The Exchanges

Q What do you think of the philosophical issues associated with investing today, then?

A One of the key tenets of philosophy, of Venture is that venture is, is a highly persistent asset class that the, the, the top VCs or top brands will continue to do well. Now, if you look at, you know, just pick, just pick the Forbes Midas list, for instance, and you will see that four out of the top 10 VCs, Steve Anderson, Chris Saka, Josh Copeland, Peter Thiel, In that they didn't have firms, uh, 10 years ago, right? Even, even Andreessen Horowitz wasn't around 10 years ago, right? So for all this talk of we see being increasingly persistent, um, the, the reality is, um, it's not. And the reality is that there is a huge churn in venture capital. But it's incredibly hard to figure where the puck is going. And I think there are kind of two reasons for this. And I'll tie this back to what, what you had said before, right, about technical expertise. So if you take, you know, if you take some of the best new funds that came in the last decade, say Founders Fund, First Round Capital, Lowercase Y Combinator, all of these firms Are entrepreneur-focused and entrepreneur-led funds. Um, for LPs to identify these such funds very early is incredibly, incredibly hard, because they don't have prior relationships with funds like these. Additionally, these funds don't, these firms don't have an attributable track record, kind of a prerequisite for many Uh, in LPs to invest in something. So, so…

AI assessment note: “One of the key tenets of philosophy, of Venture is that venture is, is a highly persistent asset class”

Q managers like Chris Sacker who smash it, but there's also fund managers in the turning tides, Which don't smash it and you lose the money, as you said, sometimes half or two thirds. What happens to managers who don't smash it? Is it a, you know, can you raise again? Is it that simple or is it a return to another bigger fund? What's the roadmap for them from there?

A This is a very, um, interesting dynamic is that, um, you know, we talked about the big funds and the smaller funds. So unfortunately the, the, the dynamic of our industry is such that That amongst the established managers, if you are a traditional quote-unquote VC, um, not an incubator, accelerator, post-accelerator, what is, what's actually happening is that there is always this theory of a bigger fool. So, um, what happens to them is that they might not be smashing it, but then, but because they're established, they are in the palette of managers from which People choose. So, um, they might do some investors, but, uh, another set of investors, another, a different type of institutional investors, you know, they might have endowments and foundations. They move to pensions and insurance companies. They might have pensions and insurance companies. They might go to European investors. They might lose their European investors. They go to Middle Eastern investors. So there's always somebody else. And it's also goes to return expectations. Like, like you were saying, right? So venture, in some sense, um, the return expectation of venture used to be three to five X and above, and now there are folks in the industry that are perfectly fine with a two X net return because internally their return expectations are much, much lower. That's kind of what has happened.

AI assessment note: “they might lose their European investors. They go to Middle Eastern investors. So there's always somebody else.”

Q managers like Chris Sacker who smash it, but there's also fund managers in the turning tides, Which don't smash it and you lose the money, as you said, sometimes half or two thirds. What happens to managers who don't smash it? Is it a, you know, can you raise again? Is it that simple or is it a return to another bigger fund? What's the roadmap for them from there?

A This is a very, um, interesting dynamic is that, um, you know, we talked about the big funds and the smaller funds. So unfortunately the, the, the dynamic of our industry is such that That amongst the established managers, if you are a traditional quote-unquote VC, um, not an incubator, accelerator, post-accelerator, what is, what's actually happening is that there is always this theory of a bigger fool. So, um, what happens to them is that they might not be smashing it, but then, but because they're established, they are in the palette of managers from which People choose. So, um, they might do some investors, but, uh, another set of investors, another, a different type of institutional investors, you know, they might have endowments and foundations. They move to pensions and insurance companies. They might have pensions and insurance companies. They might go to European investors. They might lose their European investors. They go to Middle Eastern investors. So there's always somebody else. And it's also goes to return expectations. Like, like you were saying, right? So venture, in some sense, um, the return expectation of venture used to be three to five X and above, and now there are folks in the industry that are perfectly fine with a two X net return because internally their return expectations are much, much lower. That's kind of what has happened.

AI assessment note: “they might lose their European investors. They go to Middle Eastern investors. So there's always somebody”

Q Now, I want to touch on, because you mentioned returns there, And I, I do have a question from a contemporary of yours in, in Michael Kim at Sandana. And, and he wanted to know with regards to expectations, do you have the same, uh, return profile and expectations for your larger funds as you do for your smaller funds?

