The Exchanges

Q And then final one, Gary, what's the most recent investment publicly announced, that is, and why did you say yes?

A We just announced a really big round for standard cognition, and so they are cashierless checkout, so anyone can walk into a store, you know, you can pick up a bag of chips and walk out and basically get a bill automatically to your mobile app, and so something that really will change the face of retail across the board. It's something that Amazon is obviously bringing out with Amazon Go, and the pattern that we're seeing again is that Instacart was the biggest beneficiary of Amazon making big inroads into retail. We think catcherless checkout is about to totally remake retail again. And standard cognition now is actually able to sign very large contracts with some of the biggest grocers in the world at the end of the day, because Amazon is coming for them. And that's something that we're pretty interested in and that, you know, we're in the middle of sort of this extreme surge in big tech. And what we realize is our startups are actually some of the best people to supply the arms to the little guy or sort of the rest of the S&P 500 that cannot hire good software talent. So hopefully we can sort of restore a little bit of balance out there into the empire.

AI assessment note: “We just announced a really big round for standard cognition”

Q Wow, yeah, no, I'm sure. Tell me, Gary, who's the best board member you've worked with, and why?

A Satish Jarmaraj at Redpoint was actually our first board member for Posterous, and so, My favorite things about him was that he's so technical. He literally wrote Java server pages at Sun before he started a company and then became a VC. And so one of the things I always admired and we try to model as much as possible actually is this idea that we can actually help the founders at a fundamental level. If we understand frankly what their product is and how they're building it, you know, we can sort of be by their side and that's just worked so well across the My whole career thus far, so we owe Satish a really great debt of gratitude.

AI assessment note: “Satish Jarmaraj at Redpoint was actually our first board member for Posterous”

Q to ask this series of questions ever since our first interview, so I took the chance today. So now you have your product market fit shown with the returns and the latest fund from initialized, but things change with scale. So let's take these in turn. The first is ownership. I'd love to hear, how do you think about ownership requirements changing with the evolution of funds as they grow?

A I think one of the things that shocked me the most You know, we really started with a tiny fund, a seven million dollar fund, and it was basically pretty easy to put a 50 to a 100,000 dollar check into basically every deal that we could possibly want to do. And over the years, particularly with fund three, we got to a hundred twenty five million, and that meant that we needed to get our ownership targets to five to 10%. And now with fund four, we're actually up to a two hundred twenty five million dollar fund with basically 15% ownership targets. We'll do 10% sometimes, but That's sort of the spreadsheet math that you basically have to go with as you scale your capital, and so that's been an incredibly difficult evolution in a lot of ways because the hardest part is breaking a lot of hearts. We are finding that there are a lot of seed funds that we want to do work with, but because our check is so big and the founders get very dilution sensitive, it actually makes it hard to collaborate with all the people we absolutely love to do a lot of work with, and so that's one of the harder challenges for us. Love co-investing, and I find that It's been very, very fruitful, but that just sort of goes with the territory as you build up the assets under management.

AI assessment note: “up to a two hundred twenty five million dollar fund with basically 15% ownership targets”

Q What level of ownership do you think is required to generate the alpha required to return the fund, which is always what we're trying to do with deals?

A Yeah, absolutely. We went back and kind of looked historically at What people do for seed rounds. My favorite thing about seed actually, and it fits our temperament really, is that we love to be super collaborative, especially with other investors. So, five percent ownership at the initial check size means that we're usually among the biggest checks in that seed round, if not the biggest. Between five, if we can target five to 10% ownership initially, that's still enough to bring in the SV Angels or the Fuel Capitals or other great investors that we especially like to work with. And then on the flip side, that's That's enough such that we're properly invested. We're going to keep working with them. And then at their later rounds, we can help them out as well.

AI assessment note: “if we can target five to 10% ownership initially, that's still enough”

Q What level of ownership do you think is required to generate the alpha required to return the fund, which is always what we're trying to do with deals?

A Yeah, absolutely. We went back and kind of looked historically at What people do for seed rounds. My favorite thing about seed actually, and it fits our temperament really, is that we love to be super collaborative, especially with other investors. So, five percent ownership at the initial check size means that we're usually among the biggest checks in that seed round, if not the biggest. Between five, if we can target five to 10% ownership initially, that's still enough to bring in the SV Angels or the Fuel Capitals or other great investors that we especially like to work with. And then on the flip side, that's That's enough such that we're properly invested. We're going to keep working with them. And then at their later rounds, we can help them out as well.

