The Exchanges

Q I do want to finish this, Steve. Probably the most exciting, which is, what's the most recent publicly announced investment for you, and why did you get so excited and say yes?

A Prellis Briologic, P-R-E-L-L-I-S, run by this wonderful founder, Melanie. I met you. And it just so happens a friend of mine had joined as a vice president, but we're really obviously betting on her and they print three D organs, which is a category I've been watching in terms of market timing for years now, you know, over a decade, I've been watching companies that could three D print organs for your organ transplant. But what they realized is a, they've built something that scales better than anything else out there. And B that there's a really simple tiny organ you can print, which is the lymph node specifically right now to build antibody therapies for coronavirus and COVID- So the best way to amplify your B cell and T cell response to have a recreation, literally recreation of the human lymph nodes. So you basically externalize your entire immune system onto a Petri dish. You get 100,000 of these things running in parallel. You can do it without requiring serum from humans. You just take the virus, you present it to these synthetic immune system nodes, which are human organs outside the human and have a much more rapid, you know, 30 days to antibody therapy, a much more rapid process innovation cycle than others. But of course, that's just obviously timely for today. An interesting bet, as Bill Gates would put it, the best bet we got against coronavirus, given how it's mut…

AI assessment note: “Prellis Briologic, P-R-E-L-L-I-S, run by this wonderful founder, Melanie.”

Q fundamentally different. My question to you is, fund structures are the same. They're 10 years and they're two years on top. I love asking Matt off of this because it normally leads to a rant, but like, how do you think about current fund structures being what they are and with the investments that you make and maybe the investments that society needs, do we need to change fund structures?

A Yeah, I think so. Especially for the kind of investing that we're talking about here again. And I don't want to be, by the way, sound too disparaging for the mainstream venture markets. Like my point is just, it's being well served by the mainstream venture market, which is tenure funds, focusing on short wins than the internet and what have you, and two to three year pops, like really making the IRR happen when you get lucky. That's fine. And God bless him. But for what we're talking about today, you're exactly right. In fact, I've been on A variety of companies' boards for between 15 and 20 years when they're successful. In fact, when Neophotonics went public, they had over 3000 employees, and I had been there longer than any of them, which is a whole other story. But yeah, so we took that into account when we were forming Future Ventures. We made it a fifteen-year fund instead of 10 years. We debated making it an evergreen fund, which is a structure that Sutter Hill in the early days and some others have pursued, but it has some complexities, and you have to explain it to LPs in a way that doesn't really fit all their models as easily as a normal fund structure. So we went for 15. We just figured, hey, We'll just do that because we know that that's what we're focused on. We know that our LPs are going to buy into that. And I can also point out that every venture fund I've ev…

AI assessment note: “We made it a fifteen-year fund instead of 10 years.”

Q within that fund, given the projects that you invest in, I guess, and maybe I'm wrong here, but A, given the, not outlandishness, but given how societally important they are and how big a project they are just to take on, they're harder to do than a lot of software. Blunt, do you expect loss ratios to be higher? And how do you think about the right levels of diversity

A That's a good point. You know, it's strange. I would have thought that the loss ratio should be a lot higher, that there's just, whenever you go earlier, whenever you have tech risk compounding on top of all the other usual risks, you know, team and market and what have you, but it hasn't played out that way at large. So if I think about synthetic biology, while there were a lot of flame outs, we didn't tend to have that many. In fact, in the whole clean tech category, which was a huge investment thesis of mine for probably a good six, seven years, it didn't really End up being a big smoking hole. And the same thing is actually, I think I know the answer is starting to come to me. Why has it worked out this way? A cleaner example I can tell you is from the internet. So in the nineties, starting in 95, we were doing 80% internet investing at DFJ. So it was almost everything. We were known as the internet firm. And in fact, strangely in 95 to 96, we did a third of all internet investments for the entire venture industry. Not in dollar amounts, but just sheer number of deals. So we literally were a third of the market. And so you might think when the dot-com crash came that we'd have this massive wipeout in our portfolio. But if you aggregate all of our losses from every loser that we did in the internet, it was much less than soft bank lost in a single investment with buy.com. I …

AI assessment note: “I would have thought that the loss ratio should be a lot higher”

Q Steve, I do want to ask one more thing before the quickfire, and it's, you know, so many incredible moments in that relationship. When you think about maybe just the most memorable, it doesn't have to be the favorite or the best, but just the most memorable to you, what would you say the most memorable is that you'll tell grandchildren about?

