The Exchanges

Q viable segment. Obviously, considering I think you coined it, it's the first time I've heard it on the show. But in terms of markets, one element that always fascinates me is Uh, the ability to foresee market creation and the ability to invest in, in market creation, uh, outcomes. How do you assess market creation with, with regards to undefined, um, entrance into the market? How do you assess that?

A Well, that's really interesting. So it depends on your, your market. So I have a, again, a framework called the black and white framework. The acronym black, uh, stands for blatant and latent aspiration and critical. So if you think of a two by two, where at the bottom left is latent and aspirational needs, this is things we don't know we need, uh, and they're aspirational things. So anything in the fashion area is a latent aspirational need. At the top right is blatant and critical. Um, and blatant critical things are like, hey, a new regulation just got introduced that says, for example, we've now got a valuable derivative, so we don't have another financial meltdown. Okay. That's a blatant critical need. You know, it gives rise to companies like Reval, for example, have created products for that. Um, but If you're Steve Jobs, you don't sit there thinking about blatant critical needs, or, you know, you're Mark Zuckerberg. What you think is, hey, people have this, you know, basic need, for example, in the consumer world to meet people, to get to know them, to date them, and, you know, hey, how can we do that? Could we create a social network? It wasn't called that, of course, but that was a latent aspirational need that has evolved to becoming now a blatant critical need, because people have figured out that actually, That's how they like to communicate and how they like to st…

AI assessment note: “I have a, again, a framework called the black and white framework.”

Q and I do, you're right. And one of the big things I'm learning is actually what VCs look for in LPs and whether all LP money is the same. Um, and I'm intrigued as to, to actually whether you feel LPs can offer strategic value to your portfolio companies. You know, we mentioned portfolio companies adding value to other portfolio companies. Can LPs add it to, to, um, portfolio companies?

A I don't think many of them think that way, because most of them obviously look at us as the professional portfolio managers and say, look, the reason we're giving you money is because we don't have time to do that. Um, but I think there are a couple of things I could offer, though. One is that, like everything, you know, not all P's, all LPs are made equal. And there are one or two that have very distinct mandates to actually co-invest, for example. Uh, we have, you know, a couple of funds and funds, very carefully chosen. Um, and those, uh, are partners who will definitely do follow-ons for us. So, you know, I mentioned That there's well over forty billion dollars worth of capital behind our LPs that are investing in us. That was important to us because, you know, I've invested in companies like Demandware, for example, which probably took about seventy million dollars worth of capital before we got it public. I mean, obviously, you know, nothing when you compare it to three billion dollar outcome, but still, you know, not a trivial amount of money for a C to A fund. So if we don't need to go along and we need sort of, you know, significant capital behind us, we do want some of our LPs to co-invest with us. So you, you might select some for that reason. You might select others to be the exact opposite, to be passive supporters who really just, you know, will get behind your ag…

AI assessment note: “I don't think many of them think that way, because most of them obviously look”

Q viable segment. Obviously, considering I think you coined it, it's the first time I've heard it on the show. But in terms of markets, one element that always fascinates me is Uh, the ability to foresee market creation and the ability to invest in, in market creation, uh, outcomes. How do you assess market creation with, with regards to undefined, um, entrance into the market? How do you assess that?

A Well, that's really interesting. So it depends on your, your market. So I have a, again, a framework called the black and white framework. The acronym black, uh, stands for blatant and latent aspiration and critical. So if you think of a two by two, where at the bottom left is latent and aspirational needs, this is things we don't know we need, uh, and they're aspirational things. So anything in the fashion area is a latent aspirational need. At the top right is blatant and critical. Um, and blatant critical things are like, hey, a new regulation just got introduced that says, for example, we've now got a valuable derivative, so we don't have another financial meltdown. Okay. That's a blatant critical need. You know, it gives rise to companies like Reval, for example, have created products for that. Um, but If you're Steve Jobs, you don't sit there thinking about blatant critical needs, or, you know, you're Mark Zuckerberg. What you think is, hey, people have this, you know, basic need, for example, in the consumer world to meet people, to get to know them, to date them, and, you know, hey, how can we do that? Could we create a social network? It wasn't called that, of course, but that was a latent aspirational need that has evolved to becoming now a blatant critical need, because people have figured out that actually, That's how they like to communicate and how they like to st…

AI assessment note: “I have a, again, a framework called the black and white framework.”

