The Exchanges

Q Do you not think you should just blindly follow if you got a tier one?

A No, but, but that's closer to right than not. You know, like if, if I look at fund one, what was our top performer? It was demand force. Who followed me in demand force? Bill Gurley at benchmark. What was the second best performer? Twitch. Who followed us in Twitch? Ethan at Bessemer. Okay, let's talk fund two. What was number one in fund two? It was Lyft, who followed us, uh, Naveen at Mayfield Fund, uh, Founders Fund, A-Six-Teen-Z. Okay, what was the second biggest winner? Okta, who followed us, you know, we did that with A-Six-Teen-Z, then Sequoia came in, Greylock at Sequoia. And so, one way to think about it is your follow-on dollars might be best thought of as a subset of where the best firms follow. Because we've had the best firms follow and the companies not do well. Verage sale. Sequoia aggressively followed and it didn't, didn't do well. So one, one way I think about follow-on investing is For a seed fund, it's closer to index investing than people think. And if you say, okay, I'm going to index off of the very best funds, as you kind of point out, more often than not, if that's all you did, you'd, you'd have massively better follow-on returns than most, most firms. If, if the LPs knew, like if they, if they tracked, what's the return on follow-on checks versus first checks, there'd be pitchforks and like, Revolts in the street. It's so bad.

AI assessment note: “No, but, but that's closer to right than not.”

Q Do you agree with the ethos that every check has to be a fund return?

A Um, ish. Here's the way I would phrase it. Um, our business is hard in seed, but not complicated. Five percent of our checks need to be a hundred X cash on cash on the first check, and about 10 to 15% need to be 20 X cash on cash on the first check. You achieve that, you're 10 X fund. And so the loss ratio is about the same between a three X fund and a 10 X plus fund. What matters is the magnitude of your big winners, but it kind of goes back to this Pareto idea. If your best company returns, say, 64% of your fund, The follow on check in that company is gonna probably be a 20 bagger.

AI assessment note: “Um, ish. Here's the way I would phrase it.”

Q Now, lesson number two, before I go two off course, uh, you're gonna have to bring me back, unlike me being the one bringing you back. Sure. Financial agility. So, crisis, that's number two, financial agility. What should we learn about financial agility from the last few weeks?

A Yeah, so, you know, a lot of what I saw, especially the Twitter sphere, was, well, you know, CEOs should know how to manage risk, and they should know that FDIC only insures 250,000 dollars. I think that's the wrong lesson, right? Like, I look at it like, startups are impossible. Startups start out dead and have to prove they're alive. And they have one job to do, which is get product market fit, And that means answering one very specific question, which is, what can we uniquely do that people are desperate for? And anything that you do not in the service of that is wasted ergs of energy. Your time is the only thing that's zero sum. And so a decision to become a part-time hedge fund bond expert, it subtracts from your efforts to get product market fit. And so the way I look at it is the real lesson is one of financial agility. What, what you want is not to become an expert in finances. What you want is to create the conditions where you can move quickly no matter what happens. And so, like, what might that look like? Uh, one best practice might be have at least three places to keep your money already set up and have some amount of money in each one. You'd probably want them to not be a hundred percent correlated. So if you have a, if you have an account with SVB or First Republic, You probably want to be in a big three bank as well. Um, you probably want to have it, if you have…

AI assessment note: “What you want is to create the conditions where you can move quickly no matter what happens.”

Q Do you not think you should just blindly follow if you got a tier one?

A No, but, but that's closer to right than not. You know, like if, if I look at fund one, what was our top performer? It was demand force. Who followed me in demand force? Bill Gurley at benchmark. What was the second best performer? Twitch. Who followed us in Twitch? Ethan at Bessemer. Okay, let's talk fund two. What was number one in fund two? It was Lyft, who followed us, uh, Naveen at Mayfield Fund, uh, Founders Fund, A-Six-Teen-Z. Okay, what was the second biggest winner? Okta, who followed us, you know, we did that with A-Six-Teen-Z, then Sequoia came in, Greylock at Sequoia. And so, one way to think about it is your follow-on dollars might be best thought of as a subset of where the best firms follow. Because we've had the best firms follow and the companies not do well. Verage sale. Sequoia aggressively followed and it didn't, didn't do well. So one, one way I think about follow-on investing is For a seed fund, it's closer to index investing than people think. And if you say, okay, I'm going to index off of the very best funds, as you kind of point out, more often than not, if that's all you did, you'd, you'd have massively better follow-on returns than most, most firms. If, if the LPs knew, like if they, if they tracked, what's the return on follow-on checks versus first checks, there'd be pitchforks and like, Revolts in the street. It's so bad.