A You know, it's funny. If you use the word incredible, Might be like saying, what's the most incredible moment you have with your brother, or it was your mom, whoever it is that you said you like to spend time with. And there are many of them, right? It's a lifetime of them. So I've known Elon for 24 years. Now, if you said, what's the most memorable? Yeah, there's a few. So, you know, it doesn't, so again, this isn't the best, but it's certainly memorable. We're in Texas. We're watching this test vehicle, the F-Nine R launch. This was before any company had shown that you could, in fact, return a booster back. And just the audaciousness of this engineering task is monumental. It's like you're talking about transonic and supersonic speeds and things that are The height of a three-story building coming back at you under thrust and then landing vertically near where you want it to land. It's never been done before. It's perceived as insane by every industry observer and every competitor is like, good luck with that. You know, you keep going because that'll never work. And here we are in Texas watching one of the interim test vehicles take off for the first time using some new technologies. And it starts to arc over achingly. And I've launched a lot of rockets myself, by the way, amateur rockets. And so I've seen a lot of them go wrong, and I can tell them, oh my gosh, this is not …

AI assessment note: “We're in Texas. We're watching this test vehicle, the F-Nine R launch.”

Q I totally agree with you there. This is off schedule, but I'm too intrigued to ask, given the 25 years in the business, I haven't experienced a macro downturn, a boom or a bust, so to speak. You have done multiple times. How did it affect your thinking and investment mindset, seeing the booms and busts, and what would you advise me being a newbie to it, so to speak?

A Yeah, it's a wonderful hardening of the soul and of the spirit, in a variety of ways that were not something I would have predicted. For example, I Lost about 90% of my net worth in the dot com crash. And I just wrote it down. I didn't sell. I didn't think about the timing of selling. And the thing that allowed me to go through that is I had just come off the dot com boom. And so I made what was easy money, if you will, as an investor in that sector. It was like shooting fish in a barrel, frankly, in the late nineties, or at least the mid to late nineties. So I had pledged and my wife had pledged to give everything away to charity. And so when we rode that roller coaster down, it didn't feel like our own personal net worth Was evaporating. It was the future charitable donations we'd be making. So to make a long story short, I weathered through that, held on the public stocks, at least that I held at that point came back and I took a different view adventure in general, sort of the long-term view, not the, oh my gosh, there's so much stress and anxiety about thinking about the timing of exits. And I sort of shifted coming out of that crash to not worrying about exits at all. In fact, I've never sold a single share of anything I've invested in as a venture capitalist. But that was around that time period that that perspective sunk in. The other thing maybe more tactical is I saw …

AI assessment note: “I sort of shifted coming out of that crash to not worrying about exits”

Q Steve, any book where you recommend just the first few chapters, I'm instantly attracted to, so I think that's a great entry point. Tell me, most memorable board member you sat on a board with, and what made them so memorable?

A There have been so many. There's a lot of characters. On the positive vector, I'd say Antonio Gracias of Valor. Certainly the most value-added board member I've sat with, and it's incredible to me how someone who comes from a domain and a background of more operating investment management, meaning Investing in industrial companies. He started in the Midwest and eventually moved more into technology with Tesla and others. This ability to roll up one sleeve as a board member and be helpful in the company in its greatest moments, whatever it might be, bringing gross margins up for a product line, helping the sales channel, whatever it might be. I've witnessed how different it is from the way I operate at a board level and domain of ideas and networks, and I'm deeply respectful of it. Stepping back, I would say, I think there's a huge array of different models for success in venture, and a lot of us think that whatever we happen to be is the one and only model that makes sense, and actually there's enormous cognitive diversity, enormously different frameworks that work, and I think very different venture funds that need to be wrapped around these kinds of personality differences, but there isn't one size fits all, and that was very interesting and informative to me.

AI assessment note: “I'd say Antonio Gracias of Valor. Certainly the most value-added board member”

Q Not at all, but I do want to kick off with a little bit on you, so tell me, for those that maybe have been living under a rock, how did you make your way into the world of startups and venture and come to be really one of the most prominent and forward-thinking investors in the Valley today?

A Oh gosh, it makes me blush to hear you say that, but my short story is I'm a geek at heart. Way back when I studied electrical engineering, computer design, I even started a PhD. In that field. Worked in chip design, software, companies like Apple and Next and HP. And about 25 years ago, I sent a resume in cold over the transom, as they say, to Tim Draper, who was running a small early-stage venture firm called Draper Associates that had twenty-six million dollars under management at the time. And it led to an interview, it led to being hired at one of those rare events where there was no prior connection or any sort that I had to the venture world, and I joined what was called Draper Associates. The venture industry per year has grown 25 X since then, so 25 X in 25 years. So it's a very different world today, of course, but it was a boutique pre-internet era. So personally, I guess I've gone through a bit of a random walk of technology, business, technology, engineering, and I really found my dream job. I didn't know about it prior, and as I've been doing this now for 25 years, I couldn't imagine doing anything else. It's such a great place to learn about the future and to learn about the frontiers of technology.