AI assessment note: “if we can target five to 10% ownership initially”

Q People look to new platforms and kind of transformational shifts, AI, bots, VR, AR, any, any of the above. So what's your take on these fundamental platform shifts that everyone in our industry is really so focused on?

A Yeah, absolutely. I mean, we're spending a lot of time with as many teams as we can in the space. On the flip side, we kind of worry that 2016 is actually a lot like 2004, uh, which is when I, you know, turned down the shot to come To join Palantir as first employee. Um, around that time, I personally went out and sought out a position with mobile devices. By then I had spent like four or five years writing basically programmatic web software. And what I should have done was kept doing that. Uh, but instead, you know, in 2004, I and quite a lot of investors and smart engineers were chasing the next thing. So investing in Windows Mobile and J to me and Blackberry, because we said, well, The boom is over. The bust was pretty bad. Maybe the web is dead, but the ironic thing is to that in 2004, Facebook was new, you know, Facebook, that was the time to continue to invest in the web. And so for me, that was a lesson that I don't intend to repeat. I really do think that just software itself, the platforms that we have right now, they're really sort of invading these late adopter industries. And we see it with things like Flexport or one of our favorite companies is Bannerman. In the security guard space.

AI assessment note: “On the flip side, we kind of worry that 2016 is actually a lot like 2004”

Q and he's like, absolutely, it's fundamental that you don't go to someone for the first time meeting them and say, hey, invest in my company. But then you've also got like Dave Vass and that bright wheel on the show who's like, hey, you've got to be very efficient about it, beeps Streamline, do fundraising periods, and run an efficient process. Where do you stand on the Always Be Raising?

A Usually what we do with our companies is we say, well, once we fund them, it's really sort of product engineering marketing time. You know, let's build that thing, and let's have something of merit to actually talk to other people about. But usually around what I realize now that I didn't see at Y Combinator was that getting to the Series A is actually very significant. It's incredibly difficult, obviously, and it's actually about building that relationship with that Series A partner, and so what that means is don't do a shotgun wedding. You really can't expect to build a partnership with your Series A board member more or less in an abbreviated process of a week or two. Almost always what you need to do is sort of build relationships over the course of maybe six months or longer. That's really something that founders really need to focus on a little bit earlier, and so that means don't fundraise Just get to know them, ask for advice, treat your potential Series A board partner as a true partner, or someone that you really might want to work with for the next 10 years, and treating it less transactionally is incredibly important for seed stage founders.

AI assessment note: “don't do a shotgun wedding... build relationships over the course of maybe six months”

Q go with the territory. It's very challenging. It's very challenging not to seem like kind of a round hog in, in many ways. Totally feel you there. The second, though, that is semi-tied to ownership is the element of price sensitivity. The bigger the fund, the more one that has the bandwidth maybe to pay up, so to speak. How do you assess and evaluate your own price sensitivity, Gary?

A Yeah, well, luckily I have really good partners, and at the end of the day, price is actually about trying to match that correct valuation to the stage of that company. One of the arguments that actually I kind of have to have with founders on a relatively regular basis is you can get that valuation, but that raises the bar so much more for that next round. This isn't the last round of funding you'll ever raise, and if it is, that's fantastic. Hats off. I think that we all win in that scenario, but the majority of Companies that want to continue to grow in a venture style with significant year-on-year growth, we're going to have to think about working backwards from that next round, and going out with too high evaluation in this round makes it that much harder to even get to, you know, sort of a two X on the next round that would look like something that's successful for those other Series A or Series B partners who might come in, and that's always the trade-off. We don't need 48 months of runway here. We don't really even sometimes need 36 months. 24 feels really good to us. It gives the company the right kind of cushion to be able to take risks and achieve the next round, and more money at a higher valuation sometimes can actually get in the way of that adventure to be able to get to the next stage, and that's, frankly, the thing that we always have to deal with.

AI assessment note: “price is actually about trying to match that correct valuation to the stage”

Q go with the territory. It's very challenging. It's very challenging not to seem like kind of a round hog in, in many ways. Totally feel you there. The second, though, that is semi-tied to ownership is the element of price sensitivity. The bigger the fund, the more one that has the bandwidth maybe to pay up, so to speak. How do you assess and evaluate your own price sensitivity, Gary?