AI assessment note: “No, but, but that's closer to right than not.”

Q Does that exclude first-time founders who've not done anything before?

A Uh, no, because, like, um, let's take one, uh, Marc Andreessen, right? He was at the University of Illinois. Uh, he'd never run a business before. He was in a supercomputer lab, and, um, at the time, the internet had just been made legal for business, so it could only be used in universities and academia. And Mark is trying to make, um, a collaboration software. For a team of researchers, and so he starts tinkering with the early technologies of World Wide Web, and he creates a browser, but was Mark going after a market for browsers? Heck no, right? Like Mark didn't, Mark didn't know what markets were at the time, right? He was just trying to build what was missing about the internet. He was, he was trying to make the internet immediately more useful for him and his team. So why is that important? Well, Mark was living in a time machine. It turns out that he was using machines similar to the machines everybody would have soon. He was on a network similar to the kind of networks everybody would be on soon, and he was using the type of web protocols everybody would be using soon. And so his knowledge about that That domain knowledge of the future was more important than any business person's knowledge of improving the present. Everybody thought AT&T is going to build a digital highway, or that, you know, Time Warner, or Microsoft Network, or AOL, or maybe the government should bu…

AI assessment note: “Uh, no, because, like, um, let's take one, uh, Marc Andreessen, right?”

Q Does that exclude first-time founders who've not done anything before?

A Uh, no, because, like, um, let's take one, uh, Marc Andreessen, right? He was at the University of Illinois. Uh, he'd never run a business before. He was in a supercomputer lab, and, um, at the time, the internet had just been made legal for business, so it could only be used in universities and academia. And Mark is trying to make, um, a collaboration software. For a team of researchers, and so he starts tinkering with the early technologies of World Wide Web, and he creates a browser, but was Mark going after a market for browsers? Heck no, right? Like Mark didn't, Mark didn't know what markets were at the time, right? He was just trying to build what was missing about the internet. He was, he was trying to make the internet immediately more useful for him and his team. So why is that important? Well, Mark was living in a time machine. It turns out that he was using machines similar to the machines everybody would have soon. He was on a network similar to the kind of networks everybody would be on soon, and he was using the type of web protocols everybody would be using soon. And so his knowledge about that That domain knowledge of the future was more important than any business person's knowledge of improving the present. Everybody thought AT&T is going to build a digital highway, or that, you know, Time Warner, or Microsoft Network, or AOL, or maybe the government should bu…

AI assessment note: “Uh, no, because, like, um, let's take one, uh, Marc Andreessen, right?”

Q But what if the field is not your conditions?

A Well, if the field's not your conditions, you just have to be more discerning. So, you know, Buffett, Buffett said it well once. Investing is like a game where there's no called strikes. And so you can just let pitch over pitch go by. And everybody says, swing you bum. Everybody else is swinging. And you say, no, I don't have to swing. I don't like, I don't see my pitch. I'm just going to wait until a meatball comes over the plate and just swing at it with all my might. And if one doesn't come, well, I'll wait some will someday. And this is a great way to think about pacing because in, in 2009, everybody was in the fetal position. And Ann and I were seeing deal after deal where we're like, this totally meets our criteria. This is awesome. Ann funded Lyft at five and a half million post money.

AI assessment note: “Well, if the field's not your conditions, you just have to be more discerning.”

Q You, you said there about, kind of, Anne's, uh, incredible investment, seven 50 into Lyft, um, and whatever that was, a two 50 X. You gotta sell for that to be a two 50 X, respectfully, Mike, because I don't know what Lyft's market cap is today, but it wouldn't have been a two 50 X if you sold today. How do you know when's the right time to sell?