AI assessment note: “I sent a resume in cold over the transom, as they say, to Tim Draper”

Q of the week, as I'm sure you know and would agree with. In terms of like assessing founder psychology, how do you think about determining in the very early days when we bank these projects, whether a founder is a flip the coin versus a take money off the table and sell for the first offer that comes through? How do you determine that true ambition in the early days?

A I will answer that question, but I first want to commend you that that is exactly the right mental leap to make, which is that is why This whole thesis is why venture firms say we want to invest in visionary founders. We want to invest in missionaries, not mercenaries, the way John Doerr or somebody famously said. Why we want to invest in people that have a hallucinogenic optimism, as I described Sevier, the founder of Hotmail. You want someone who's so deeply tied to their mission that they don't think about sort of the common logic of what's the best financial decision in the moment. And so that's why we look for that personality type in founders, because it correlates to this exact thing, all they'll keep flipping. So how do we look for it? I like to ask every entrepreneur somewhere towards the end of the first pitch meeting, what does the company look like in 20 years? And I got to tell you, I get responses all over the map. The worst is they look at me with incredulous eyes or even laugh at the question. That's the worst. Next, you know, like that's not a company you want to invest in because they don't have any image of where they're going to be in 20 years. They'll flip the company and be on their third startup by then. So the sort of arbitrage seeking opportunists get weeded out easily by that one. The true company Founders that we want to bet on have the most rich answ…

AI assessment note: “I like to ask every entrepreneur... what does the company look like in 20 years?”

Q how large this can be, it's not a capped five billion unbundling of Google Drive application. This is like fundamental society changing transitions, and the exits are so big. Does entry price really matter? Like, if you paid a hundred or 200, kind of who cares if it's going to be a fifty billion dollar company changing the way we eat meat? How important is price to you, I guess?

A Something emotionally in me says it matters, but I think that's only because I can't help myself. There's no logical reason why entry price should matter as much as it does, but I do find that I'm inherently just, I just can't help myself. It'd be kind of like, I can't play chess poorly than my best ability. I'm not particularly good at chess, but you know, pick any game. But your question is actually right analytically, which is if you look at the power laws of portfolio returns in an early stage venture fund, both within the fund and across multiple funds, it is unbelievably consistent from Across firms. So you can aggregate all early stage venture. You can do all the early stage venture within a given firm like DFJ or future ventures or within any given fund. And in all of these scales of analysis, there's like one company that matters that equals the returns of every other company combined. And then number two on the list oftentimes is the same. In other words, it equals everything below it combined, sometimes even number three. And if you plot that on a piece of paper, like, wow, what do you make of this? Right? So that's one thing that you start to realize that if you made a routine error of entering two X too high, but you pick the right companies, then that two X too high doesn't matter, right? The entry price is irrelevant. What's much more important is betting on rema…

AI assessment note: “The entry price is irrelevant. What's much more important is betting on remarkable people”

Q What's your favorite book and why? What's the book we should be reading?

A Well, let's see. The most influential on me was Out of Control by Kevin Kelly. It's a 95 book, recently translated into Mandarin, wildly popular today in China, so I think it was ahead of its time, but it helped set my fascination with iterative algorithms, biology, the information systems biology, what we can learn. Kevin Kelly's an amazing writer. I like all of his books, but this one is my favorite. It's about biological metaphors, information technology. By the way, I should just mention that if Someone wants to read just a few chapters. Almost as influential as Ray Kurzweil's Age of Spiritual Machines. But again, only the first few chapters when he sets up this framework of the, you know, hundred-year version of Moore's Law. I show that slide in every talk I give, regardless of subject matter, because I think it's the most important thing ever graphed. It's the most important thing in technology business, and it gives you a sense of where the future will lie. I say only the first few chapters, because the rest of his book he uses to then predict the future. He might be right. He might be wrong. I think it's better just as an analytical tool for each of us to use to think about where the world is heading, given the compounding of Moore's Law.

AI assessment note: “The most influential on me was Out of Control by Kevin Kelly.”

Q Not at all, but I do want to kick off with a little bit on you, so tell me, for those that maybe have been living under a rock, how did you make your way into the world of startups and venture and come to be really one of the most prominent and forward-thinking investors in the Valley today?

A Oh gosh, it makes me blush to hear you say that, but my short story is I'm a geek at heart. Way back when I studied electrical engineering, computer design, I even started a PhD. In that field. Worked in chip design, software, companies like Apple and Next and HP. And about 25 years ago, I sent a resume in cold over the transom, as they say, to Tim Draper, who was running a small early-stage venture firm called Draper Associates that had twenty-six million dollars under management at the time. And it led to an interview, it led to being hired at one of those rare events where there was no prior connection or any sort that I had to the venture world, and I joined what was called Draper Associates. The venture industry per year has grown 25 X since then, so 25 X in 25 years. So it's a very different world today, of course, but it was a boutique pre-internet era. So personally, I guess I've gone through a bit of a random walk of technology, business, technology, engineering, and I really found my dream job. I didn't know about it prior, and as I've been doing this now for 25 years, I couldn't imagine doing anything else. It's such a great place to learn about the future and to learn about the frontiers of technology.