Q And then I have one more question before we dive into a quick fire. And that is, you mentioned like Demandware earlier, obviously a hugely successful company. In terms of those incredibly hot deals where competition is rife, how do you assess ownership and valuation with regards to those deals and getting, you know, uh, underscores investment in, in those deals?

A So interesting you asked that. Well, first of all, valuation is just a stunningly stupid concept. Who on earth can value a person? I can't. Uh, and at the stage that we're working at, we're valuing people. So what we try to do is just look out and say, uh, When you really look back at all the successful companies, all this notion of ownership and, you know, valuation just washes out. What you've got to do is, as an entrepreneur, form a partnership with your funding partner. On our side, we think of it very much as, you know, we want to work with people that we're really excited about, you know, helping them build their careers and their lives on. As I said, we invest money, but they invest their lives. And think about how you're going to support them. Well, the two fundamental things you need to have is you need to have enough ownership for the founders, and you need to have enough ownership for the Recruitment of, you know, A plus talent, as I call it, and, uh, A plus talent's a whole subject into itself, but that's, uh, the beginning of our discussion. The second thing you've then got to do is what we talked about earlier is you've really got to think about what's the right amount of capital that's going to get them on this vector funding from where they are now to where they're going to hit the right milestones to get a nice uptick, and between those two things, valuation fa…

AI assessment note: “between those two things, valuation falls out, and we never try to get clever”

Q and I do, you're right. And one of the big things I'm learning is actually what VCs look for in LPs and whether all LP money is the same. Um, and I'm intrigued as to, to actually whether you feel LPs can offer strategic value to your portfolio companies. You know, we mentioned portfolio companies adding value to other portfolio companies. Can LPs add it to, to, um, portfolio companies?

A I don't think many of them think that way, because most of them obviously look at us as the professional portfolio managers and say, look, the reason we're giving you money is because we don't have time to do that. Um, but I think there are a couple of things I could offer, though. One is that, like everything, you know, not all P's, all LPs are made equal. And there are one or two that have very distinct mandates to actually co-invest, for example. Uh, we have, you know, a couple of funds and funds, very carefully chosen. Um, and those, uh, are partners who will definitely do follow-ons for us. So, you know, I mentioned That there's well over forty billion dollars worth of capital behind our LPs that are investing in us. That was important to us because, you know, I've invested in companies like Demandware, for example, which probably took about seventy million dollars worth of capital before we got it public. I mean, obviously, you know, nothing when you compare it to three billion dollar outcome, but still, you know, not a trivial amount of money for a C to A fund. So if we don't need to go along and we need sort of, you know, significant capital behind us, we do want some of our LPs to co-invest with us. So you, you might select some for that reason. You might select others to be the exact opposite, to be passive supporters who really just, you know, will get behind your ag…

AI assessment note: “there are one or two that have very distinct mandates to actually co-invest”

Q And then I have one more question before we dive into a quick fire. And that is, you mentioned like Demandware earlier, obviously a hugely successful company. In terms of those incredibly hot deals where competition is rife, how do you assess ownership and valuation with regards to those deals and getting, you know, uh, underscores investment in, in those deals?

A So interesting you asked that. Well, first of all, valuation is just a stunningly stupid concept. Who on earth can value a person? I can't. Uh, and at the stage that we're working at, we're valuing people. So what we try to do is just look out and say, uh, When you really look back at all the successful companies, all this notion of ownership and, you know, valuation just washes out. What you've got to do is, as an entrepreneur, form a partnership with your funding partner. On our side, we think of it very much as, you know, we want to work with people that we're really excited about, you know, helping them build their careers and their lives on. As I said, we invest money, but they invest their lives. And think about how you're going to support them. Well, the two fundamental things you need to have is you need to have enough ownership for the founders, and you need to have enough ownership for the Recruitment of, you know, A plus talent, as I call it, and, uh, A plus talent's a whole subject into itself, but that's, uh, the beginning of our discussion. The second thing you've then got to do is what we talked about earlier is you've really got to think about what's the right amount of capital that's going to get them on this vector funding from where they are now to where they're going to hit the right milestones to get a nice uptick, and between those two things, valuation fa…

AI assessment note: “between those two things, valuation falls out, and we never try to get clever”

Q What's your reading material? What blogs or newsletters do you read constantly?