A Yeah, well, luckily I have really good partners, and at the end of the day, price is actually about trying to match that correct valuation to the stage of that company. One of the arguments that actually I kind of have to have with founders on a relatively regular basis is you can get that valuation, but that raises the bar so much more for that next round. This isn't the last round of funding you'll ever raise, and if it is, that's fantastic. Hats off. I think that we all win in that scenario, but the majority of Companies that want to continue to grow in a venture style with significant year-on-year growth, we're going to have to think about working backwards from that next round, and going out with too high evaluation in this round makes it that much harder to even get to, you know, sort of a two X on the next round that would look like something that's successful for those other Series A or Series B partners who might come in, and that's always the trade-off. We don't need 48 months of runway here. We don't really even sometimes need 36 months. 24 feels really good to us. It gives the company the right kind of cushion to be able to take risks and achieve the next round, and more money at a higher valuation sometimes can actually get in the way of that adventure to be able to get to the next stage, and that's, frankly, the thing that we always have to deal with.

AI assessment note: “price is actually about trying to match that correct valuation to the stage”

Q and he's like, absolutely, it's fundamental that you don't go to someone for the first time meeting them and say, hey, invest in my company. But then you've also got like Dave Vass and that bright wheel on the show who's like, hey, you've got to be very efficient about it, beeps Streamline, do fundraising periods, and run an efficient process. Where do you stand on the Always Be Raising?

A Usually what we do with our companies is we say, well, once we fund them, it's really sort of product engineering marketing time. You know, let's build that thing, and let's have something of merit to actually talk to other people about. But usually around what I realize now that I didn't see at Y Combinator was that getting to the Series A is actually very significant. It's incredibly difficult, obviously, and it's actually about building that relationship with that Series A partner, and so what that means is don't do a shotgun wedding. You really can't expect to build a partnership with your Series A board member more or less in an abbreviated process of a week or two. Almost always what you need to do is sort of build relationships over the course of maybe six months or longer. That's really something that founders really need to focus on a little bit earlier, and so that means don't fundraise Just get to know them, ask for advice, treat your potential Series A board partner as a true partner, or someone that you really might want to work with for the next 10 years, and treating it less transactionally is incredibly important for seed stage founders.

AI assessment note: “so that means don't fundraise Just get to know them, ask for advice”

Q So, attribution. How do you think about it?

A At this point, we really want to reduce the effect of attribution, so I don't want people to basically act as if they have to protect their deal at all costs. And the vote trading and things like that that happen at other partnerships, I would be desperate to avoid at initialize. Thus far, we've avoided it. On the flip side, you do need some light form of attribution just so that you can have those discussions around performance to help people actually get better, and that's a very difficult subject. You basically want to avoid the worst of it, and you want to get the good effects of it, and I think as a managing partner, you basically have to have, I have a lot of conversations and one-on-ones About exactly that.

AI assessment note: “we really want to reduce the effect of attribution”

Q self-development. And you advised over 700 startups at YC, and have invested in more than a hundred since initialized. So I have to ask then, and this is a question from Judith, one of your LPs, Judith at Weathergage. What were the big takeaways from that experience with YC, seeing so many incredible companies? And what were the commonalities in the very successful teams? So let's start with the takeaways.

A Yeah, of course. I think the most surprising thing is how long, well, when you're talking about working with Founders who are new on network. They're often, you know, not only is it often the first time that they start companies, but it's actually the first time they've managed people. Sometimes the first time they've ever shipped a product. So as a result, you know, one of the more remarkable things is that there are companies that they take two or three years even to get to product market fit. And so that's something that you just have to be prepared for at the earliest stage. But on the flip side, when they get the right mentorship, when they get the right people around them, and they have the capital to get there, these are founders who turn into absolutely fantastic CEOs. And when they hit their stride, they really, really get to create really, really powerful businesses. So I think that's the craziest thing is that people who have basically no experience building a product, managing people over the course of years will actually be able to do it.

AI assessment note: “I think the most surprising thing is how long, well, when you're talking about working with Founders”

Q Too interesting not to dive in. I didn't expect to go off schedule this early, Gary, but we, we hear like Naval often unbundle VC into the different packages, be it advising, be it Capital, be it kind of structural ownership. How do you think about that, and is that what you're suggesting there?