AI assessment note: “I sent a resume in cold over the transom, as they say, to Tim Draper”

Q to have brunch and, you know, buying the Peloton fine, but, you know, not a huge, huge amount of money. And it kind of questioned my relationship with money, actually. And I don't really know where I've landed. And I still ruminate on it a lot. I'm interested to hear your thoughts, given the many years you've spent in venture. How do you think about your relationship with money now?

A Yeah. I think my relationship with money changed when I had kids and I reflected on my own upbringing. I was not wealthy growing up. My parents were both immigrants from Estonia and came to the U S without much in their back pocket, but at least enough to live, but not really any wealth. And yet I grew up and I had the privilege of going to a private school and to a really awesome university where I got to see all different types of backgrounds in terms of wealth. And I didn't know of any role models, and I still don't, where kids came into wealth and then had the fire in the belly to make a difference and had happiness and meaningful lives. It's like very rare. I mean, I can sort of think of one person more or less, I think, in my entire life history, where if they knew they had money from their parents, they ended up having a happy life. Let's just put it like that as a filter. And so I thought, well, I don't want to wish that on my kids. And I had to think about a will. I was forced to have a will and a living trust for the first time. I mean, forced to meaning this responsibility of a parent. You got to think about what about Babies. If you die. Right. And then it sort of was obvious to me. I want to give it all away. I'm not going to give them some arbitrary number of amount of money that will grow based on how I do in my job. It's like, no, let's start from first principl…

AI assessment note: “I think my relationship with money changed when I had kids”

Q how large this can be, it's not a capped five billion unbundling of Google Drive application. This is like fundamental society changing transitions, and the exits are so big. Does entry price really matter? Like, if you paid a hundred or 200, kind of who cares if it's going to be a fifty billion dollar company changing the way we eat meat? How important is price to you, I guess?

A Something emotionally in me says it matters, but I think that's only because I can't help myself. There's no logical reason why entry price should matter as much as it does, but I do find that I'm inherently just, I just can't help myself. It'd be kind of like, I can't play chess poorly than my best ability. I'm not particularly good at chess, but you know, pick any game. But your question is actually right analytically, which is if you look at the power laws of portfolio returns in an early stage venture fund, both within the fund and across multiple funds, it is unbelievably consistent from Across firms. So you can aggregate all early stage venture. You can do all the early stage venture within a given firm like DFJ or future ventures or within any given fund. And in all of these scales of analysis, there's like one company that matters that equals the returns of every other company combined. And then number two on the list oftentimes is the same. In other words, it equals everything below it combined, sometimes even number three. And if you plot that on a piece of paper, like, wow, what do you make of this? Right? So that's one thing that you start to realize that if you made a routine error of entering two X too high, but you pick the right companies, then that two X too high doesn't matter, right? The entry price is irrelevant. What's much more important is betting on rema…

AI assessment note: “There's no logical reason why entry price should matter as much as it does”

Q And I love that question. I guess my question to you on that one is often with these, often more technical projects as they always tend to be, and with the very long time horizons and huge societal impacts that The question that I'm always fearful of is market timing with such long projects. How do you assess and view market timing risk inherent within making the investment?

A So that in a way is the focus of what I try to do. In other words, if I was to say, what is the skill set that I'm trying to hone? What is it that I do as an early stage venture capitalist? It's trying to figure out market timing. So backing up for a moment, I believe at a absolutist level or an objective level, market risk is the worst kind of risk. Meaning if you don't know if a customer is going to like the product intuitively or logically or provably, you don't want to invest in that. So this is why we avoid gaming. Turns out gameplay is super important. It doesn't matter how good you've sketched out, you know, what the game's going to look like. And to actually build it, devote most of the cost of development and have final gameplay to play with, you actually know if it's a hit. So these are the hits driven business as they're famously called in venture. Most of entertainment and what have you would fit this. Like I could never do Hollywood or even pretend to be a film producer or label for that reason. Now market timing on the other hand, Is an art. And I'll give you simple examples. Could be, okay, back to the electric vehicle example. It is inevitable that all vehicles will be electric. If you look far enough in the future, no one will debate this point. And I've done this with oil industry executives and others. You're like, oh, you know, they can get really bogged dow…

AI assessment note: “What is it that I do as an early stage venture capitalist? It's trying to figure out market timing.”

Q Quickfire, and it is the relationship with Elon, as we spoke about earlier from SpaceX. It's one that's really been such a long-term relationship for you, and when you think about Elon himself as an entrepreneur, I'm so interested. I've obviously read all the biographies and all the books on Elon. From your perspective, having seen The Insider, what makes Elon so incredibly special as an entrepreneur, do you think?