A Yeah, so I, I think that there's a couple of things, and by the way, this is something we haven't really talked about yet, that is good for seed. So, um, let's imagine it's 2015, and, ah, Lyft stock at the time, in the private markets, was about 25 bucks a share. It was worth more than it is today, by a meaningful amount. At the beginning of the year, we said, you know, we need to sell some of this, because we're behind a billion and a half dollar preference stack. We're in this thing at a five and a half million dollar post in my evaluation. We're competing against Travis Kalanick, who's a freaking maniac, who I respect a lot, but I'm like, you know, he's not a fun guy to compete with. Um, and this thing is going to impact our fund, right? We are way in the money on this thing. And so, uh, Ann had a post-it note on her monitor that said IQ test, and we put it on in January that year, and the IQ test was, I need to find a way to sell some of our Lyft stock this year. So she ended up selling, um, a fair chunk of it. I don't think half of our stake, but, but a fair amount in, uh,,,, in in in in, in in in in in, in in in in in, in in And, and so one thing that I think a lot of seed funds don't get is there's two ways to make money. One is on entry pricing inefficiency, but the other is to arbitrage exit price inefficiency. And like, so, like with Lyft, A-sixteen Z was in Lyft. The…

AI assessment note: “we need to sell some of this, because we're behind a billion and a half”

Q Now, lesson number two, before I go two off course, uh, you're gonna have to bring me back, unlike me being the one bringing you back. Sure. Financial agility. So, crisis, that's number two, financial agility. What should we learn about financial agility from the last few weeks?

A Yeah, so, you know, a lot of what I saw, especially the Twitter sphere, was, well, you know, CEOs should know how to manage risk, and they should know that FDIC only insures 250,000 dollars. I think that's the wrong lesson, right? Like, I look at it like, startups are impossible. Startups start out dead and have to prove they're alive. And they have one job to do, which is get product market fit, And that means answering one very specific question, which is, what can we uniquely do that people are desperate for? And anything that you do not in the service of that is wasted ergs of energy. Your time is the only thing that's zero sum. And so a decision to become a part-time hedge fund bond expert, it subtracts from your efforts to get product market fit. And so the way I look at it is the real lesson is one of financial agility. What, what you want is not to become an expert in finances. What you want is to create the conditions where you can move quickly no matter what happens. And so, like, what might that look like? Uh, one best practice might be have at least three places to keep your money already set up and have some amount of money in each one. You'd probably want them to not be a hundred percent correlated. So if you have a, if you have an account with SVB or First Republic, You probably want to be in a big three bank as well. Um, you probably want to have it, if you have…

AI assessment note: “one best practice might be have at least three places to keep your money”

Q Mike, um, in last few years we saw fund deployment paces increase significantly. Yours did not, uh, if I'm right. Yours was actually a much longer duration. How do you think about fund deployment pacing?

A Yeah, I feel like, um, One of the most underappreciated variables that a fund can control is its timeline. So the more risky the investments that you make, and let's, let's face it, seed is as risky as it gets, seed and pre-seed, the more time diversification works to your advantage. And so if you're, if you're raising a fund every 18 months at the height of 20, 20 to 20, 22, You're going to be paying high prices the whole time. You're going to, you know, you're going to be exposed completely to whatever risk was involved in that window of time. And so the advantage of time diversification is you don't have to try to predict the future. It's, it's a lot like what we were talking about earlier with financial agility. What you're saying is all things being equal, if I invest over a five-year time horizon, which is, you know, our fund six was from 2017 to Uh, early twenty-twenty-two. If you, if you invest over a five-year time horizon, if the market corrects, you've got a bunch of companies that already got product market fit, right? You're not, you're not suddenly triage mode of all your, you know, companies, the last two funds, you know, you might be worried about 20% of your last fund. And so, and, and, you know, you're not paying high prices the whole time, you know, you're, you're paying the prices that, that characterize the market. But you're able to diversify that over tim…

AI assessment note: “the more risky the investments that you make... the more time diversification works”

Q like, analysis on what went wrong, finger-pointing who to blame. That's not what we're doing today. We're doing the takeaways and the practical lessons that founders can incorporate into their daily Roles. So, when we think about lesson number one, you said to me crisis lesson number one is scenario planning. Mike, can you walk me through, what is the scenario planning lessons that founders can and should take away?