A Well, when I first joined Y Combinator as actually just a designer in residence, so I was just joining to help out on a part-time basis, just spending time with startups, and I was helping them with their homepage design and first-time experience, and along the way, that was winter, 20 11. That was the batch that Yuri Milner and SV Angel came along and said, we're going to give everyone 150,000 dollars to every single company in that batch. It was about 40 companies, and I just got to know that many people very quickly just by actually helping them. And so in a way, that was a form of unbundling at that moment. And then right after that batch, Paul Graham actually came and said, hey, you could take advisor shares in some of these companies. And so in a way, I think that that will continue to happen. And Along the way, someone came along and gave us our first angel fund very early, and that was Alex Bangash from Trusted Insight. And so I basically was sort of plucked from basically that exactly unbundled situation into an actually bundled situation.

AI assessment note: “And so in a way, that was a form of unbundling at that moment.”

Q One thing's for sure, he's never getting a job again. But then let's do the vision for Initialized. Is it going to be the mega fund in 10 years' time, or are we capping it like a benchmark or a foundry?

A Yeah, I think we should be disciplined around, well, We really should focus on the zero to 20 employee sort of stage. I think there are tons and tons of people out there who are fantastically great scaling operator, like series A and later investors. But for us, we are all always obsessed with people starting out and then just helping them avoid the 10,000 landmines that are inevitably right there. And we believe that if you avoid the landmines, well, it makes you that much more likely to succeed. And when these things succeed, People get jobs. Amazing solution products. Things happen. So we're very mission-oriented around, like, specifically that. Let's help founders who are like us. And so that means we have to stay at the zero to 20 employee stage. If we went later, then we just wouldn't be able to do our best work.

AI assessment note: “we have to stay at the zero to 20 employee stage.”

Q Say yes to everything. But then how did, how did that translate then into the early stage investing then?

A Yeah, I, so I ended up joining as employee number 10 instead about a year later. So They were unsuccessful with me to get me to quit my entry level job at Microsoft, but they were able to get a number of our, you know, mutual close friends. And a year later, I came down actually for a wedding and visited the office and said, oh my goodness, I've, I've made a horrible mistake. So better late than never. And I got to join then and build sort of a product team from scratch. So got to work on a new one point O product that was the Palantir finance product that was sold to a hedge funds and financial institutions. And sort of build a team from scratch, and then also design the logo. So at that point, I was kind of hooked. I just suddenly really understood the kind of magic that really can only happen in Silicon Valley to a certain extent. Small teams of super smart people can actually make software that goes out and makes a really, really big impact out there. So I got the bug myself, having seen my friends create Palantir, that I could probably do this too. And so another friend of mine from college and I decided to start a company in the blogging space, and by 2008, Y Combinator was kind of the place where anyone who was a great product person or an engineer, you knew, or you knew of friends who were going through, who'd gone through that program and became successful through it. …

AI assessment note: “that was kind of My intro to YC, and it really helped us”

Q Too interesting not to dive in. I didn't expect to go off schedule this early, Gary, but we, we hear like Naval often unbundle VC into the different packages, be it advising, be it Capital, be it kind of structural ownership. How do you think about that, and is that what you're suggesting there?

A Well, when I first joined Y Combinator as actually just a designer in residence, so I was just joining to help out on a part-time basis, just spending time with startups, and I was helping them with their homepage design and first-time experience, and along the way, that was winter, 20 11. That was the batch that Yuri Milner and SV Angel came along and said, we're going to give everyone 150,000 dollars to every single company in that batch. It was about 40 companies, and I just got to know that many people very quickly just by actually helping them. And so in a way, that was a form of unbundling at that moment. And then right after that batch, Paul Graham actually came and said, hey, you could take advisor shares in some of these companies. And so in a way, I think that that will continue to happen. And Along the way, someone came along and gave us our first angel fund very early, and that was Alex Bangash from Trusted Insight. And so I basically was sort of plucked from basically that exactly unbundled situation into an actually bundled situation.

AI assessment note: “plucked from basically that exactly unbundled situation into an actually bundled situation.”

Q I love that, Hackers and Painters. Tell me, from Alex Bangash himself, the biggest learning from working at Palantir?