A It's a tough question. His mom gets asked this a lot. He's asked this a lot. So let me first amplify and agree with the question, which is, I think he's perhaps the greatest gift of the American dream living right now. You know, by the way, Immigrant to America specifically dreamed the American dream and built incredible companies in multiple industries that haven't faced new entrants for decades and have become some of the most important drivers of change. Let's just be modest at this point, just say drivers of change in a bunch of unrelated industries. So it does beg the question, what is it? So first he would say, well, I think about problems from a first principles perspective with a physics training And some of my best entrepreneurs, by the way, do have that perspective. I would also put Planet Lab CEO in the same bucket, where if you're trained deeply in physics, you do think about a first principles approach, not where we are, but what should be possible. So again, this couples beautifully with his vision or the vision, his framework, shall we say, looking at 500 years and then chaining back to the present. Elon does this inherently better than anyone I know, and there's parts of it that are just magical to me, and I don't know how he does it. So for example, okay, we need to build a rocket to get to Mars. Oh, shoot. We need to make these rockets come back from Mars. We …

AI assessment note: “first principles perspective with a physics training... looking at 500 years and then chaining back”

Q to have brunch and, you know, buying the Peloton fine, but, you know, not a huge, huge amount of money. And it kind of questioned my relationship with money, actually. And I don't really know where I've landed. And I still ruminate on it a lot. I'm interested to hear your thoughts, given the many years you've spent in venture. How do you think about your relationship with money now?

A Yeah. I think my relationship with money changed when I had kids and I reflected on my own upbringing. I was not wealthy growing up. My parents were both immigrants from Estonia and came to the U S without much in their back pocket, but at least enough to live, but not really any wealth. And yet I grew up and I had the privilege of going to a private school and to a really awesome university where I got to see all different types of backgrounds in terms of wealth. And I didn't know of any role models, and I still don't, where kids came into wealth and then had the fire in the belly to make a difference and had happiness and meaningful lives. It's like very rare. I mean, I can sort of think of one person more or less, I think, in my entire life history, where if they knew they had money from their parents, they ended up having a happy life. Let's just put it like that as a filter. And so I thought, well, I don't want to wish that on my kids. And I had to think about a will. I was forced to have a will and a living trust for the first time. I mean, forced to meaning this responsibility of a parent. You got to think about what about Babies. If you die. Right. And then it sort of was obvious to me. I want to give it all away. I'm not going to give them some arbitrary number of amount of money that will grow based on how I do in my job. It's like, no, let's start from first principl…

AI assessment note: “I think my relationship with money changed when I had kids”

Q It's not on the quick file list, but I'm too interested to ask it. You mentioned that the partnership dynamics. How do you nurture that intellectual honesty and cognitive diversity at a partnership level?

A Well, cognitive diversity is something I think you have to hire for. There's a natural human tendency given the implicit biases that we carry, and anyone who doesn't know what that means, like intuitively, like immediately, yep, implicit biases. I strongly encourage you to take the implicit bias test at Harvard. It's very eye-opening. So we're all biased. We all have a deeply seated homophily bias. We want to hire people that look Like ourselves. So people with high energy hire high energy people. Optimists hire optimists. Outgoing people hire outgoing people and extroverts. It's kind of spooky. And so you have to force yourself to think about cognitive diversity. For example, of all the people I've hired into the venture industry over the last 15 years, and there's been a lot of them, about 85% have been women. The other was people of color, and all the people that I promoted on a venture track have been women. So that alone, gender diversity, is a good proxy for cognitive diversity. But there are many others. And things like don't recruit from your alma mater is a simple one. Most venture firms look at, like, where they went to school. It's all the same school. Like, that's because it's the easiest path on recruiting. You hire people that you either personally knew or went to the same kind of classes you went to so you know how to judge their past experience. Ridiculous way t…

AI assessment note: “have voting policies where everyone's equal, and that wisdom of crowds effect can be tapped”

Q of the week, as I'm sure you know and would agree with. In terms of like assessing founder psychology, how do you think about determining in the very early days when we bank these projects, whether a founder is a flip the coin versus a take money off the table and sell for the first offer that comes through? How do you determine that true ambition in the early days?