A Yeah, so it's interesting. Uh, one of the things I noticed during what was happening when the SVB bank run occurred, there was a very wide variance in the quality of response that we saw, uh, for some founders versus the others. Some founders would be in a position of saying, look, if we can't get our money back within a certain amount of time, we're out of business. Or, you know, they, they were talking about what they hope would happen. Uh, but the problem is there are some things that you can't control. And so the best founders, what we saw, they were doing scenario planning. They, and with the scenario planning, what you try to do is you try to map the choices that you have, you know, the different options against the, the different uncertain outcomes. And so like, like, um, maybe an example that would resonate with everybody was when COVID 19 happened. There were lockdowns, and nobody knew how long the lockdowns would be, and so the lockdowns might be three months, they might be six months, it might be 12 months or longer, and given those different scenarios, what are your choices? Don't change my plan, reduce my plan by a certain amount of expense, or reduce my plan by a whole lot more expense, but what you get is like a matrix, and then you start to say, okay, Within each of those cells of the matrix, what will we need to do? And so the best founders that I worked with d…

AI assessment note: “with the scenario planning, what you try to do is you try to map the choices”

Q Some pretty stellar names there, Mike. And then I want to finish today on the most recent publicly announced investment for you. And why did you say yes and get so excited?

A There's one that I like a lot that we'll probably start getting more attention pretty soon. It's called common stock. What they are is a social platform for people to trade ideas and insights about stocks in the markets. And one of the things that's interesting about it is we now live in an API centric world. And so you can connect like your Robin hood or your TD Ameritrade accounts directly to the platform. And so, for example, if you say I traded a hundred shares of Tesla, it's put in the record digitally that you did. It's verified. And so when you think about the fact that you can record trades digitally and have a source of truth, there's a lot of interesting stuff that you could do with that, right? If you had a bunch of followers on Twitter, say you could go to common stock and have people pay a subscription to see what trades you made or things like that. In the form of a newsletter. So I think that one's an interesting one. We'll see where it goes. It's super early.

AI assessment note: “It's called common stock. What they are is a social platform for people to trade”

Q Do you just think that venture is a less attractive investment category then?

A I don't think so. I just think that a lot of people have forgotten what the right goal is. And so, I sit there and I say, look, I need to make a hundred X on my first check. There has to be a way I can do that if everything goes my way. And I'm not going to get that by acting like an efficient market operator. Right. So to the extent that seed investing is an efficient market, it's not going to be a good business. And so you got to find inefficiencies for it to be a good business. And then people say, well, what if, what if I can't find inefficiencies? I'm like, okay, then you shouldn't be a seed investor because the idea is not to invest as an active investor in efficient markets, right? Like if you're an active investor, you have to find inefficiencies in the market or you got no business investing.

AI assessment note: “I don't think so. I just think that a lot of people have forgotten”

Q Do you just think that venture is a less attractive investment category then?

A I don't think so. I just think that a lot of people have forgotten what the right goal is. And so, I sit there and I say, look, I need to make a hundred X on my first check. There has to be a way I can do that if everything goes my way. And I'm not going to get that by acting like an efficient market operator. Right. So to the extent that seed investing is an efficient market, it's not going to be a good business. And so you got to find inefficiencies for it to be a good business. And then people say, well, what if, what if I can't find inefficiencies? I'm like, okay, then you shouldn't be a seed investor because the idea is not to invest as an active investor in efficient markets, right? Like if you're an active investor, you have to find inefficiencies in the market or you got no business investing.

AI assessment note: “I don't think so. I just think that a lot of people have forgotten”

Q Would you start to sell applied when it gets to a hundred?

A Yeah. But here's the key. You got to do it in a way where you're not just being selfish about it. You want to do it in a way that, uh, in fact, we did sell some applied and, and, but we did it in a way where it was in full cooperation with Gasser, right? I was like, I'm not going to do this behind your back, or I'm not going to do this against your good wishes. And so is there a way we can make this a win for you? That's the discussion we need to be having. But you can't have that discussion the day the round closes, right? You gotta, you gotta be like, hey, here's how I'm seeing things. Am I making sense? You know, Kasser is a grownup, right? He's like, hey, I get it. I understand you got a business to run.

