The Exchanges

Q Absolutely. In terms of kind of the VC logic around it, I'm always intrigued whether the thesis of billion dollar requirements in terms of exits is true. Do you think that really is a fundamental pillar of the VC exit ecosystem, or is it a slight, uh, mythology created in recent times?

A So I think it's, it's a little bit of both. I think the, the expectations have definitely inflated around the valuations that have been put out, right? There's over 200 Companies that are considered these unicorns, many of them will probably never live up to their billion dollar valuations, but they've redefined for venture capitalists what their expectations are. You have to put that alongside the fact that venture funds have been growing, and the rule of thumb we use there is we say any exit that isn't at least equivalent to the size of the fund is not really material to a fund. So typical rule of thumb, a venture capitalist will own 20% of a company over time and hopefully at exit. In many cases, a billion dollar exit For a billion dollar fund is relevant because they'll make two hundred million dollars in order to turn one fifth of the fund. By the way, that's not amazing to return only one fifth of your fund on a billion dollar exit. It's actually kind of frustrating. You need five of those just to return your fund. You need 15 of those to get to a three X return, which most limited partners would be looking for. But at least it starts to become relevant. But a fifty million dollar take home from a VC, from a Two hundred and fifty million dollar exit if it's a billion dollar venture fund. So the 20% on two hundred and fifty million dollars is fifty million. You just can't …

AI assessment note: “So I think it's, it's a little bit of both.”

Q Absolutely. In terms of kind of the VC logic around it, I'm always intrigued whether the thesis of billion dollar requirements in terms of exits is true. Do you think that really is a fundamental pillar of the VC exit ecosystem, or is it a slight, uh, mythology created in recent times?

A So I think it's, it's a little bit of both. I think the, the expectations have definitely inflated around the valuations that have been put out, right? There's over 200 Companies that are considered these unicorns, many of them will probably never live up to their billion dollar valuations, but they've redefined for venture capitalists what their expectations are. You have to put that alongside the fact that venture funds have been growing, and the rule of thumb we use there is we say any exit that isn't at least equivalent to the size of the fund is not really material to a fund. So typical rule of thumb, a venture capitalist will own 20% of a company over time and hopefully at exit. In many cases, a billion dollar exit For a billion dollar fund is relevant because they'll make two hundred million dollars in order to turn one fifth of the fund. By the way, that's not amazing to return only one fifth of your fund on a billion dollar exit. It's actually kind of frustrating. You need five of those just to return your fund. You need 15 of those to get to a three X return, which most limited partners would be looking for. But at least it starts to become relevant. But a fifty million dollar take home from a VC, from a Two hundred and fifty million dollar exit if it's a billion dollar venture fund. So the 20% on two hundred and fifty million dollars is fifty million. You just can't …

AI assessment note: “So I think it's, it's a little bit of both.”

Q Now, I'd love to get started today with anyone who's been living under a rock and didn't hear your origin story into venture. So how did you make your initial steps into what I call the wonderful world of venture capital?

A Sure. So I, I was twice an entrepreneur, uh, started a company in New York during the dot-com boom, and then, um, went to business school and during business school teamed up with Micah Rosenblum, uh, to start a company with him and two folks out of MIT called Brontes Technologies, and our first investor was David Frankel, who's my third partner in Founder Collective, along with Micah, who I mentioned before, and Brontes was, uh, I won't dive too deep on that story since it's a 20 minute show, but it was, uh, a really exciting experience. Um, we built a extremely innovative product in a market I never thought I'd want to spend time in, but turned out to be a very exciting market for us, which was Mass customization for dentistry, three, three D scanning the mouth to replace the dental impression. And while it sounds very much like a medical device, which at some level it was, it was also a IOT system and a cloud system and a computer vision system. And we use three printing technologies. And so it was a really exciting multidisciplinary product. Ultimately we sold that company to three M in 2006. So it's starting to be quite a long time ago. Uh, I stayed there until the end of 2008. And in that period from 2006 to 2008, we, Mike and I joined Dave Frankel along with another classmate, Chris Dixon, and all started doing a whole bunch of angel investing together. And that work ult…

AI assessment note: “all started doing a whole bunch of angel investing together. And that work ultimately became founder collective.”