A I will answer that question, but I first want to commend you that that is exactly the right mental leap to make, which is that is why This whole thesis is why venture firms say we want to invest in visionary founders. We want to invest in missionaries, not mercenaries, the way John Doerr or somebody famously said. Why we want to invest in people that have a hallucinogenic optimism, as I described Sevier, the founder of Hotmail. You want someone who's so deeply tied to their mission that they don't think about sort of the common logic of what's the best financial decision in the moment. And so that's why we look for that personality type in founders, because it correlates to this exact thing, all they'll keep flipping. So how do we look for it? I like to ask every entrepreneur somewhere towards the end of the first pitch meeting, what does the company look like in 20 years? And I got to tell you, I get responses all over the map. The worst is they look at me with incredulous eyes or even laugh at the question. That's the worst. Next, you know, like that's not a company you want to invest in because they don't have any image of where they're going to be in 20 years. They'll flip the company and be on their third startup by then. So the sort of arbitrage seeking opportunists get weeded out easily by that one. The true company Founders that we want to bet on have the most rich answ…

AI assessment note: “I like to ask every entrepreneur somewhere towards the end of the first pitch meeting”

Q What's your favorite book and why? What's the book we should be reading?

A Well, let's see. The most influential on me was Out of Control by Kevin Kelly. It's a 95 book, recently translated into Mandarin, wildly popular today in China, so I think it was ahead of its time, but it helped set my fascination with iterative algorithms, biology, the information systems biology, what we can learn. Kevin Kelly's an amazing writer. I like all of his books, but this one is my favorite. It's about biological metaphors, information technology. By the way, I should just mention that if Someone wants to read just a few chapters. Almost as influential as Ray Kurzweil's Age of Spiritual Machines. But again, only the first few chapters when he sets up this framework of the, you know, hundred-year version of Moore's Law. I show that slide in every talk I give, regardless of subject matter, because I think it's the most important thing ever graphed. It's the most important thing in technology business, and it gives you a sense of where the future will lie. I say only the first few chapters, because the rest of his book he uses to then predict the future. He might be right. He might be wrong. I think it's better just as an analytical tool for each of us to use to think about where the world is heading, given the compounding of Moore's Law.

AI assessment note: “The most influential on me was Out of Control by Kevin Kelly.”

Q I totally agree with you there. This is off schedule, but I'm too intrigued to ask, given the 25 years in the business, I haven't experienced a macro downturn, a boom or a bust, so to speak. You have done multiple times. How did it affect your thinking and investment mindset, seeing the booms and busts, and what would you advise me being a newbie to it, so to speak?

A Yeah, it's a wonderful hardening of the soul and of the spirit, in a variety of ways that were not something I would have predicted. For example, I Lost about 90% of my net worth in the dot com crash. And I just wrote it down. I didn't sell. I didn't think about the timing of selling. And the thing that allowed me to go through that is I had just come off the dot com boom. And so I made what was easy money, if you will, as an investor in that sector. It was like shooting fish in a barrel, frankly, in the late nineties, or at least the mid to late nineties. So I had pledged and my wife had pledged to give everything away to charity. And so when we rode that roller coaster down, it didn't feel like our own personal net worth Was evaporating. It was the future charitable donations we'd be making. So to make a long story short, I weathered through that, held on the public stocks, at least that I held at that point came back and I took a different view adventure in general, sort of the long-term view, not the, oh my gosh, there's so much stress and anxiety about thinking about the timing of exits. And I sort of shifted coming out of that crash to not worrying about exits at all. In fact, I've never sold a single share of anything I've invested in as a venture capitalist. But that was around that time period that that perspective sunk in. The other thing maybe more tactical is I saw …

AI assessment note: “I sort of shifted coming out of that crash to not worrying about exits at all.”

Q Quickfire, and it is the relationship with Elon, as we spoke about earlier from SpaceX. It's one that's really been such a long-term relationship for you, and when you think about Elon himself as an entrepreneur, I'm so interested. I've obviously read all the biographies and all the books on Elon. From your perspective, having seen The Insider, what makes Elon so incredibly special as an entrepreneur, do you think?

A It's a tough question. His mom gets asked this a lot. He's asked this a lot. So let me first amplify and agree with the question, which is, I think he's perhaps the greatest gift of the American dream living right now. You know, by the way, Immigrant to America specifically dreamed the American dream and built incredible companies in multiple industries that haven't faced new entrants for decades and have become some of the most important drivers of change. Let's just be modest at this point, just say drivers of change in a bunch of unrelated industries. So it does beg the question, what is it? So first he would say, well, I think about problems from a first principles perspective with a physics training And some of my best entrepreneurs, by the way, do have that perspective. I would also put Planet Lab CEO in the same bucket, where if you're trained deeply in physics, you do think about a first principles approach, not where we are, but what should be possible. So again, this couples beautifully with his vision or the vision, his framework, shall we say, looking at 500 years and then chaining back to the present. Elon does this inherently better than anyone I know, and there's parts of it that are just magical to me, and I don't know how he does it. So for example, okay, we need to build a rocket to get to Mars. Oh, shoot. We need to make these rockets come back from Mars. We …

AI assessment note: “think about problems from a first principles perspective with a physics training”

Q Steve, any book where you recommend just the first few chapters, I'm instantly attracted to, so I think that's a great entry point. Tell me, most memorable board member you sat on a board with, and what made them so memorable?