A So funny you asked that. I'm a big believer, as you've heard, in listening rather than reading, and so I try to get into a much more interactive dialogue. I'm a much bigger believer in things like workshops, but I do try to follow things that are, you know, obviously great things like Mattermark that I know you like as well. Love Mattermark. Yeah, it's great. I mean, I think things that point me to resources where I can go and engage with entrepreneurs, but most of the time we try to have, you know, a much more interactive way of engaging entrepreneurs than just, you know, sort of reading the blogs and so forth. But by the way, I do encourage entrepreneurs to blog because I think rather than reading other people's blogging for yourself is actually, first of all, great therapy, and secondly, it brings people to understand how they might help you.

AI assessment note: “I do try to follow things that are, you know, obviously great things like Mattermark”

Q Great guys. But they suggest alignment through never following on, uh, past their initial seed investment, and they suggest that that allows them to be completely aligned throughout the journey. Do you, do you agree with, with that perspective? I mean, how do you view Founder to VC alignment, and how do you ensure its, uh, its success with Underscore?

A Well, first of all, I think everybody has a different contribution to bring to this. So we don't have all the answers. And in fact, part of what we're still doing and will continue to do is to listen to figure this out. But we actually went back to basics and said VC was founded as a model over 40 years ago, and we think it's ripe for disruption. Um, it's just like any other business as change happens. And there's been a lot of change. You know, you think about angel listing, crowdsourcing, kickstarting, you know, co-founding, um, and accelerating and incubating. Those are a lot of changes, many of which happened in the last decade or so. If you see that much change in a business, you don't just stick your head in the sand and carry on, which is basically what the traditional VC model has done for 40 years. So we stepped back and said, look, let's fix this at the core. It requires a couple of things. First of all, when we mentioned that it takes a community to build a great company, we should actually make a community accessible to entrepreneurs at every stage of their business. And this is a key insight that comes from having, you know, built businesses for many decades. And that is that you aren't Actually looking at the same set of skills at every step, you know, for example, when you're ideating or creating or validating, that's very different than when you're looking for, …

AI assessment note: “we stepped back and said, look, let's fix this at the core”

Q long-term investing vision that you, that you brilliantly have in mind that In terms of kind of runway, how much runway do you generally advise for in terms of prospective investments and portfolio companies? In terms of how long you like to give them. I know that Jeff Clavier likes to give kind of 24 to 36 months. Is that a similar approach to you with this long-term investment mindset?

A Well, Jeff's a very good guy. I like Jeff a lot. And, um, you know, I think if you listen to all the good VCs, they'll say something like 18 months. Some of them, like Jeff, think longer. What I love about Jeff's thinking is it's really a ten-year game. So actually how I think about it is even longer than that. I actually think, and we do this literally Um, as I called it vector funding, which is a, you know, term we created for a reason. We think about the entire vector of building a business. Now it's folly to think that we're going to know how much capital each company is going to take, but you can at least create the vector and start to look at all the milestones it's going to take to fund them, you know, at seed at series a and beyond. And you can think about what do you need to prove? Uh, and when I teach this at Harvard, there's a whole piece on this, by the way, on the startup secrets.com site, it's called funding strategies to go the distance.

AI assessment note: “how I think about it is even longer than that. I actually think... vector funding”

Q What do you mean? We want to get paid out first.

A Of course they do. You know, that's the old model, right? Um, so it took a lot of work. I mean, first of all, it took a year of legal work to sort of actually establish the platform and to get the rules in a way that, The work out, the modeling, and everything else. But here's the fun thing. Just like any breakthrough, uh, it's not understood by many initially, and that's the whole point. You're going into unknown territory. But the kinds of people you want with you, of course, are the innovators. You don't want the laggards. And so that's exactly what's happened. And we're thrilled with what's happened. I mean, the fund has been oversubscribed very quickly. We were able to select the VC, sorry, the LPs who really understood the model and wanted to get behind it. I'm happy to tell you that, you know, that's well over forty billion dollars worth of capital, uh, in the foundations and, uh, for example, uh, the kind of educational institutions and children's hospitals and the like that have got behind us. So we not only selected them for their innovation, we also selected them from their causes. So we really want to be working with people who are going to make a difference in the world. So things like the World Foundation or the children's hospitals that we're working with, really, we feel like when we make a lot of money, they'll, they'll do great things in the world. But also be…

AI assessment note: “that's the old model, right? Um, so it took a lot of work.”