Q In terms of kind of, we mentioned the pressure cooker imposed on founders. Often by investors, we have to admit in terms of valuation upticks, you spoke about kind of After raising in terms of kind of your thesis, and I know it's tough to, to not apply a rule of thumb, but what are your rough expectations of valuation uptake based upon VC funding and raising for founders?

A So start with, if you're going to be a venture backed startup, people are betting on you to be some sort of rocket ship, right? You maybe don't have to grow as fast as Facebook did, but the idea is you're going to grow, you're going to have a fast growth business. That's why people are investing. I think at the early stage, rough rule of thumb, there's no perfect definition here. You should at least be tripling every two years. Some people would argue you should be doubling every year, which would mean Forex in two years. But just to sort of put a more fair rule of thumb on it, if you're not tripling your valuation in three years, you're probably not, I'm sorry, in two years, you're probably not living up to the expectations that have been put on the company. And you could say, boy, the VCs are terrible. They're the ones driving these expectations. Actually, the expectations come as a result of a tough negotiation where, Not just VCs, but founders typically want more capital and higher price. And so it's on both sides, the intention of the VC to get more capital in and incentives to do so, and the desire of the entrepreneur to take more capital at a higher price that are driving those lofty expectations. But I think a lot of founders don't look at the risk that they're adding around those really huge post money valuations and what it actually means for their company. They just …

AI assessment note: “rough rule of thumb... You should at least be tripling every two years.”

Q And when you were a founder then yourself, who is your founder role model?

A Ooh, that's really good. Um, You know, I'll, I'll take a, a somewhat, um, uh, less known one, but I, I was very lucky to have Kelsey Wirth on my board, uh, who was the founder of Invisalign, and we had gone after this industry that I never imagined we'd go after that was certainly very quirky to the, to the venture community, and Kelsey had built a billion dollar company in five years in that industry, uh, enabling mass customization, but on the output side, we were on the input side, And, um, she really played a great mentoring role with me, would come out to the company a half day a month and just sit in meetings, you know, share her thoughts with me, give me feedback. I would throw the toughest things I was thinking about at her. Um, and she always was willing to dive deep and give me an opinion, but not be dogmatic, um, understanding that she had, you know, only the data I was giving her in a limited data set. And, um, Um, she was just a great mentor and collaborator in that way.

AI assessment note: “I was very lucky to have Kelsey Wirth on my board”

Q And then what's, we've mentioned seed funds and successful seed funds that you respect. Who are they in particular? I mean, just a few names that you particularly respect and admire.

A You know, I can rattle off a lot of names. I mean, I think there are a lot of really good people in this business, but, you know, we, uh, we think very highly of First Round and Lear Ventures and Floodgate, and here in Boston, I think very highly of NextView, and, um, Steve Anderson's done a great job at Baseline, and I've, I've, um, I've had the opportunity to work with Bryce Roberts at OATV, and that's been a great experience, and Roger Ehrenberg at IA Ventures, and, you know, this is a, um, It's, it is an industry of some really, really great people, uh, and I've learned a lot from a lot of these folks, and I think very highly of them, and I'm almost feel bad making a list like that, because there are, you know, easily another dozen folks that I should probably be mentioning.

AI assessment note: “we think very highly of First Round and Lear Ventures and Floodgate”

Q And when you were a founder then yourself, who is your founder role model?

A Ooh, that's really good. Um, You know, I'll, I'll take a, a somewhat, um, uh, less known one, but I, I was very lucky to have Kelsey Wirth on my board, uh, who was the founder of Invisalign, and we had gone after this industry that I never imagined we'd go after that was certainly very quirky to the, to the venture community, and Kelsey had built a billion dollar company in five years in that industry, uh, enabling mass customization, but on the output side, we were on the input side, And, um, she really played a great mentoring role with me, would come out to the company a half day a month and just sit in meetings, you know, share her thoughts with me, give me feedback. I would throw the toughest things I was thinking about at her. Um, and she always was willing to dive deep and give me an opinion, but not be dogmatic, um, understanding that she had, you know, only the data I was giving her in a limited data set. And, um, Um, she was just a great mentor and collaborator in that way.

AI assessment note: “I was very lucky to have Kelsey Wirth on my board, uh, who was the founder of Invisalign”

Q And then what's, we've mentioned seed funds and successful seed funds that you respect. Who are they in particular? I mean, just a few names that you particularly respect and admire.