A Absolutely not. Yeah. My thinking is that if a smaller fund is worthy to be invested in, um, they should have a shot at five to 10 X. I know it sounds ridiculous, um, but actually it is really, really possible. A forty million dollar fund, which has a portfolio of 15 companies and they own 15 to 20 companies and they own, you know, 15% or 20% of, um, those companies and, um, um, are able to, you know, as you can see if they have one or two multi-billion dollar exits, You're suddenly talking of a very, very large multiple. From a statistical standpoint, and from just a model standpoint, those kinds of things become very, very possible, even if you assume a very high loss. So that's where we think the true venture is. In fact, and this goes back to the LP landscape, um, you know, so some of these smaller funds, um, Um, you know, and I would categorize, it's not just all small funds, right? It has to be the best of the small funds. So if your loss rate is very low, and you have no shot at investing in amazing companies, it is a very bad investment. But if you are dominant, and you're not competing, you know, the nice thing I like about some of these small funds is that they don't compete in their sector, in their geography, in their states. They don't compete with Sequoia and Excel, benchmark, and increase. So they are dominant. They will never lose to them because they will never…

AI assessment note: “Absolutely not. Yeah. My thinking is that if a smaller fund is worthy”

Q What do you think of the philosophical issues associated with investing today, then?

A One of the key tenets of philosophy, of Venture is that venture is, is a highly persistent asset class that the, the, the top VCs or top brands will continue to do well. Now, if you look at, you know, just pick, just pick the Forbes Midas list, for instance, and you will see that four out of the top 10 VCs, Steve Anderson, Chris Saka, Josh Copeland, Peter Thiel, In that they didn't have firms, uh, 10 years ago, right? Even, even Andreessen Horowitz wasn't around 10 years ago, right? So for all this talk of we see being increasingly persistent, um, the, the reality is, um, it's not. And the reality is that there is a huge churn in venture capital. But it's incredibly hard to figure where the puck is going. And I think there are kind of two reasons for this. And I'll tie this back to what, what you had said before, right, about technical expertise. So if you take, you know, if you take some of the best new funds that came in the last decade, say Founders Fund, First Round Capital, Lowercase Y Combinator, all of these firms Are entrepreneur-focused and entrepreneur-led funds. Um, for LPs to identify these such funds very early is incredibly, incredibly hard, because they don't have prior relationships with funds like these. Additionally, these funds don't, these firms don't have an attributable track record, kind of a prerequisite for many Uh, in LPs to invest in something. So, so…

AI assessment note: “that is one kind of philosophical, um, issue that is at the forefront”

Q And then what's your favorite blog or newsletter? What's your must reads when it comes in?

A I like authentic stuff. I, I like authentic, um, things and also changes with, with time. All right. So on the one hand, I, I think some of the most authentic things that I've been seeing in the past decade, um, started with, with, with, uh, Fred Wilson. Paul Graham. I think Paul Graham has had a lot of impact on, on the way I look at startups and, and, uh, things. Um, and then, uh, I, I think of all the, the, the folks, I think very few people can match the intellectual firepower and, and the, and the, and literally the, the contrarian thinking of Peter Thiel. So, and Peter doesn't do a blog per se, but, You know, he's done his books and his lectures at Stanford, and so I think Taylor is probably the one, if not the most significant, one of the most, the most original thinkers of technology in our time, and I think that's why he has been so successful in places which are where others have not. He does the meta-thinking. He does the thinking about thinking, about venture, And, and technology. So I, I think, you know, Peter has been a great influence. Ben Horowitz is, is an amazing thinker about execution. Two of the newer folks, and this also tells you, right, um, if I look at what's going, right, so, so today I have to keep up, right, so that's why I follow Justin Kan on Snapchat, right, so it's not just, it's not just the thinking, but the, but the delivery of the thinking. I…

AI assessment note: “I follow and I'm influenced by Jason Lemkin on, on Sasta.”

Q seed funds and the early entrepreneurial funds of your lower cases, your soft techs, uh, and, and now they're all much bigger funds. They've gone upscale in the venture world. So what do you make of the scaling up of, of these funds, and is this a continued trend that we'll continue to see, or do you see benefits in remaining true to your core pre-seed and seed investment thesis?