AI assessment note: “Yeah. But here's the key. You got to do it in a way”

Q Can I just direct a conversation? I do just want to answer this. For LPs that are asking, every LP is asking, how should they view the prior vintage? Is it mulligans? Are we all getting a write-off for it, and you know what, it was just a bad era? How should they view it?

A I, I think that in the end, you have a long-term relationship with your LP, and they come to some conclusions about your overall judgment, and whether they want to still be in business with you. I'm not a big fan of mulligans. Uh, you know, I'm, I'm kind of a, I kind of believe everything counts in this world. Uh, and so, you know, I think that part of why people want mulligans on their twenty-twenty-one funds is, um, they were investing their funds in an eighteen-month cycle. And, you know, what they should have been doing is investing in a five-year cycle because the, the, everything was so frothy, and so that's why I sometimes struggle with the mulligan idea. I kind of feel like, um, it's a big responsibility to have all this money, and, uh, we should try to do a good job when we invest it. You know, we'll make mistakes. I've made more than my share, but like, but, but I hope I come by them honestly, right? I hope I can explain to my LPs This was my strategy. Here's why I did what I did. It didn't work out, or I was stupid, or whatever, but like, I don't buy that, really.

AI assessment note: “I'm not a big fan of mulligans. Uh, you know, I'm, I'm kind of a, I kind of believe everything counts”

Q Yeah, but can we, Mike? When it costs, you know, I had the founder of Character.ai on the show, and it cost two million dollars to train a single model. They needed tens of millions of dollars to get off the ground. Is it even possible for traditional seed to play in that world where the capital crime is so much so early?

A Yeah, and I wish whoever funded that round all the luck in the world, but I don't see that as a non-consensus investment. I see that as a Expensive, high-priced investment, and hopefully it works, but you're not going to make a thousand times your money on that deal. You're probably not going to make a hundred times your money, even in the best of circumstances. And so, like, our job is hard, but not complicated. We need to find companies early that have insights about the future that aren't obvious, that have entrepreneurs that can make those insights real, and then we need to have the presence of mind to see that before other investors upstream see that. And then make a bet with them, uh, and co-create the future with them to the extent of our ability. That always exists. The opportunity to find inefficiency always exists, but you have to not just accept the conventional rules as they're given, right? We have to be willing to find gaps in the market and inefficiencies and realize that is the job, right? The job isn't to get into the hot deal. The job is to get into the great deal That other people don't understand is great yet.

AI assessment note: “I see that as a Expensive, high-priced investment, and hopefully it works”

Q Can I just direct a conversation? I do just want to answer this. For LPs that are asking, every LP is asking, how should they view the prior vintage? Is it mulligans? Are we all getting a write-off for it, and you know what, it was just a bad era? How should they view it?

A I, I think that in the end, you have a long-term relationship with your LP, and they come to some conclusions about your overall judgment, and whether they want to still be in business with you. I'm not a big fan of mulligans. Uh, you know, I'm, I'm kind of a, I kind of believe everything counts in this world. Uh, and so, you know, I think that part of why people want mulligans on their twenty-twenty-one funds is, um, they were investing their funds in an eighteen-month cycle. And, you know, what they should have been doing is investing in a five-year cycle because the, the, everything was so frothy, and so that's why I sometimes struggle with the mulligan idea. I kind of feel like, um, it's a big responsibility to have all this money, and, uh, we should try to do a good job when we invest it. You know, we'll make mistakes. I've made more than my share, but like, but, but I hope I come by them honestly, right? I hope I can explain to my LPs This was my strategy. Here's why I did what I did. It didn't work out, or I was stupid, or whatever, but like, I don't buy that, really.

AI assessment note: “I'm not a big fan of mulligans. Uh, you know, I kind of believe everything counts”

Q Mike, how many of your founders did scenario planning? Respectfully, I, Probably had one or two out of maybe a hundred.