A You know, I can rattle off a lot of names. I mean, I think there are a lot of really good people in this business, but, you know, we, uh, we think very highly of First Round and Lear Ventures and Floodgate, and here in Boston, I think very highly of NextView, and, um, Steve Anderson's done a great job at Baseline, and I've, I've, um, I've had the opportunity to work with Bryce Roberts at OATV, and that's been a great experience, and Roger Ehrenberg at IA Ventures, and, you know, this is a, um, It's, it is an industry of some really, really great people, uh, and I've learned a lot from a lot of these folks, and I think very highly of them, and I'm almost feel bad making a list like that, because there are, you know, easily another dozen folks that I should probably be mentioning.

AI assessment note: “we think very highly of First Round and Lear Ventures and Floodgate”

Q that you like to speak to your LPs and hear the commonalities with what they're saying. I speak to mine, and they all say when they look at their venture books, I've got no idea where to place them. If you guys were to answer that to LPs, Where should we, how should we think about the book values of the last vintage? Is this just a load of mulligans?

A It's really interesting. One of our LPs was sharing with us that, um, despite the market being up the last two quarters in December, the end of the year quarter and the financials they got in April for most funds was the first time they really saw the, the venture valuations dramatically fall. And his thesis was, it's not like we all started grading our own homework better. It's just that we really actually had to show stuff to auditors, and because we had to do that, it changed things. And the funny thing about that is I don't actually think the auditors really do that much on valuation, in my opinion, besides just make sure you're following your own rules, right? But I think some of it is the 18 month safe harbor that was nonsense all along that everyone has used. Um, all of a sudden that's starting to expire for a lot of funds and companies. But I think the answer to your questionary is a little bit of a depressing one. One of three things are going to happen to those companies, right? They're either going to take the extraordinary amount of cash they got, cut their burn rates down and figure out how to build real companies. And by the way, many of those will still never raise money ever again, but they'll build real companies and find real exits. They're going to find a kick save somewhere because they might have something kind of working and there's someone out there who's…

AI assessment note: “I think the answer to your questionary is a little bit of a depressing one”

Q Talking of upside though, I am intrigued because we spoke about kind of what makes an investment worthy. Five percent isn't tempting enough. 20 is. What do you make of the rise of the mega funds we've seen of today of the billion dollar plus Andreessen Greylock, uh, NEA style?

A You know, I think, I think for them to do really well, they need to do a lot of growth stage investing, right? Where they're writing meaningful eight figure checks, large eight figure checks into companies and, Seeing strong return on those companies, and I think that's led to a lot of the sort of private IPO period with longer extended periods where companies aren't going public, and possibly the, you know, in many cases, the overfunding of businesses that today are the unicorn class of companies, but I think if they're picking wisely among that class, evidence suggests over time they can do well in that business. I think it's a lot harder to take their money at a stage where You're an early stage company, and you know the only way to move the dial on your business, on, on their business, from your startup, is to have a billion dollar plus outcome.

AI assessment note: “for them to do really well, they need to do a lot of growth stage investing”

Q So what is practicing efficient entrepreneurship then really if we break it down?

A Yeah, I think it's a series of things. It's, it's using capital to accelerate those things that are working as opposed to using capital to find things that work. So there's always going to be some element of using capital to experiment. That is totally fine and to be expected. But what ultimately happens is when some things appear to be working and VCs get excited, they tend to offer because there are very big funds out there today, tend to offer more capital than probably makes sense for the entrepreneur at that moment. And then there's a big burden on that entrepreneur, and then the valuations go up to, to match the amount of capital to some degree. And then there's a big burden on the entrepreneur to live up to that valuation and aggressively utilize that capital. So burn rate increases, right? And this whole cycle creates what, what we said is, you know, venture capital is a hell of a drug. It is sort of a drug dependency because now you have a burn rate that's not necessarily well justified by the evidence that the market is telling you about your company. It's, it's largely validated by VC's willingness To give you money, not by customers demonstrating the value you're creating in the market. And yet, if you don't live up to that burn rate and don't start to see the acceleration that you now have tremendous pressure to achieve, you become pretty much unfundable. All of a …

AI assessment note: “It's using capital to accelerate those things that are working as opposed to using capital”

Q Talking of upside though, I am intrigued because we spoke about kind of what makes an investment worthy. Five percent isn't tempting enough. 20 is. What do you make of the rise of the mega funds we've seen of today of the billion dollar plus Andreessen Greylock, uh, NEA style?