A Palantir, at the end of the day, was one of the most powerful cults I ever came into contact with, and cult in a good way, in that every startup that I've ever worked with that worked very well had that sort of atmosphere of, This is something we believe that nobody else believes sort of going back to the contrarian nature of really successful startups. And so there's definitely something that you had to believe that nobody else believed to join talent here for them. It was actually just this deep sense of mission around helping basically companies and governments that had no access to really, really good software engineering and, you know, helping them solve problems, whether it's for fighting human traffickers or, Frankly, just a lot of businesses cannot hire good engineers, and so, you know, that was really, really powerful for me, and then probably the only culture that was even stronger than Palantir, where, you know, if we had head-to-head offers out to software engineers, the only one we would lose to was Facebook.

AI assessment note: “Palantir, at the end of the day, was one of the most powerful cults”

Q Absolutely. That's a nice sweet spot there. In terms of kind of, we spoke about kind of portfolio optimization with the potential spray and pray slash invest and work model. But how do you approach thematic investing at Seed? Is this the best way to build pattern recognition?

A Yeah. I mean, the hard part about Seed is that there's very, there are very few patterns, uh, Simply because you're at the earliest possible stage. One thing that we learned at YC is that if you are mainly about the founders first, then a related aside, a lot of founders come to me and ask, well, what's the hot field? What, you know, what should I be working on? And I have to tell them that's backwards, right? The hot trends basically happen when smart people apply themselves to an idea or a market that really, really needs what they're building. And frankly, that lesson actually going back to my, you know, why did I turn down being first engineer at Palantir? I spent a lot of time trying to figure that out, and it actually came out of this thinking, because this is why I'm very, very careful about it, that when I was 23 and I got an offer from one of the best investors in Silicon Valley, proven operator, plus my best friends from college who I had worked on other projects with, I couldn't imagine a better co-founding team for me to work with, Stephan Cohen and Joe Lonsdale. Why did I say no? And it actually kind of went back to something as simple as that, that I was waiting for the universe to tell me what was going to be hot. And, you know, TechCrunch didn't exist at the time. Maybe I was looking at the Wall Street Journal tech section, or I was looking at media to tell me w…

AI assessment note: “the hard part about Seed is that there's very, there are very few patterns”

Q I mean, I love that kind of believing in them before they believe in themselves. I do have to ask, though, obviously, conviction-building proceeds See change over the years. When you look at what gets you excited and where you build conviction within founders, within meeting them in those very, very early stages, has that changed over the years? Or do you think that core remains the same?

A I think what put us in the business, frankly, we're Alexis and I being partners at Y Combinator very early is seeing a very, very high volume of great founders. And that is what actually helped build our network. And so early on, we didn't necessarily have that network We built it through just helping, frankly, thousands of founders in sort of 25 to 30 minute increments over the course of years. And at that point, you build this crazy network of thousands of people who you have a relationship with, who you've already helped, who they, you know, they trust you, and you trust them. You've seen them through adversity. And so that's sort of the really interesting shift that we've seen it initialized, where very early, when we first funded Brian Armstrong at Coinbase, It wasn't like I knew Brian before we knew we met him through YC, but now what we find is the absolute strongest form of deal flow that we get is actually a lot of the people who we've seen and we've helped in the trenches back then. And that's sort of the ongoing struggle actually that I think most venture capitalists sort of face is that we actually ran the numbers recently and people who we worked very closely with previously, their startups outcomes are actually looking about three times better. Then the folks that we didn't have sort of that multi-year background and sort of process with. And on the flip side, if …

AI assessment note: “now what we find is the absolute strongest form of deal flow that we get”

Q Not at all. The pleasure is all mine, but I want to kick off today. And for those that made the cardinal sin of not listening to our first episode, tell me, Gary, how did you make your way into what I know to be the wonderful world of venture and really come to found initialized?

A Well, I started off as an engineer. What I realized is it's kind of a common story. A lot of people have no intention of ever actually coming into venture capital. And then as you discover how much capital there is actually in the world and how many problems are out there, then venture sort of sucks you in and makes you realize, hey, if I can raise capital and I can deploy it well, then that's actually one of the more limiting reagents than good engineers and good product people and good builders. And if anything, that's my story that I ended up realizing while I could build and while I could build great software and My true calling was actually trying to help other people like me, and sort of being that Marco Polo between the two worlds. That was something that probably didn't happen enough, and over time, I think it'll change radically, because I think we'll have quite a lot more people helping people at that very earliest stage, that kind of background.

