The Exchanges

Q I mean, you teed me up perfectly there with the mention of benchmark, because I wanted to ask, one big change is obviously the supply of capital in the market today, and Bill Gurley from Benchmark Said on the show that the biggest challenge he faces is the oversupply of capital in the market today. How do you think about this? Let's start with that on the oversupply.

A I think there's definitely an oversupply of capital. That might be a bit selfish, and I wish there was a lot less capital, a lot less competition, and therefore that would drive from just a supply-demand perspective, lower pricing for me as the VC with the same quality of entrepreneurs. So I think that there's an oversupply of capital in the VC market However, talking to my friends who are investment managers and other asset classes, they believe the same thing. So as you're looking at a decade of a bull market, if you're looking at historically low interest rates across the board, and therefore a flight from fixed income, everything else is basically overcapitalized, and it's really depressing returns across all asset classes.

AI assessment note: “I think there's definitely an oversupply of capital.”

Q company that you've backed that a lot of your partners told me we had to discuss, and you mentioned it earlier, and it's Pinterest. And so before the quick fire round, we're going to do a story time round. So as I said, spoke to four of your amazing partners. All of them said Pinterest is a must ask. How did you find them? What's the early story there, Ray?

A So the early story is, again, this was the trough of the global financial crisis beginning of 2009, where not many people were interested in entrepreneurship, and not many investors were interested in writing checks. But I was a judge at the NYU business plan contest, and Ben and Paul, the original team, along with Ben's girlfriend's brother, who's now Ben's brother-in-law was going to NYU, so they recruited him to the team so they could get in front of some investors. And through that process, although they lost the business plan contest, I was enthralled by both their ideas about how the mobile web is going to change the discovery process and just really impressed by how thoughtful Ben was and how they thought through product in the categories and even how they were going to build their business. So despite I would say everybody running from the doors from either the public markets, and especially the illiquid private markets, you know, we were excited to be the lead investor in the seed round for Pinterest.

AI assessment note: “I was a judge at the NYU business plan contest, and Ben and Paul”

Q What's the best board meeting format? Hours, structure, what's the best?

A I think the best structure is a board dinner the night before, where people could re-warm up to each other, so you're not walking into a cold room in the meeting, not temperature-wise, but in terms of everybody getting up to speed on the weather, the traffic patterns, all the other bullshit. And then, uh, so you're, you've already warmed to the room, and then having a three-hour meeting, of which very little to no slides are walked through, But it's structured in what I call the three P's of people, and that's the most important thing going on at companies almost any size, where your human capital is, and where you might have deficiencies. Product, and that's a point where you might have a demo or a product roadmap where you're able to say, here's where our product is today, and here's where it's going. So that's really the heart of your economic engine and how good your product is. And then performance. You know, therefore, these people are producing this product and selling it And here's our performance. And what are you seeing in those elements of performance that matter? And that is generally not walked through on a granular basis because everybody's already read the document. The questions they've already asked. If there's additional questions, you talk about it at dinner, but you're able to walk through the three Ps that are essential to any company. And you're able to di…

AI assessment note: “having a three-hour meeting, of which very little to no slides are walked through”

Q Obviously, the timing that we mentioned that does affect the pricing within the market. I do want to ask Samuel Shaw, you mentioned you listened to his show, which I'm thrilled to hear, but he said that maintaining price discipline is the hardest challenge he faces today. How do you think about your own price discipline, and how do you assess your own price sensitivity?

A We've gone back and looked at this, and at first mark, we've been around for almost a dozen years, and we're incredibly data-driven, and we've gone back and looked at False positives and false negatives and decisions we've made over the years. And we've come to see is that if we're wrong by 20 or 30% on price in a seed in a series A company, it doesn't matter that much. If we're off by 50% on price, it does matter. And a hundred percent of price matters more. And the pricing, and some people talk about, well, the price doesn't matter as long as you're in the best deals, because it'll all come out. If you know it's the best deal, you should put in as much as possible, but oftentimes you don't know till later. And where we see it in a portfolio construction and fund management perspective is that you're able to increase your shots on goal. So if you pay twice as much for a company, you're definitely going to be able to invest in half as many companies and therefore have half as many chances to invest in a great company which could return the funds.

AI assessment note: “if we're wrong by 20 or 30% on price... it doesn't matter that much”

Q Absolutely. In terms of kind of getting them in the right place there. I do want to touch on, you mentioned a specific moment in maybe the life cycle of a company there. In terms of moments, were there any inflection moments for you sitting on boards that changed the way you think about what it takes to really be a great board member?