A You know, I think, I think for them to do really well, they need to do a lot of growth stage investing, right? Where they're writing meaningful eight figure checks, large eight figure checks into companies and, Seeing strong return on those companies, and I think that's led to a lot of the sort of private IPO period with longer extended periods where companies aren't going public, and possibly the, you know, in many cases, the overfunding of businesses that today are the unicorn class of companies, but I think if they're picking wisely among that class, evidence suggests over time they can do well in that business. I think it's a lot harder to take their money at a stage where You're an early stage company, and you know the only way to move the dial on your business, on, on their business, from your startup, is to have a billion dollar plus outcome.

AI assessment note: “for them to do really well, they need to do a lot of growth stage investing”

Q So what is practicing efficient entrepreneurship then really if we break it down?

A Yeah, I think it's a series of things. It's, it's using capital to accelerate those things that are working as opposed to using capital to find things that work. So there's always going to be some element of using capital to experiment. That is totally fine and to be expected. But what ultimately happens is when some things appear to be working and VCs get excited, they tend to offer because there are very big funds out there today, tend to offer more capital than probably makes sense for the entrepreneur at that moment. And then there's a big burden on that entrepreneur, and then the valuations go up to, to match the amount of capital to some degree. And then there's a big burden on the entrepreneur to live up to that valuation and aggressively utilize that capital. So burn rate increases, right? And this whole cycle creates what, what we said is, you know, venture capital is a hell of a drug. It is sort of a drug dependency because now you have a burn rate that's not necessarily well justified by the evidence that the market is telling you about your company. It's, it's largely validated by VC's willingness To give you money, not by customers demonstrating the value you're creating in the market. And yet, if you don't live up to that burn rate and don't start to see the acceleration that you now have tremendous pressure to achieve, you become pretty much unfundable. All of a …

AI assessment note: “using capital to accelerate those things that are working as opposed to using capital”

Q So I have two, two kind of subsequent questions from that before we dive into the quickfire. And the first is, does that mean founders are Potentially too ambitious today. I've, I've seen trillion three times in the last two weeks in decks. Is there a kind of heightened ambition that's potentially too much?

A I think it's, it's bravado, not ambition, right? I've never believed that go big or go home is a requirement to building a big company. I think entrepreneurs build big companies because they can see over the inflection points of the company, how much upside there is in the future of that company. So when somebody offers them more future value than they can see, they sell. And when somebody offers them less future value than they can see, they don't sell. Right. And hopefully they're making relatively rational decisions about when to sell their businesses. So I think it's a bravado artificial notion. If you're not set out to build a billion dollar business, there's no reason VC should be interested in investing. And we just had an IPO of a company that sold that, that went public and is worth about a billion dollars. And all along, The founder of that company was rational in terms of talking about what made sense. And all along, he could clearly see that the company was growing incredibly fast and was going to become more and more valuable. And so the people who were making him aggressive offers to buy his business, he wasn't interested, not because of some irrational go big or go home theory, but because he could clearly see what the potential was at each inflection point of that business. And why would he sell if he could see that much more upside?

AI assessment note: “I think it's, it's bravado, not ambition, right?”

Q Mm-hmm. And, and do you think then you're, you're a very unique fund then for not engaging in follow rounds to a large extent?

A I put it this way. I'm very surprised, um, how few funds there are out there. So we have a big peer group now of seed funds that I really think are terrific. I mean, a lot of people I love working with insanely talented individuals, um, who could raise much bigger funds and choose to be seed investors. And I can name names, but a really, really terrific peer group. But I am surprised at how rare it is to find a fund that really focuses only on that seed stage. Um, and doesn't want to write life cycle checks. And I think there are a bunch of reasons for that. One is conventional wisdom is what it is. One is that sense that, that FOMO, that fear of missing out of what you said before, oh my goodness, how did I, I could have invested in Uber also at three hundred million, and today it's worth, you know, depending on what press you read, 60 or seventy billion, right? And I missed out, missed out on that. And I think that logic flow leads to more and more lottery ticket type of investing. And we see our investing strategy as much more of a Rational averages play. I mean, it's not that we don't believe we'll have great outliers. We have three, what people like to call unicorns in our first fund right now, and that's great. Um, but we don't predict, we don't assume that that is a requirement to have great outcomes in our funds.