AI assessment note: “I started off as an engineer... My true calling was actually trying to help other people”

Q Can I ask Gary, I'm too intrigued. What does that internal decision-making look like for you in terms of the voting structure? Is it kind of unanimous? Is it a case of kind of majority wins? How do you think about optimizing that internal partnership decision-making around investments?

A Our experience with the power law is pretty similar to a lot of other people's in that the things that are the most controversial, the things that have either strong yeses Or knows. Those are the ones that seem to perform the best, and that's no surprise to people who follow Peter Thiel and, you know, his book Zero to One. At the end of the day, what we are doing with founders is often believing in them before they maybe even believe in themselves, but the positive result from that is that they go on to create something that puts a dent in the universe, and frankly, if everyone knew that that was a good idea, then you'd have infinite competition, and that type of competition drives down margins, Actually makes it much harder to scale a venture business. And so at the end of the day, being able to have high agency matters a lot. And so ad initialized, all the GPs get silver bullets, you know, not unlimited ones, but you know, that's sort of the release valve. And then up the middle, we basically require two strong yes in that process. And so we do require high conviction. And I think that that's something that is the right mix for us.

AI assessment note: “all the GPs get silver bullets... we basically require two strong yes in that process.”

Q the softer side and the harder side. So if we start on the softer side, maybe the less tangible elements. When we chatted before, Gary, you left me on a cliffhanger when you said there is something pre-seed and seed investors can do that is more useful than anything else. However, you very kindly left me there. So what is that one thing, and what does it mean to you?

A One of the things I discovered really early is at Y Combinator, we would meet people who had never started companies before. They had Built software, they'd ship products for other people, but sitting in that CEO seat, it's something that they've never done before. And I don't know about you, but I'm pretty sure that pretty much all of us, even probably most of the people listening to this podcast right now, experience from time to time, this very, very intense form of imposter syndrome. And that's almost inevitable because so few startups succeed. And as a VC, it takes so long to figure out whether or not you're good. It takes five years to figure out if you're good. And so that's also true for the founder journey and founders all the time are wondering, am I failing? Well, the good ones do anyway. That was actually one of the big secrets of Y Combinator that if a founder frequently comes to their investors and asks, am I failing? That's almost always correlated and found in the founders who succeed because, you know, at that point you're actually asking the right questions. Now on the flip side, that doubt can be so crippling. It can be so thoroughly Mind bending for a founder that, you know, pre-product market fit when you don't have customers yet, when you have to go out there and do the coding sprints of, you know, several months to even build the first version of the prod…

AI assessment note: “sit down with them and say, look, Hey, I was there for Instacart”

Q the softer side and the harder side. So if we start on the softer side, maybe the less tangible elements. When we chatted before, Gary, you left me on a cliffhanger when you said there is something pre-seed and seed investors can do that is more useful than anything else. However, you very kindly left me there. So what is that one thing, and what does it mean to you?

A One of the things I discovered really early is at Y Combinator, we would meet people who had never started companies before. They had Built software, they'd ship products for other people, but sitting in that CEO seat, it's something that they've never done before. And I don't know about you, but I'm pretty sure that pretty much all of us, even probably most of the people listening to this podcast right now, experience from time to time, this very, very intense form of imposter syndrome. And that's almost inevitable because so few startups succeed. And as a VC, it takes so long to figure out whether or not you're good. It takes five years to figure out if you're good. And so that's also true for the founder journey and founders all the time are wondering, am I failing? Well, the good ones do anyway. That was actually one of the big secrets of Y Combinator that if a founder frequently comes to their investors and asks, am I failing? That's almost always correlated and found in the founders who succeed because, you know, at that point you're actually asking the right questions. Now on the flip side, that doubt can be so crippling. It can be so thoroughly Mind bending for a founder that, you know, pre-product market fit when you don't have customers yet, when you have to go out there and do the coding sprints of, you know, several months to even build the first version of the prod…

AI assessment note: “incredible moment to be able to sit down with them and say, look”

Q Say yes to everything. But then how did, how did that translate then into the early stage investing then?