A You know, I've had the benefit of sitting with some good board members over time. I was a little bit on a board with John Doerr. You know, I've been on board with Mitch Lasky from Benchmark. I, you know, some really excellent people and excellent board members, and I think what I was able to learn from them is talk less. So you might have an opinion on a lot of things, or, you know, maybe even if you're younger, an opinion on most things, but you're diluting your own voice by talking so much or opining on so much. Pick out, before the board meeting, Read the materials ahead of time. Be thoughtful of where you think, you know, the most important issues for the company are, and your perspective on those, and patiently wait for a time to ask a thoughtful question or lend a subtle perspective to really focus on those things instead of defocusing the board and wasting time on things which aren't really going to be the strategic elements that the company needs to do to move the need.

AI assessment note: “what I was able to learn from them is talk less”

Q Speaking of kind of ways to avoid competing with everyone, another way is to actually own your own lines of distribution yourself. How important is that for you when assessing the viability of, especially kind of a consumer brand opportunity?

A I think it would be great. It's obviously important if you completely own that customer experience. It's improbable, especially when you're starting out at the seed in series A, that you could own that full stack of customer experience. So what you want to do is something a bit clever, and thinking back to Airbnb with Obama owes and having cereal at the Democratic convention and the Republican convention years ago. There are ways That are non-scalable, as Paul Graham would say, that the earliest stages to get off the ground, and then kind of light that fire that is either viral, as you might have seen in Airbnb and a lot of the, a lot of the, uh, network and marketplace business models, or a way that, to start that ball rolling without having to compete on the front end with the Facebook properties or the Google properties, the beginnings of customer acquisition.

AI assessment note: “It's obviously important if you completely own that customer experience. It's improbable”

Q But let's move swiftly past that. So you've been in venture since then. You've seen the boom and bust of the dot Com, 2008. We had Josh at first round on the show, and he said that seeing the bus made him more conservative. How did seeing the booms and busts impact your investing mindset today, Rick?

A Yeah, it definitely made me more conservative in the bus. So I was an entrepreneur in 2001, and you know, you're kind of living hand to mouth. I was trying to raise money between Thanksgiving and Christmas of 2001, post September 11, during the holidays, and everyone thought the internet was a Pet rock, and nothing was really going to happen in technology, and it's all a fraud. So it really made me very focused on capital efficiency and risk capital, and I think as I mentor, manage companies, I have been more conservative, and I have been focused on a lot of controlling your own destiny as opposed to maybe being more aggressive and pushing the throttle more, and as I catch myself doing that, and maybe I'm able to get feedback from my fellow board members or entrepreneurs, That I partner with. It's helpful to say, oh, I'm willing to push this further and push you further on the risk spectrum. And whether that's payback period on investment or a different way to expand into new markets, I feel like I'm always thinking about both the upside and the downside of cases.

AI assessment note: “it definitely made me more conservative in the bus”

Q I'm so pleased you said that about eliminating financing risk, because I think we've seen a lot of first-time funds invest the funds very quickly within the first, say, 18 months, and they're going to have a lot of companies coming back for refinancing at the same time. My question being, how important do you think is temporal diversification within the portfolio itself as a fund manager?

A I know you've mentioned this in the last couple of your guests. I think it's very important We always look at it on the classic model of we invest over three years, and because of that, you're able to get multiple microeconomic cycles. You don't know until five years later, was that a good time or a bad time to invest? But you want to be able to capture as broad of a band as possible, because you want to focus yourself on finding the best companies, not choosing market time. So being able to invest over a longer period of time is very important. And frankly, you hopefully have the benefit of being able to raise a large enough Fund that gives you that window for diversification.

AI assessment note: “I think it's very important We always look at it on the classic model”

Q off schedule so much sooner than I thought I would, but you said about buying ahead of the curve there, and something that I'm seeing just continuously, and I'm not sure if it's great and the sign of a thriving ecosystem or a concern and the sign of inflation in the macro, but it's preemptive rounds. How do you think about the massive rise we're seeing in preemptive rounds today?

A It's amazing that I would say most of the rounds we see are companies are never raising money. And a couple of things we've seen that we've seen early in the cycle, maybe a post seed. And we hear that they're not raising money in the raise in a few months. And then a few weeks later, the route's already done. So our take on it as an investor who wants to be in the best companies is your job as an investor is to invest. So any company that's meeting with you, they should assume that you're interested in investing and they're interested in taking investment dollars. So you can't reactively wait for someone to raise their hand and say they're raising. You have to proactively be focused on the best companies and the best entrepreneurs, and basically proactively kick off a financing process by putting out a term sheet or being more aggressive.

AI assessment note: “You can't reactively wait for someone to raise their hand and say they're raising.”

Q In terms of shots on goal, there's a time when the reserve allocation, really, that's just a serious opportunity cost of dollars, and you're not really even retaining your ownership in the company that you're reserving into. When do you think about kind of peeling off on the reserves, and how do you think about that versus another check in the core fund?