AI assessment note: “I am surprised at how rare it is to find a fund that really focuses”

Q And then how do you measure your success as a VC? Is it through the support that you provide? Is it through your LP returns? What is it for you?

A Um, I'd start with my partnership, to be completely honest. I mean, I, I think this gets to be a very lonely business, uh, and very transactional business if the people you're doing, doing the work with every day, um, aren't having fun doing this with you, and you're not having fun doing it with them. So, I think the team we have here, we have an eight person team, uh, my two partners, uh, the quality is the bedrock of that relationship, is the bedrock of what we do. And then, the next thing I'd say is, You know, we take the most pride in the work we do with founders. So when we're not leads, we try to be good sounding boards and available to founders, and some use us frequently, and some don't come to us that much, and that's okay, right? Because what we're not trying to do is, uh, overly, um, Manage these companies or add overhead burden to what they have to do every day. If they're getting the help they need somewhere else, that's great. But for a lot of those founders, they, they do rely on us a lot. And, and we like that. That doesn't, you know, it doesn't feel like a burden to us. It really feels like we're, you know, we're valued in helping. Uh, and then the ones we're on the board, boards of are the ones we get to know, um, the most intimately. So, you know, we, we invest in the trade desk, um, in two, beginning of And Jeff Green and I have had a phone with the CEO of t…

AI assessment note: “we take the most pride in the work we do with founders.”

Q And then how do you measure your success as a VC? Is it through the support that you provide? Is it through your LP returns? What is it for you?

A Um, I'd start with my partnership, to be completely honest. I mean, I, I think this gets to be a very lonely business, uh, and very transactional business if the people you're doing, doing the work with every day, um, aren't having fun doing this with you, and you're not having fun doing it with them. So, I think the team we have here, we have an eight person team, uh, my two partners, uh, the quality is the bedrock of that relationship, is the bedrock of what we do. And then, the next thing I'd say is, You know, we take the most pride in the work we do with founders. So when we're not leads, we try to be good sounding boards and available to founders, and some use us frequently, and some don't come to us that much, and that's okay, right? Because what we're not trying to do is, uh, overly, um, Manage these companies or add overhead burden to what they have to do every day. If they're getting the help they need somewhere else, that's great. But for a lot of those founders, they, they do rely on us a lot. And, and we like that. That doesn't, you know, it doesn't feel like a burden to us. It really feels like we're, you know, we're valued in helping. Uh, and then the ones we're on the board, boards of are the ones we get to know, um, the most intimately. So, you know, we, we invest in the trade desk, um, in two, beginning of And Jeff Green and I have had a phone with the CEO of t…

AI assessment note: “I'd start with my partnership, to be completely honest.”

Q And with this kind of really serious and genuine founder alignment that you have at Founder Collective, does it slightly irritate you to see so many VCs call themselves founder friendly? I mean, it's kind of in every single VC pitch that they're founder friendly. Does that irritate you when you actually look and think?

A No, I think it's great. I honestly, um, so I think I built Brontes in a time where VCs didn't particularly pride themselves They prided themselves on being founder friendly. They prided themselves on being shrewd and smart, and I used to joke that if there's a dollar on the table and you're sitting across the table from a VC, they're certain that dollar is theirs and not yours, and I think, you know, there's still a lot of that out there, but if, if the whole sort of ethos of we're also founder friendly is something that keeps VCs focusing on the importance of being founder friendly and understanding that what the founder is doing is so much harder. Then what the VC is doing. I think that's a pretty good thing overall. So I think, you know, the sort of the magnitude of how founder friendly you are, which is a funny metric, um, people are going to have to reference and they're going to have to try to understand, um, how you acid test that and how you structurally try to build alignment. Uh, and that's fine. But if ultimately the ethos of the industry now is shifting towards truly being more founder friendly, I think that's a great thing.

AI assessment note: “No, I think it's great.”

Q interview with David, um, David stated that you don't do follow-on rounds, generally speaking, uh, because he, he said it aligns you with your founders, and then you don't alter judgment calls down the line because you're both on the same side. So do you feel that you miss out then financially by not doing the follow-on rounds with, with the likes of your Uber, who are clearly rocket ships?