A There have been so many. There's a lot of characters. On the positive vector, I'd say Antonio Gracias of Valor. Certainly the most value-added board member I've sat with, and it's incredible to me how someone who comes from a domain and a background of more operating investment management, meaning Investing in industrial companies. He started in the Midwest and eventually moved more into technology with Tesla and others. This ability to roll up one sleeve as a board member and be helpful in the company in its greatest moments, whatever it might be, bringing gross margins up for a product line, helping the sales channel, whatever it might be. I've witnessed how different it is from the way I operate at a board level and domain of ideas and networks, and I'm deeply respectful of it. Stepping back, I would say, I think there's a huge array of different models for success in venture, and a lot of us think that whatever we happen to be is the one and only model that makes sense, and actually there's enormous cognitive diversity, enormously different frameworks that work, and I think very different venture funds that need to be wrapped around these kinds of personality differences, but there isn't one size fits all, and that was very interesting and informative to me.

AI assessment note: “On the positive vector, I'd say Antonio Gracias of Valor.”

Q What would you most like to change about the world of venture today?

A You know, if I could wish for something that I think may be impossible, I wish it could scale. Where the groups that do it well could do it 10 X or a hundred X as much as they do, because I think there are many more ideas that aren't getting funding and won't get funding than the industry can serve. And unfortunately, when you just double or triple or 10 X, the size of any given fund, it changes what they do. I don't think venture firms scale at all at headcount. One of the biggest things I've learned in the last 25 years is that team size is essential between two and five partners max. If you get to seven, you're at your limit. If you had more than seven partners, IRRs and returns will plummet, and this is part of the process learning I've gone through over the last 25 years. Team size is super important, both development teams within companies and on boards. So that's why venture doesn't scale, in my opinion. So I think there are groups that can automate the provision of capital. There's a company called Capital that's doing this in the debt side for companies that are more predictable, like enterprise software, consumer internet companies, where you would lend instead of using venture to grow these businesses in what might be Thought of as venture rounds, but move it to the debt side. But overall, as I look at venture, too much of it feels like a lottery. This power law that…

AI assessment note: “I wish it could scale. Where the groups that do it well could do it”

Q that long-term hold perspective. I guess my question is, with the proliferation of secondaries that we've seen over the last few years, I always say, like, hey, take a certain amount of money off the table that covers your back in certain ways, and then ride the upside. How do you think about that, and how would you advise managers who are thinking about navigating secondary opportunities, given your perspective?

A That's a really good point. I'm speaking for myself as a venture capitalist that holds a portfolio of stocks. As a entrepreneur who's heavily invested in one company, your advice is spot on. You can do a better job as a manager if you're not operating from a place of fear, and if you can take 10% or so off the table and sort of cover your nest egg, if you will, or your ability to live in Silicon Valley, if that's where you're based, for example, and not fear for family or what have you. People are more creative, frankly, when they're not fearful, and removing the element of that is important. By the way, if you think about some of the structures in a lot of venture term sheets, things like back in the nineties, we often did participating preferred. It's a technique of trying to align the risk tolerance of investors with startup companies. An investor should be more risk seeking than the entrepreneur. In other words, I can withstand the complete loss of an investment more easily than they can withstand the complete loss of their baby, right? Their startup that they devoted so many years and hard work into. And so you'll find these terms that sort of rebalance that equation more towards the way the venture capitalist wants it, which is Go for it. Roll the dice. Here's a thought experiment I sometimes use when I was teaching the hot milk case at Stanford, which is imagine you pres…

AI assessment note: “As a entrepreneur who's heavily invested in one company, your advice is spot on.”

Q around the lack of downstream investors. If you want to do an enterprise data company, wow, we both know there's many multi-billion dollar funds that want to do that. Is it a concern for you in terms of the lack of downstream investors that will engage with a nuclear fusion project, that will engage with a synthetic meat creation project? How do you think about that lack of downstream investors?

A No, it's exactly right. And it relates to timing. It's that intuitive sense of, can I sell this to them when it comes time for the series B or whatever the next round is to our investment. And that sometimes that's related to getting the timing just right. Like in the case of SpaceX, they actually had a rocket finally succeed after we invested and that changed everything in their relationship with NASA and contracts that they had. Other times it's a sales effort on my part, which is there are a group of Follow on investors. So even though there's a dearth of them, I completely agree with the premise of the question that like the venture industry has an abundance of herd mentality investors in what I call the crack of.com investing consumer internet enterprise software, where everyone has the same strategy and they don't seem to scratch their heads that they all have the same strategy, but somehow think they're just going to execute everyone else, right? Either through the personal networks or what have you. And it's just bizarre. And there's a real supply and demand imbalance in all the other meaningful companies that are now changing every other part of the economy. Which, by the way, let me just mention one thing that I've seen over 25 years. When I started in venture capital, there were like three sectors. There was software, semiconductors, and life sciences. And that was i…