A I'd say a fair number, but we were, we were fortunate in that, um, when COVID happened, uh, I had a webinar with our founders called Own Your Runway, and it was, um, one of the, one of the aspects of the agenda was scenario planning and the importance of it. Like, I, I actually think scenario planning is good not just for crisis management, but it's good for uncertainty, right? So, uh, I'm a big fan of Annie Duke, uh, who wrote the book Thinking in Bets, uh, And when you think about it, startups, you don't want to have too much of a rigorous, deliberate plan because you, you don't know how all the uncertainties are going to play out. What you really want to do is be empowered in the face of uncertainty rather than reacting to uncertainty, and scenario planning lets you have confidence and precision about the actions you take depending on what occurs as events unfold. So I think it can be, it can be good for any situation, not just a crisis situation.

AI assessment note: “I'd say a fair number, but we were, we were fortunate in that”

Q Mike, um, in last few years we saw fund deployment paces increase significantly. Yours did not, uh, if I'm right. Yours was actually a much longer duration. How do you think about fund deployment pacing?

A Yeah, I feel like, um, One of the most underappreciated variables that a fund can control is its timeline. So the more risky the investments that you make, and let's, let's face it, seed is as risky as it gets, seed and pre-seed, the more time diversification works to your advantage. And so if you're, if you're raising a fund every 18 months at the height of 20, 20 to 20, 22, You're going to be paying high prices the whole time. You're going to, you know, you're going to be exposed completely to whatever risk was involved in that window of time. And so the advantage of time diversification is you don't have to try to predict the future. It's, it's a lot like what we were talking about earlier with financial agility. What you're saying is all things being equal, if I invest over a five-year time horizon, which is, you know, our fund six was from 2017 to Uh, early twenty-twenty-two. If you, if you invest over a five-year time horizon, if the market corrects, you've got a bunch of companies that already got product market fit, right? You're not, you're not suddenly triage mode of all your, you know, companies, the last two funds, you know, you might be worried about 20% of your last fund. And so, and, and, you know, you're not paying high prices the whole time, you know, you're, you're paying the prices that, that characterize the market. But you're able to diversify that over tim…

AI assessment note: “One of the most underappreciated variables that a fund can control is its timeline.”

Q Can I ask what makes you think that they're, I'm just too interested, but what makes you think they're retreating? I had Dave Tish on the show, and he talked about the five on 25 product that these wonderful funds have created for us. Um, I don't see them retreating, though. What makes you think that?

A Because I'd love to know. Yeah, and retreating may be too strong of a word, but I think that they are now, some of them are now seeing, um, the impact of writing a whole lot of seed checks, and not having their top people Managing those relationships, and now being in a situation where they raised a whole bunch of funds with a lot of money really quickly, and they need to make sure that their fund returners have the capital and, uh, help that they need to, to even break even from the last round. You know, if, if, if I have a billion dollar fund, I'm going to worry about those types of things more than I'm going to worry about the next million dollar check or protecting The company I wrote a two million dollar check for nine months ago.

AI assessment note: “some of them are now seeing, um, the impact of writing a whole lot”

Q Is the partner who led the investment and is closest to the founder not best positioned to write the follow on investment? I understand the decision making separation that comes from having a separate partner, but is that knowledge not all bestowed upon the one who wrote it and has that relationship?

A Well, I mean, it's, we're all in the same firm, right? So we talk about these, but, but I would say that, um, I would like the person to write the first check to be irrationally committed to the success of a company, and so I want them to be trying every way they can to help the company succeed, and so, um, I think it's better if someone like Iris can sort of say, hey, look, we want everybody to succeed, but I, you know, I, I'm, My job is to put the most money in the best companies. And so, you know, five years into fund six, right? We, we have a chart of these are the most valuable companies in fund six based on valuations, not based on opinion. What percent of our reserves are in those companies? And, and, you know, if it's high, you can guess that we're doing a good job on the follow on dollars, but like, To me, that's the, that's the valid way to think about it. You know, you don't want to, what, what too many seed managers do is they say, oh, I, I know this company better than the rest of the world knows it, so I'm going to put some more money in, but all too often they know things that aren't so, and there's a, there's a reason that the company struggles to raise, um, and so, you know, I, I, I try really hard not to overestimate our ability to Fund companies that the market doesn't want to fund when that's their job at that stage that we know more than the rest of the ent…

AI assessment note: “I would like the person to write the first check to be irrationally committed”

Q you think about market sizing, say, because I've had so many different variations on the show in terms of, I love a tiny market, which is the insertion point in the Expands and expands and expands. And then I have other people that say it's just got to be a massive town from day one. How do you think about market analysis and that as a insight development importance factor?