A But I think what gets lost in that conversation is how much of the upside we're capturing of Uber. So it's for sure the case that we could have captured even more had we invested in every single round. But if you really just, you know, I won't do the math because I can't share all those numbers, but if you sit and you simulate that math, what you find is we capture I mean, it's not as if the company going up, you know, thousands of times in multiple, um, doesn't capture most of that upside, right? That, that growth, you know, if we had invested in every single round, um, we still wouldn't, I don't think, come close to doubling what our current value is. And, and it counts for something. I'd be delighted to double my current value. But, um, but we're capturing a tremendous amount of that upside. And so I, I think people lose track of that, uh, and instead get very focused on investing at later stages. And, you know, when it works out, you always feel smart. Every company that does really, really well, you always ask yourself, why didn't we own more of that company? But across an entire portfolio, we have a different strategy.

AI assessment note: “if we had invested in every single round, um, we still wouldn't... doubling”

Q Mm-hmm. And, and do you think then you're, you're a very unique fund then for not engaging in follow rounds to a large extent?

A I put it this way. I'm very surprised, um, how few funds there are out there. So we have a big peer group now of seed funds that I really think are terrific. I mean, a lot of people I love working with insanely talented individuals, um, who could raise much bigger funds and choose to be seed investors. And I can name names, but a really, really terrific peer group. But I am surprised at how rare it is to find a fund that really focuses only on that seed stage. Um, and doesn't want to write life cycle checks. And I think there are a bunch of reasons for that. One is conventional wisdom is what it is. One is that sense that, that FOMO, that fear of missing out of what you said before, oh my goodness, how did I, I could have invested in Uber also at three hundred million, and today it's worth, you know, depending on what press you read, 60 or seventy billion, right? And I missed out, missed out on that. And I think that logic flow leads to more and more lottery ticket type of investing. And we see our investing strategy as much more of a Rational averages play. I mean, it's not that we don't believe we'll have great outliers. We have three, what people like to call unicorns in our first fund right now, and that's great. Um, but we don't predict, we don't assume that that is a requirement to have great outcomes in our funds.

AI assessment note: “I am surprised at how rare it is to find a fund that really focuses”

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”

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: “I think the healthiest thing that founders could do with more capital is drive a longer runway.”

Q Thanks. Now, I'd love to hear a little about your backstory and, and how you got into the wonderful world of venture. Can you give us the Eric Paley snapshot?

A Sure. Um, I was a founder of two different companies. Um, I think growing up, I was always quite interested in entrepreneurship. I didn't know exactly how to go about it. Um, my first job out of Out of undergraduate, uh, was in consulting, and I, I didn't actually enjoy it very much, and I wanted to be somewhere where I was much more challenged and actually creating every day, um, and I looked to found a business that we could found with effectively no capital, so ultimately left my job along with my brother and my cousin, and we started a web development company during the dot-com boom, and worked for a lot of startup clients, and luckily a few brands that weren't startups, because when things imploded, Uh, it was good to have some non-started clients. Exactly. Uh, and that company's called Abstract Edge, and it still exists. Uh, it's still run by my, my, uh, brother and my cousin, and, um, and they've been at it for quite some time now, uh, and work, done great work with lots of neat clients. And then, um, when the bust happened, I really felt like, uh, I was out ahead of myself, that it was great to get challenged, but I think in really good times, you feel extremely, you know, probably People feel a little overconfident. Right now, it's probably one of those times, uh, and in, in, in bad times, uh, you, you sort of retrench a little bit and think about, um, what, what shoul…

AI assessment note: “I was a founder of two different companies.”

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: “I think alignment counts for a tremendous amount. I think there's actually a pretty big”

Q Are you? Because some VCs don't go along for that ride and see that as a very kind of, uh, Unassailable bridge that you don't cross as, as a VC and a founder. Do you kind of, uh, aid with personal troubles?

A You know, there's a very human side of this business that is completely real, um, and when you're investing at a stage where there isn't a business yet in most cases, um, you're betting on a person. And when you're betting on that person and, you know, they're going through a divorce or they have a sick kid or a sick parent or, um, meaningful, uh, medical, uh, issues of their own, I mean, I don't, I don't know how you don't engage the human side of that. Um, And I, I think the very best investors that I most admire, uh, you know, talk about that a lot, and it is a very real part of all of this. Um, so I think, yeah, I mean, we, we value these relationships. We, we, we value the founders, even the ones who end up having to leave their companies. We, we're upset to see them leave their companies, and, um, we know how hard that is. Um, and that does happen sometimes, and we hate, we hate seeing that happen. So, um, Yeah, I mean, you know, there's a lot of emotional rollercoaster to this business, but for sure, there's a certain grounding of knowing that we're doing well by our investors, and the whole thing is very, feels more worthwhile, because these companies, because they do work sometimes, and there's some really great success stories.