Q long-term investing vision that you, that you brilliantly have in mind that In terms of kind of runway, how much runway do you generally advise for in terms of prospective investments and portfolio companies? In terms of how long you like to give them. I know that Jeff Clavier likes to give kind of 24 to 36 months. Is that a similar approach to you with this long-term investment mindset?

A Well, Jeff's a very good guy. I like Jeff a lot. And, um, you know, I think if you listen to all the good VCs, they'll say something like 18 months. Some of them, like Jeff, think longer. What I love about Jeff's thinking is it's really a ten-year game. So actually how I think about it is even longer than that. I actually think, and we do this literally Um, as I called it vector funding, which is a, you know, term we created for a reason. We think about the entire vector of building a business. Now it's folly to think that we're going to know how much capital each company is going to take, but you can at least create the vector and start to look at all the milestones it's going to take to fund them, you know, at seed at series a and beyond. And you can think about what do you need to prove? Uh, and when I teach this at Harvard, there's a whole piece on this, by the way, on the startup secrets.com site, it's called funding strategies to go the distance.

AI assessment note: “We think about the entire vector of building a business.”

Q Great guys. But they suggest alignment through never following on, uh, past their initial seed investment, and they suggest that that allows them to be completely aligned throughout the journey. Do you, do you agree with, with that perspective? I mean, how do you view Founder to VC alignment, and how do you ensure its, uh, its success with Underscore?

A Well, first of all, I think everybody has a different contribution to bring to this. So we don't have all the answers. And in fact, part of what we're still doing and will continue to do is to listen to figure this out. But we actually went back to basics and said VC was founded as a model over 40 years ago, and we think it's ripe for disruption. Um, it's just like any other business as change happens. And there's been a lot of change. You know, you think about angel listing, crowdsourcing, kickstarting, you know, co-founding, um, and accelerating and incubating. Those are a lot of changes, many of which happened in the last decade or so. If you see that much change in a business, you don't just stick your head in the sand and carry on, which is basically what the traditional VC model has done for 40 years. So we stepped back and said, look, let's fix this at the core. It requires a couple of things. First of all, when we mentioned that it takes a community to build a great company, we should actually make a community accessible to entrepreneurs at every stage of their business. And this is a key insight that comes from having, you know, built businesses for many decades. And that is that you aren't Actually looking at the same set of skills at every step, you know, for example, when you're ideating or creating or validating, that's very different than when you're looking for, …

AI assessment note: “VC was founded as a model over 40 years ago, and we think it's ripe for disruption.”

Q What's your reading material? What blogs or newsletters do you read constantly?

A So funny you asked that. I'm a big believer, as you've heard, in listening rather than reading, and so I try to get into a much more interactive dialogue. I'm a much bigger believer in things like workshops, but I do try to follow things that are, you know, obviously great things like Mattermark that I know you like as well. Love Mattermark. Yeah, it's great. I mean, I think things that point me to resources where I can go and engage with entrepreneurs, but most of the time we try to have, you know, a much more interactive way of engaging entrepreneurs than just, you know, sort of reading the blogs and so forth. But by the way, I do encourage entrepreneurs to blog because I think rather than reading other people's blogging for yourself is actually, first of all, great therapy, and secondly, it brings people to understand how they might help you.

AI assessment note: “I'm a big believer, as you've heard, in listening rather than reading”

Q What do you mean? We want to get paid out first.

A Of course they do. You know, that's the old model, right? Um, so it took a lot of work. I mean, first of all, it took a year of legal work to sort of actually establish the platform and to get the rules in a way that, The work out, the modeling, and everything else. But here's the fun thing. Just like any breakthrough, uh, it's not understood by many initially, and that's the whole point. You're going into unknown territory. But the kinds of people you want with you, of course, are the innovators. You don't want the laggards. And so that's exactly what's happened. And we're thrilled with what's happened. I mean, the fund has been oversubscribed very quickly. We were able to select the VC, sorry, the LPs who really understood the model and wanted to get behind it. I'm happy to tell you that, you know, that's well over forty billion dollars worth of capital, uh, in the foundations and, uh, for example, uh, the kind of educational institutions and children's hospitals and the like that have got behind us. So we not only selected them for their innovation, we also selected them from their causes. So we really want to be working with people who are going to make a difference in the world. So things like the World Foundation or the children's hospitals that we're working with, really, we feel like when we make a lot of money, they'll, they'll do great things in the world. But also be…

AI assessment note: “Of course they do. You know, that's the old model, right?”