A You know, in every asset class, in every sector, the best returns are always, uh, in places where others can't invest. What happens is that, you know, smaller funds raise larger, uh, larger funds, smaller managers. Uh, they then tend to compete for the same deals. They might be, you know, they might be putting smaller checks, but they are in the same series A or B. Uh, many of the series A or B that you're seeing today, um, are actually very similar to what series C or D used to be five to 10 years ago. We are witnessing series A of anywhere from 15 to a hundred million dollars. Uh, so even the smaller funds are now being a part of these later stage rounds. Early stage venture capital is now defined by rounds, um, which, which incubators are doing, where they take money in return for helping start the company. Accelerators, where they take the YC model, and also post-accelerators. Along those lines, there's, there are Angel seed rounds and post seed. So almost the series A has become, um, the fourth or fifth institutional round. At least my feeling, um, where I see that is that, um, that is the best place to invest. Um, um, you know, um, there was close to forty billion raised last year, 14, fifteen billion in Q-one. 90%, 90 to 95% of that Is not going into true early stage. True early stage is getting smaller and smaller. Um, so investors are investing, not in the institution,…

AI assessment note: “That has been a fundamental structural shift.”

Q Now, I'd love to get the ball rolling today by discussing how you came to be an LP, and then what made you decide to found Trusted Insight. So what's the origin story for you?

A Um, so, um, I, I think, uh, for me, uh, it was, uh, just, uh, circumstances where, um, I had, uh, first thought of, um, first thought of joining venture capital. Um, but at that time, this was around 2001, 2002, there was no venture capital happening. So when I talked to some of my mentors at that time, some of the people, um, In the industry, they said, gee, Alex, why don't you consider looking at, um, what the LPs think of this market? And then when I started talking with the LPs, um, uh, I, I found that if I, uh, brought to bear my technical and operational expertise in that field, uh, I would have a differentiated, um, approach, uh, Uh, vis-a-vis a VC. I spent close to a decade in their labs, um, working in different technologies. Many VCs had similar background as me, but very few LPs. I had, um, the background in context that I had for technology investing.

AI assessment note: “when I talked to some of my mentors at that time”

Q Now, I'd love to get the ball rolling today by discussing how you came to be an LP, and then what made you decide to found Trusted Insight. So what's the origin story for you?

A Um, so, um, I, I think, uh, for me, uh, it was, uh, just, uh, circumstances where, um, I had, uh, first thought of, um, first thought of joining venture capital. Um, but at that time, this was around 2001, 2002, there was no venture capital happening. So when I talked to some of my mentors at that time, some of the people, um, In the industry, they said, gee, Alex, why don't you consider looking at, um, what the LPs think of this market? And then when I started talking with the LPs, um, uh, I, I found that if I, uh, brought to bear my technical and operational expertise in that field, uh, I would have a differentiated, um, approach, uh, Uh, vis-a-vis a VC. I spent close to a decade in their labs, um, working in different technologies. Many VCs had similar background as me, but very few LPs. I had, um, the background in context that I had for technology investing.

AI assessment note: “when I talked to some of my mentors at that time, some of the people”

Q there when we said about those that smash it and, and those that don't, What about second time funds where it's very difficult to tell if someone smashed it or they haven't smashed it? Um, because there's real, no real exits and hopefully no, none that fallen off the side of the cliff, so to speak. So how do you judge your first, a first time fund manager's second raise?

A So in a lot of sense, you know, um, it's almost the same as a company, right? It's like, how do you select your best, select the best syndicate? And typically you select the best syndicate. Of two types of people. One, A, that they can give you signal, and B, um, that have deep pockets. So if you haven't made enough progress, they can follow on. So typically, it's the same with venture funds. So when you, um, when you choose a partner, an institutional partner, they know enough where they will say, okay, in two years, um, I will recommit to you. Um, with the understanding that you will not have had exits, with the understanding that some of your underlying investments would not have shown a lot of progress. Even the ones, the managers that have smashed it, it was not evident in two years that they would be the best manager. So in some cases, um, you know, uh, I have seen quite the opposite. Most people, um, get very, uh, very concerned, uh, And tend to not free up. Managers, PC managers have a choice of sophisticated investors. They should pick those that are willing to support them over multiple fund cycles.