A Yeah, I, so I ended up joining as employee number 10 instead about a year later. So They were unsuccessful with me to get me to quit my entry level job at Microsoft, but they were able to get a number of our, you know, mutual close friends. And a year later, I came down actually for a wedding and visited the office and said, oh my goodness, I've, I've made a horrible mistake. So better late than never. And I got to join then and build sort of a product team from scratch. So got to work on a new one point O product that was the Palantir finance product that was sold to a hedge funds and financial institutions. And sort of build a team from scratch, and then also design the logo. So at that point, I was kind of hooked. I just suddenly really understood the kind of magic that really can only happen in Silicon Valley to a certain extent. Small teams of super smart people can actually make software that goes out and makes a really, really big impact out there. So I got the bug myself, having seen my friends create Palantir, that I could probably do this too. And so another friend of mine from college and I decided to start a company in the blogging space, and by 2008, Y Combinator was kind of the place where anyone who was a great product person or an engineer, you knew, or you knew of friends who were going through, who'd gone through that program and became successful through it. …

AI assessment note: “So I ended up joining as employee number 10 instead about a year later.”

Q Not at all. The pleasure is all mine, but I want to kick off today. And for those that made the cardinal sin of not listening to our first episode, tell me, Gary, how did you make your way into what I know to be the wonderful world of venture and really come to found initialized?

A Well, I started off as an engineer. What I realized is it's kind of a common story. A lot of people have no intention of ever actually coming into venture capital. And then as you discover how much capital there is actually in the world and how many problems are out there, then venture sort of sucks you in and makes you realize, hey, if I can raise capital and I can deploy it well, then that's actually one of the more limiting reagents than good engineers and good product people and good builders. And if anything, that's my story that I ended up realizing while I could build and while I could build great software and My true calling was actually trying to help other people like me, and sort of being that Marco Polo between the two worlds. That was something that probably didn't happen enough, and over time, I think it'll change radically, because I think we'll have quite a lot more people helping people at that very earliest stage, that kind of background.

AI assessment note: “I started off as an engineer... My true calling was actually trying to help”

Q episode about you, and he said many wonderful things. I do want to start on, you mentioned the word angel fund there. It's always a super interesting transition for me from angel to VC. So tell me, we had Andy McLaughlin on the show, and he said with the transition, he became more concerned Conservative, managing real institutional capital. How do you think the transition affected your investing mentality, Gary?

A That's something that I think about every single day, because we do see a lot of funds come out, and then they sort of become a very tightly held partnerships of just a few people, and the economics, the way people make decisions, all of those things are all very tightly held, because it's such a difficult journey to even be able to deploy that type of capital. Be able to raise institutional capital is so rare. That people hold it very, very tightly. And so the challenge for us has been, how do we actually become an institutional firm that is multidisciplinary and has as many people as possible who sort of have the different faces and the different expertise that you actually need to get a pre-seed and seed company to their Series A. And, you know, that's not just the classic stuff around strategy and, you know, how to be a CEO. It's actually design. It's product. You're at such an early stage that you need to figure out what you need to build and which market to build it for and how to attack that market from the very beginning. And so being able to help with marketing, with branding, with PR, you know, design, engineering, AI and ML is such a fundamental piece of what all startups are sort of needing these days that even being able to help with that, being able to help with AI data pipelines and as granular as helping figure out what the weight should be on those models. Thos…

AI assessment note: “how do we actually become an institutional firm that is multidisciplinary”

Q episode about you, and he said many wonderful things. I do want to start on, you mentioned the word angel fund there. It's always a super interesting transition for me from angel to VC. So tell me, we had Andy McLaughlin on the show, and he said with the transition, he became more concerned Conservative, managing real institutional capital. How do you think the transition affected your investing mentality, Gary?

