially attach to the big names on the venture side. And that, that becomes this feedback that allows the sort of top firms to sort of differentiate themselves from others. And what we know is that there's huge dispersion in returns in venture capital. So if you own the top decile…

AI assessment note: “I don't know if it matters, but, you know, venture is particularly interesting.”

Q markets in particular, everyone's like, I can't believe it. This company is, you know, four and a half X ARR. What is going on? And my question is like, is this actually just the new normal? And was it incredibly buoyant markets before that was unrealistic and irrational? And this is the new normal, or is this a down period? I'm not even sure if this is a down period.

A You know, it's very interesting, Harry. I, I, you know, you mentioned COVID before, just to dwell on that for a moment. I think COVID, um, was a huge challenge for a lot of companies, right? In other words, there was, for many young companies, there was demand pull forward. Uh, and by the way, if you don't have a seasoned, well, even if you do have a seasoned management team, it's difficult to manage through these things. And then you had sort of a regression back to more normal patterns. And so it was a very difficult period to measure, manage through. And by the way, even like You know, world-class companies like Walmart and Target, you know, which have really good invent managers and so forth and lots of data. They stumbled through, you know, Amazon. These guys all stumbled through this, right? And they're still kind of coming out the back end of it. So just to be clear, the COVID, you know, a one in a century type of event created a lot of management challenges. Now, the flip side is when you talk about valuation, there are really a couple issues that are important. One is inequities. We have this idea of, of implied duration, which is, you know, when am I getting my cash flows? And for a lot of younger companies and more growthier companies, the cash flows don't come for until many years into the future, right? So we're paying for the future to some degree that creates sen…

AI assessment note: “when you talk about valuation, there are really a couple issues that are important”

Q Let's put this to one side, Matthew. Thank you for your one. Final one for you. You've achieved so much, Michael. What does success look like for you, and why do you still do what you do? That was from Bill Gurley.

A Yeah, I mean, I just, I mean, I love I love what I get to do, and I'm, I'm, I'm very blessed. You know, Dennis Lynch is the guy that runs our team at counterpoint global and Dennis, uh, is, is a great person to work for and work with. And, uh, so I get, I have a job that I get to do. I, I, I get to do what I love to do every single day. I hope that, um, I'm hopefully that it's contributing something to the world. And, uh, there's a sense of independence and autonomy that's very powerful for me. And by the way, I said this, I will never, as long as I'm useful to somebody, I probably will never retire because I have way too much fun and intellectual stimulation doing this. And I'll go back to what I mentioned before. I think that that the key for me is this idea of inputting and outputting. And by the way, that's a big part of the teaching I do as well. So I teach at Columbia business school that output also that shows up there. So always learning. And by the way, I I really believe this passionately. I think the best teachers are great students, right? The best teachers are great students. They're constantly learning about their topic, the nuances, and how to communicate in an effective way. So to me, it's that input output, um, Uh, which, which hopefully will go on for as long as I'm around.

AI assessment note: “I probably will never retire because I have way too much fun and intellectual stimulation”

Q No, that, like, do you, does it change how you assess people?

A Well, yeah, I mean, this is another one where, uh, this is that the Buffett, you know, likes to say, or I, no, actually starts with Peter Lynch, I think, where he say, you know, when, when the, When a business, a challenging business and, uh, and you know, when a business and management, so if a challenging business and brilliant management, it's likely the business's reputation remains intact. I think that was a good example, which is I really liked the CEO, but I, uh, the business itself was challenged and, and the reputation of the business remained intact. So that's a good, that's always a good lesson is that even great managers or even thoughtful managers, if they're managing a very difficult situation, uh, Will have a difficulty, uh, doing well.

AI assessment note: “Well, yeah, I mean, this is another one where”

Q biggest companies, they had no idea how they were going to make money. They also had no idea the scale with which they'd make money, the strategy changed. I mean, everything is so uncertain. So I guess my point is, is there a point in actually doing these models or even thinking in this way when it could actually lead you to say no to something that could be amazing?

A Yeah, I mean, the thing is that, um, Look, even these companies where there's not, uh, you're not generating revenues yet, or you don't know how you're going to monetize. Uh, there is a build it and they will come philosophy, right? Which is eventually if we have a, you know, it'd be real. We have enough users. There's going to be some way that we can monetize this in some way, shape or form. If you, if you believe there is no monetization ever. Uh, then you're probably not. It might be a fun exercise, but it's a labor. You're gonna be using up a lot of capital without giving a return on the capital. So it depends what you're trying to do. So, you know, you think about early days of Google before they came up with monetization, they obviously came up with techniques to, to get a lot of people to use their search engine. Um, But that can't go on forever unless you have some, some method to monetize. Assuming that you're in business to make money and investments. So, which I, which I presume most venture capitalists are, right?

AI assessment note: “You're gonna be using up a lot of capital without giving a return”

Q biggest companies, they had no idea how they were going to make money. They also had no idea the scale with which they'd make money, the strategy changed. I mean, everything is so uncertain. So I guess my point is, is there a point in actually doing these models or even thinking in this way when it could actually lead you to say no to something that could be amazing?

A Yeah, I mean, the thing is that, um, Look, even these companies where there's not, uh, you're not generating revenues yet, or you don't know how you're going to monetize. Uh, there is a build it and they will come philosophy, right? Which is eventually if we have a, you know, it'd be real. We have enough users. There's going to be some way that we can monetize this in some way, shape or form. If you, if you believe there is no monetization ever. Uh, then you're probably not. It might be a fun exercise, but it's a labor. You're gonna be using up a lot of capital without giving a return on the capital. So it depends what you're trying to do. So, you know, you think about early days of Google before they came up with monetization, they obviously came up with techniques to, to get a lot of people to use their search engine. Um, But that can't go on forever unless you have some, some method to monetize. Assuming that you're in business to make money and investments. So, which I, which I presume most venture capitalists are, right?

AI assessment note: “that can't go on forever unless you have some method to monetize.”