AI assessment note: “it was not evident in two years that they would be the best manager”

Q there when we said about those that smash it and, and those that don't, What about second time funds where it's very difficult to tell if someone smashed it or they haven't smashed it? Um, because there's real, no real exits and hopefully no, none that fallen off the side of the cliff, so to speak. So how do you judge your first, a first time fund manager's second raise?

A So in a lot of sense, you know, um, it's almost the same as a company, right? It's like, how do you select your best, select the best syndicate? And typically you select the best syndicate. Of two types of people. One, A, that they can give you signal, and B, um, that have deep pockets. So if you haven't made enough progress, they can follow on. So typically, it's the same with venture funds. So when you, um, when you choose a partner, an institutional partner, they know enough where they will say, okay, in two years, um, I will recommit to you. Um, with the understanding that you will not have had exits, with the understanding that some of your underlying investments would not have shown a lot of progress. Even the ones, the managers that have smashed it, it was not evident in two years that they would be the best manager. So in some cases, um, you know, uh, I have seen quite the opposite. Most people, um, get very, uh, very concerned, uh, And tend to not free up. Managers, PC managers have a choice of sophisticated investors. They should pick those that are willing to support them over multiple fund cycles.

AI assessment note: “when you choose a partner... they will say, okay, in two years, I will recommit”

Q Absolutely. And we, we spoke there about kind of transparency within the ecosystem and, And one thing Naval Ravikant's very keen on is opening up the earlier stages of fundraising with AngelList. Do you think AngelList will, will fundamentally change the transparent nature of the VC and early stage funding environment?

A I think in, you know, AngelList and others, so there is a structural advantage that platforms like AngelList and Y Combinator and, um, Entrepreneur First and others, Have. So, um, you know, we do see, and this is kind of what, what you, you know, we were alluding to. Venture now has done quite well, and everything is looking good. In most asset classes, a third to a quarter of managers lose money. In venture, that, that could be, depending on the vintage, that could be half, two-thirds of the managers. Now, today, it looks like everybody is making money. But when the tide comes down, um, it will not look so well. So we think some of the best managers, which I will actually be, be platforms like AngelList. Now I'm a big fan of Nawal. AngelList is arguably much further ahead than anybody else. Um, but this is still the beginning. We think there'll be many, many, um, you know, many amazing platforms. It's just like when you look at social networking, right? It didn't start and end with Friendster or MySpace or Facebook or WhatsApp. You know, now they're a Snapchat, right? So there'll always be, there'll always be innovation there. You know, there are a few people who say, oh, well, this is the end. You know, after Twitter and Facebook, social networking is done. It's never done. It always, it's always evolving. And the next big wave, as we talked about, AI is, Is almost as fundame…

AI assessment note: “AngelList is arguably much further ahead than anybody else. Um, but this is still”

Q Absolutely. And we, we spoke there about kind of transparency within the ecosystem and, And one thing Naval Ravikant's very keen on is opening up the earlier stages of fundraising with AngelList. Do you think AngelList will, will fundamentally change the transparent nature of the VC and early stage funding environment?

A I think in, you know, AngelList and others, so there is a structural advantage that platforms like AngelList and Y Combinator and, um, Entrepreneur First and others, Have. So, um, you know, we do see, and this is kind of what, what you, you know, we were alluding to. Venture now has done quite well, and everything is looking good. In most asset classes, a third to a quarter of managers lose money. In venture, that, that could be, depending on the vintage, that could be half, two-thirds of the managers. Now, today, it looks like everybody is making money. But when the tide comes down, um, it will not look so well. So we think some of the best managers, which I will actually be, be platforms like AngelList. Now I'm a big fan of Nawal. AngelList is arguably much further ahead than anybody else. Um, but this is still the beginning. We think there'll be many, many, um, you know, many amazing platforms. It's just like when you look at social networking, right? It didn't start and end with Friendster or MySpace or Facebook or WhatsApp. You know, now they're a Snapchat, right? So there'll always be, there'll always be innovation there. You know, there are a few people who say, oh, well, this is the end. You know, after Twitter and Facebook, social networking is done. It's never done. It always, it's always evolving. And the next big wave, as we talked about, AI is, Is almost as fundame…

AI assessment note: “So we think some of the best managers, which I will actually be platforms like AngelList.”