A That's something that I think about every single day, because we do see a lot of funds come out, and then they sort of become a very tightly held partnerships of just a few people, and the economics, the way people make decisions, all of those things are all very tightly held, because it's such a difficult journey to even be able to deploy that type of capital. Be able to raise institutional capital is so rare. That people hold it very, very tightly. And so the challenge for us has been, how do we actually become an institutional firm that is multidisciplinary and has as many people as possible who sort of have the different faces and the different expertise that you actually need to get a pre-seed and seed company to their Series A. And, you know, that's not just the classic stuff around strategy and, you know, how to be a CEO. It's actually design. It's product. You're at such an early stage that you need to figure out what you need to build and which market to build it for and how to attack that market from the very beginning. And so being able to help with marketing, with branding, with PR, you know, design, engineering, AI and ML is such a fundamental piece of what all startups are sort of needing these days that even being able to help with that, being able to help with AI data pipelines and as granular as helping figure out what the weight should be on those models. Thos…

AI assessment note: “challenge for us has been, how do we actually become an institutional firm”

Q And you spoke about the surplus capital in the market there. I mean, should you hear your thoughts then on the recent mega fundraisers of the latest of Andreessen, Greylock, Kleiner? What's your take on the billion dollar plus funds and the kind of surrounding worrisome fund economics?

A Yeah, absolutely. I think the Bigger shift is, I mean, this is what everyone's talking about. It's that IPOs don't happen until much, much later. And I think one thing to really flag is actually what Eric Reese is doing right now with long-term stock exchange. What he identified actually is, we think, the root cause of what's happening. It's that the rise of buyout funds, PE funds, has caused, well, this delaying of the IPO. And frankly, you don't really want an IPO at a valuation of under a billion dollars because then you become sort of In the, in the crosshairs of quite a few PE and buyout and sort of activist investor funds that are able to buy, basically they find it, you know, treat these financial assets as just purely assets to sort of exploit to the max. And so on the flip side, you, you know, if you are the founder of a early stage company, you really don't want that to happen to you. And then there are lots of other reasons around why people aren't IPO-ing, but we think that If you look at the Wilshire 5000, there actually aren't 5000 companies in the Wilshire 5000. There are only 3500 today. And that's more or less a reflection of the public markets contracting more so than the private markets. You know, the private markets naturally have to expand. And so I think that's the biggest sort of shift that we're seeing. The classic series A funds are shifting later. They…

AI assessment note: “I think the Bigger shift is, I mean, this is what everyone's talking about.”

Q I ask a super unfair question? Have there been any cases where you haven't flexed your muscles, so to speak, in terms of paying up For a deal that maybe they've wanted you, but the price is too high for you to get comfortable, and the deal hasn't happened. Has that happened where it kind of strikes your memory, particularly maybe in one case, and was there a subsequent learning?

A Yeah, at the end of the day, for us, like any venture fund, you have to be disciplined, and internally, we have a saying, which is trust the process. It's not one partner setting the price. It's us as a group through a voting process, and that actually helps us prevent big mistakes. Um, when you make a mistake in venture, your big winner, your power law winner will cover up that mistake at some level. But on the other hand, the more the system or, you know, your partners can keep you out of trouble. That's a much better scenario. And so we want to give people as much agency as possible in getting into a deal, but we don't want to do things that frankly are imprudent, right? If, if it sets up for the company for failure, well, we're better off not doing the deal at all and getting into it. And you're sort of setting the company up for failure in that next round.

AI assessment note: “for us, like any venture fund, you have to be disciplined”

Q Absolutely. That's a nice sweet spot there. In terms of kind of, we spoke about kind of portfolio optimization with the potential spray and pray slash invest and work model. But how do you approach thematic investing at Seed? Is this the best way to build pattern recognition?

A Yeah. I mean, the hard part about Seed is that there's very, there are very few patterns, uh, Simply because you're at the earliest possible stage. One thing that we learned at YC is that if you are mainly about the founders first, then a related aside, a lot of founders come to me and ask, well, what's the hot field? What, you know, what should I be working on? And I have to tell them that's backwards, right? The hot trends basically happen when smart people apply themselves to an idea or a market that really, really needs what they're building. And frankly, that lesson actually going back to my, you know, why did I turn down being first engineer at Palantir? I spent a lot of time trying to figure that out, and it actually came out of this thinking, because this is why I'm very, very careful about it, that when I was 23 and I got an offer from one of the best investors in Silicon Valley, proven operator, plus my best friends from college who I had worked on other projects with, I couldn't imagine a better co-founding team for me to work with, Stephan Cohen and Joe Lonsdale. Why did I say no? And it actually kind of went back to something as simple as that, that I was waiting for the universe to tell me what was going to be hot. And, you know, TechCrunch didn't exist at the time. Maybe I was looking at the Wall Street Journal tech section, or I was looking at media to tell me w…

AI assessment note: “the hard part about Seed is that there's very, there are very few patterns”