A Yeah. So I'm glad you asked about market because I think this is a great illustration of why a startup is not a company yet. So most people in a company, when they think about markets, the metaphor they use is almost like a map and they want to get beach heads and they want to map the market and figure out their segment and expand from there. It's almost like you're Lewis and Clark mapping the tributaries of every river and figuring out which real estate you want to own. But startups start out dead and have to prove they're alive, right? When Marc Andreessen invented the Mosaic browser, there was no market for browsers. The product defined the market. And so what we find is that a startup starts when someone living in the future comes back to the present with a new idea, a breakthrough insight, and the market becomes a movement. And the movement happens because they attract other people to join their movement who are in on the secret with them. And over time, as the conventional wisdom starts to shift to the wisdom that the entrepreneur had, the market and the movement accelerates. And so it's really the acceleration of the movement that defines the market in startup terms. And I mean, by way of a crude analogy, people in companies think like Bible salesmen. But like when you're starting a company, you think more like a prophet, and you're trying to get disciples in the early d…

AI assessment note: “When Marc Andreessen invented the Mosaic browser, there was no market for browsers.”

Q The biggest challenge for you going forward with Floodgate today?

A The biggest challenge for us is to go from being one of the early groups of people who defined the micro VC landscape to building a fund that It competes as a team, as well as the very best, you know, like I look at benchmark and Sequoia and I have huge respect for their sustained longterm performance. And I want us to, to be able to look back and say we were at least that good. And I want to be able to, you know, when I, when I visit the campuses, the colleges and foundations that invest in us, I want to be able to point to buildings that got built because of returns that we helped create with these great companies. And so, you know, we just have to up our game on every single level if we're going to be that good.

AI assessment note: “The biggest challenge for us is to go from being one of the early groups”

Q In terms of going back to the product market fit, though, and discussing markets themselves, how do you assess category creation? You know, the likes of, Uh, ephemeral messaging didn't exist five to 10 years ago pre-Snapchat. Now it's a multi-billion dollar market. So, how do you look at, kind of, category creation and the fundamentals of it?

A The way I look at that is, first of all, like, what is a category and why does it even matter? Uh, you know, so I, when I think about category kings, I think of a more evolved type of business. So, a lot of companies, they think that their job is to create a product To sell the customers. And so they say, okay, I need to build the product, and then I need to go sell it, and if I sell a lot of it, I was a successful company. But category kings think differently than that. Category kings are trying to create not just a company, but they're trying to create a movement. And, uh, they're, they're trying to enlist people to their cause outside of even the employees of the company, and outside of even necessarily just the customers of the company. And The best companies that become category kings, you know, why does that matter? If you're the king of a category, you change the way a customer spends their money, which is ultimately why category king gets 80% of the profits. So, for example, Starbucks convinced the world that they no longer needed to spend only 50 cents for a cup of coffee, but rather should spend four dollars for a latte or for, you know, more money, even for a, for a basic Cup of coffee.

AI assessment note: “If you're the king of a category, you change the way a customer spends their money”

Q Jeff Morris Jr. is the man. I'm totally backing Jeff. Tell me, Mike, what is the single biggest challenge of your role with Floodgate today?

A Yeah, I think it always goes back to just, are we being proactive enough in thinking about original ideas that will help create great companies and really good returns? It's easy in this business when there's so many competitors around you To get kind of caught in the herd noise traffic of what's happening today all around you, and how do you just stay out of that? How do you stay out of that noise? How do you turn off that noise and hype and try to develop ideas that you think really are original and that will yield great outcomes? And that's just gotten harder in recent years. There's just a lot more noise, a lot more people in the business.

AI assessment note: “are we being proactive enough in thinking about original ideas”

Q Yeah, but can we, Mike? When it costs, you know, I had the founder of Character.ai on the show, and it cost two million dollars to train a single model. They needed tens of millions of dollars to get off the ground. Is it even possible for traditional seed to play in that world where the capital crime is so much so early?