A So as we think about just in our core fund, and we have a growth fund as well that's able to continue to support our companies as they grow, but in our core fund, our early stage fund, we think about it as we want to continue to invest in the winners, and frankly, even at the Series A and Series B level, you're not a hundred percent sure those are winners, but you have a good sense of the team being able to execute And having the market open up to you. And sometimes you're able to have a really good sense of product market fit and go to market. So you want to put as many dollars behind that as possible. And, you know, one of the other things we figured out is although you want to reserve some for downside protection, those dollars aren't really as valuable as opposed to making sure that your true winners, you're able to put dollars behind. It kind of goes back to, you can only lose a hundred percent of your money. But your winners could drive 10 times plus that of returns. So you shouldn't look at it as opportunity costs, or you should look at it as opportunity costs on the winners instead of looking at it as downside protection for the losers.

AI assessment note: “you should look at it as opportunity costs on the winners instead of looking at it as downside protection”

Q Speaking of time, really interesting. How do you think about time allocation across the portfolio? Is it spend time with the winners? They're the ones that are going to drive the returns. Is it spend time with, it sounds terrible, the losers? That's where the reputation may be built. How do you think about time allocation across portfolio?

A So we go through, and my partners and I think about on a biannual basis, where are you spending your time on boards, and how do you prioritize your boards, and how do you prioritize the companies in the portfolio, and that's not a purely quantitative exercise. You might qualitatively think that a company has tremendous upside, although today you might only have a small number of dollars in, or they might not have quite achieved product market fit or some quantitative valuation jump. So we think about how do you prioritize your board seats, and that prioritization should drive your allocation of time, and we're big believers in time being your most valuable resource, not only in your job, for your investors, your entrepreneurs, your LPs, but even in life, as you're growing and becoming a better person every day. So as we think about how we're going to allocate that time across the portfolio, it's very individualized, and it's really about not only being there to support your winners, and probably less to support Support the losers, but making sure that the entrepreneurs whose companies are not going to be very successful, that you're able to help them through the process of exiting that company or the process of getting to a good sale. And I think it's a really hard thing, and I haven't experienced that as an entrepreneur, but when something you've poured your heart and soul int…

AI assessment note: “not only being there to support your winners, and probably less to support Support the losers”

Q So are you looking at the infrastructure layer of the kind of e-commerce experience, or actually the brands that sit on top of it?

A Both pieces. So if you think about the logic underneath, and ways, for example, that your phone might be able to provide data, as well as previous recommendations, which would inform where you're going to have dinner tonight by being able to use machine learning to algorithmically suggest ideas for you, or whether you sat at a bar for two hours, so therefore your phone could Suggest an Uber to pick you up. So there's a lot of logic underneath there that's coming from pulling multiple data sources about you as a person, as well as any logic that might come off your phone. But then it goes through the infrastructure layer of personalization, and there's even apps that are doing a better job of capturing that data and delivering you a better experience.

AI assessment note: “Both pieces. So if you think about the logic underneath”

Q Terrifying. But how did you make your way into the world of venture and come to found one of the best performing funds last decade in first mark, Rick?

A So, you know, there's probably two ways I got into venture. First, in the mid-nineties, when you were in the first grade, I was in distressed buyouts, and out of college, I became an investor. I was always fascinated by investing, but I was in distressed buyouts, and then as I understood and started using the internet, I realized that, hey, this is going to be fundamentally different, and wouldn't my life be so much better if I could be part of a growing pie, you know, fundamentally changing growth, as opposed to fighting over a shrinking pie in distressed buyouts, And therefore I transitioned to VC and spent some time in VC, both in San Francisco and New York before leaving to be an entrepreneur and then moved back in later in life.

AI assessment note: “therefore I transitioned to VC and spent some time in VC”

Q my partner Fred always tells me, Harry, on a board, you have to create an environment of safety. How do you think about creating an environment of safety for the entrepreneur that they can really come to the board with anything, down sales numbers, head of sales that just left, whatever the good or bad thing that's happened. How do you think about creating that atmosphere and environment of safety?

A I haven't heard that before. I think it's great. I would, I probably have more talked about in the past of authenticity or transparency than That, you know, you have some entrepreneurs who either don't want to deliver bad news or don't want to let you down, and they're not intentionally painting a rosier picture, but they're trying to be, at least at their core, optimistic, as almost all entrepreneurs are. But what you want to be able to do is provide a space where you can authentically deal and share, and share problems. As an entrepreneur, that was probably not the culture in the nineties or even 10 years ago, where there was a tremendous power distance. Between investors and entrepreneurs, and you kind of felt like you had to go and ask permission for capital, or ask permission for everything, and that you were owning the problems, and you had to bring those problems in a structured way to your board. I think the best boards realize that you're all stakeholders in the company, that you're all shareholders in the company, and any problem that exists in the company is everyone's problem. So This is a shared problem, and therefore you need to come with a shared solution, and I think early in relationships, hopefully before you even invest, that the entrepreneur, you're able to have a great relationship with the entrepreneur, that, you know, you're able to see the authenticity t…

AI assessment note: “any problem that exists in the company is everyone's problem”