AI assessment note: “I don't know how you don't engage the human side of that.”

Q so many times on the show people say, oh, we think it's a market that's big enough for multiple venture-sized outcomes, and that can very often be the case, but the actual outcomes vary extraordinarily in size. Respectfully, Uber and Lyft are very differently priced today. How important do we think market dominance is when we think about enterprise value investing today, and how that leads our thinking when investing?

A So this is sort of counter industry, but I'm not a macro markets investor. I think later stage investors, maybe it makes a lot of sense. So I don't, I don't want to dismiss the importance of it. I just think in venture, we all want to feel like we're smarter than we are. Like you're going to do this really sophisticated market analysis. By the way, there was no market analysis on Uber and Lyft. I don't say there was none because clearly the world went the way it did, but I don't think anyone who is good at market analysis Could have predicted how that played out. And I'll tell you another story, you know, with Trade Desk, one of the reasons, one of the reasons we didn't raise a lot of money was, we were the last ones in, and people just thought it was played already in the, in the programmatic advertising market. But one of the reasons we didn't raise that money is Jeff always wanted optionality to sell the company for a couple hundred million dollars, because he wasn't convinced he could build a big enough company, by the way.

AI assessment note: “I'm not a macro markets investor.”

Q that you like to speak to your LPs and hear the commonalities with what they're saying. I speak to mine, and they all say when they look at their venture books, I've got no idea where to place them. If you guys were to answer that to LPs, Where should we, how should we think about the book values of the last vintage? Is this just a load of mulligans?

A It's really interesting. One of our LPs was sharing with us that, um, despite the market being up the last two quarters in December, the end of the year quarter and the financials they got in April for most funds was the first time they really saw the, the venture valuations dramatically fall. And his thesis was, it's not like we all started grading our own homework better. It's just that we really actually had to show stuff to auditors, and because we had to do that, it changed things. And the funny thing about that is I don't actually think the auditors really do that much on valuation, in my opinion, besides just make sure you're following your own rules, right? But I think some of it is the 18 month safe harbor that was nonsense all along that everyone has used. Um, all of a sudden that's starting to expire for a lot of funds and companies. But I think the answer to your questionary is a little bit of a depressing one. One of three things are going to happen to those companies, right? They're either going to take the extraordinary amount of cash they got, cut their burn rates down and figure out how to build real companies. And by the way, many of those will still never raise money ever again, but they'll build real companies and find real exits. They're going to find a kick save somewhere because they might have something kind of working and there's someone out there who's…

AI assessment note: “I think the answer to your questionary is a little bit of a depressing one.”

Q so many times on the show people say, oh, we think it's a market that's big enough for multiple venture-sized outcomes, and that can very often be the case, but the actual outcomes vary extraordinarily in size. Respectfully, Uber and Lyft are very differently priced today. How important do we think market dominance is when we think about enterprise value investing today, and how that leads our thinking when investing?

A So this is sort of counter industry, but I'm not a macro markets investor. I think later stage investors, maybe it makes a lot of sense. So I don't, I don't want to dismiss the importance of it. I just think in venture, we all want to feel like we're smarter than we are. Like you're going to do this really sophisticated market analysis. By the way, there was no market analysis on Uber and Lyft. I don't say there was none because clearly the world went the way it did, but I don't think anyone who is good at market analysis Could have predicted how that played out. And I'll tell you another story, you know, with Trade Desk, one of the reasons, one of the reasons we didn't raise a lot of money was, we were the last ones in, and people just thought it was played already in the, in the programmatic advertising market. But one of the reasons we didn't raise that money is Jeff always wanted optionality to sell the company for a couple hundred million dollars, because he wasn't convinced he could build a big enough company, by the way.

AI assessment note: “I'm not a macro markets investor. I think later stage investors, maybe it makes a lot of sense.”

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: “most venture funds are driven by outliers, so I, I don't know that you can take outliers out”