A Yeah, and I wish whoever funded that round all the luck in the world, but I don't see that as a non-consensus investment. I see that as a Expensive, high-priced investment, and hopefully it works, but you're not going to make a thousand times your money on that deal. You're probably not going to make a hundred times your money, even in the best of circumstances. And so, like, our job is hard, but not complicated. We need to find companies early that have insights about the future that aren't obvious, that have entrepreneurs that can make those insights real, and then we need to have the presence of mind to see that before other investors upstream see that. And then make a bet with them, uh, and co-create the future with them to the extent of our ability. That always exists. The opportunity to find inefficiency always exists, but you have to not just accept the conventional rules as they're given, right? We have to be willing to find gaps in the market and inefficiencies and realize that is the job, right? The job isn't to get into the hot deal. The job is to get into the great deal That other people don't understand is great yet.

AI assessment note: “I don't see that as a non-consensus investment.”

Q large companies in our world, but your Brax's, your Mercury's, your big, like, FinTech's the world, but not your JP's, your Wells Fargo's. Um, and then other people very openly on Twitter have been saying, I don't know about you, but in a crisis like this, I would not be moving to startup accounts. Um, How do you advise founders on, like, the security of startup banking as an alternative?

A I would say that we don't really know, right, and I, and I'm always reluctant, especially on a, with an audience that you have, to express preferences about one bank versus another, you know, because those variables are dynamic, and they can vary through time, and I don't want to have unintended impacts based on anything I say, But what I would say is, ok, let's say you decide Brix, let's say you decide Mercury, The general advice still applies. Have money in an account that's not correlated to Brex and Mercury, uh, in two other places, and have the rails set up between those pools of capital, those deposit accounts, so that you can immediately move from one to the other very quickly. It's the discipline of having the multiple places to put your money and the ability to move money fast between them that I think is more important than the Absolute. What's the best answer of the best account for startups to put their money?

AI assessment note: “Have money in an account that's not correlated to Brex and Mercury, uh, in two other places”

Q Mike, how many of your founders did scenario planning? Respectfully, I, Probably had one or two out of maybe a hundred.

A I'd say a fair number, but we were, we were fortunate in that, um, when COVID happened, uh, I had a webinar with our founders called Own Your Runway, and it was, um, one of the, one of the aspects of the agenda was scenario planning and the importance of it. Like, I, I actually think scenario planning is good not just for crisis management, but it's good for uncertainty, right? So, uh, I'm a big fan of Annie Duke, uh, who wrote the book Thinking in Bets, uh, And when you think about it, startups, you don't want to have too much of a rigorous, deliberate plan because you, you don't know how all the uncertainties are going to play out. What you really want to do is be empowered in the face of uncertainty rather than reacting to uncertainty, and scenario planning lets you have confidence and precision about the actions you take depending on what occurs as events unfold. So I think it can be, it can be good for any situation, not just a crisis situation.

AI assessment note: “I'd say a fair number, but we were, we were fortunate in that”

Q large companies in our world, but your Brax's, your Mercury's, your big, like, FinTech's the world, but not your JP's, your Wells Fargo's. Um, and then other people very openly on Twitter have been saying, I don't know about you, but in a crisis like this, I would not be moving to startup accounts. Um, How do you advise founders on, like, the security of startup banking as an alternative?

A I would say that we don't really know, right, and I, and I'm always reluctant, especially on a, with an audience that you have, to express preferences about one bank versus another, you know, because those variables are dynamic, and they can vary through time, and I don't want to have unintended impacts based on anything I say, But what I would say is, ok, let's say you decide Brix, let's say you decide Mercury, The general advice still applies. Have money in an account that's not correlated to Brex and Mercury, uh, in two other places, and have the rails set up between those pools of capital, those deposit accounts, so that you can immediately move from one to the other very quickly. It's the discipline of having the multiple places to put your money and the ability to move money fast between them that I think is more important than the Absolute. What's the best answer of the best account for startups to put their money?

AI assessment note: “Have money in an account that's not correlated to Brex and Mercury”