AI assessment note: “it relates to timing. It's that intuitive sense of, can I sell this to them”

Q within that fund, given the projects that you invest in, I guess, and maybe I'm wrong here, but A, given the, not outlandishness, but given how societally important they are and how big a project they are just to take on, they're harder to do than a lot of software. Blunt, do you expect loss ratios to be higher? And how do you think about the right levels of diversity

A That's a good point. You know, it's strange. I would have thought that the loss ratio should be a lot higher, that there's just, whenever you go earlier, whenever you have tech risk compounding on top of all the other usual risks, you know, team and market and what have you, but it hasn't played out that way at large. So if I think about synthetic biology, while there were a lot of flame outs, we didn't tend to have that many. In fact, in the whole clean tech category, which was a huge investment thesis of mine for probably a good six, seven years, it didn't really End up being a big smoking hole. And the same thing is actually, I think I know the answer is starting to come to me. Why has it worked out this way? A cleaner example I can tell you is from the internet. So in the nineties, starting in 95, we were doing 80% internet investing at DFJ. So it was almost everything. We were known as the internet firm. And in fact, strangely in 95 to 96, we did a third of all internet investments for the entire venture industry. Not in dollar amounts, but just sheer number of deals. So we literally were a third of the market. And so you might think when the dot-com crash came that we'd have this massive wipeout in our portfolio. But if you aggregate all of our losses from every loser that we did in the internet, it was much less than soft bank lost in a single investment with buy.com. I …

AI assessment note: “I would have thought that the loss ratio should be a lot higher”

Q And I love that question. I guess my question to you on that one is often with these, often more technical projects as they always tend to be, and with the very long time horizons and huge societal impacts that The question that I'm always fearful of is market timing with such long projects. How do you assess and view market timing risk inherent within making the investment?

A So that in a way is the focus of what I try to do. In other words, if I was to say, what is the skill set that I'm trying to hone? What is it that I do as an early stage venture capitalist? It's trying to figure out market timing. So backing up for a moment, I believe at a absolutist level or an objective level, market risk is the worst kind of risk. Meaning if you don't know if a customer is going to like the product intuitively or logically or provably, you don't want to invest in that. So this is why we avoid gaming. Turns out gameplay is super important. It doesn't matter how good you've sketched out, you know, what the game's going to look like. And to actually build it, devote most of the cost of development and have final gameplay to play with, you actually know if it's a hit. So these are the hits driven business as they're famously called in venture. Most of entertainment and what have you would fit this. Like I could never do Hollywood or even pretend to be a film producer or label for that reason. Now market timing on the other hand, Is an art. And I'll give you simple examples. Could be, okay, back to the electric vehicle example. It is inevitable that all vehicles will be electric. If you look far enough in the future, no one will debate this point. And I've done this with oil industry executives and others. You're like, oh, you know, they can get really bogged dow…

AI assessment note: “What is it that I do as an early stage venture capitalist? It's trying to figure out market timing.”

Q around the lack of downstream investors. If you want to do an enterprise data company, wow, we both know there's many multi-billion dollar funds that want to do that. Is it a concern for you in terms of the lack of downstream investors that will engage with a nuclear fusion project, that will engage with a synthetic meat creation project? How do you think about that lack of downstream investors?

A No, it's exactly right. And it relates to timing. It's that intuitive sense of, can I sell this to them when it comes time for the series B or whatever the next round is to our investment. And that sometimes that's related to getting the timing just right. Like in the case of SpaceX, they actually had a rocket finally succeed after we invested and that changed everything in their relationship with NASA and contracts that they had. Other times it's a sales effort on my part, which is there are a group of Follow on investors. So even though there's a dearth of them, I completely agree with the premise of the question that like the venture industry has an abundance of herd mentality investors in what I call the crack of.com investing consumer internet enterprise software, where everyone has the same strategy and they don't seem to scratch their heads that they all have the same strategy, but somehow think they're just going to execute everyone else, right? Either through the personal networks or what have you. And it's just bizarre. And there's a real supply and demand imbalance in all the other meaningful companies that are now changing every other part of the economy. Which, by the way, let me just mention one thing that I've seen over 25 years. When I started in venture capital, there were like three sectors. There was software, semiconductors, and life sciences. And that was i…

AI assessment note: “even though there's a dearth of them, I completely agree with the premise”

Q that long-term hold perspective. I guess my question is, with the proliferation of secondaries that we've seen over the last few years, I always say, like, hey, take a certain amount of money off the table that covers your back in certain ways, and then ride the upside. How do you think about that, and how would you advise managers who are thinking about navigating secondary opportunities, given your perspective?

A That's a really good point. I'm speaking for myself as a venture capitalist that holds a portfolio of stocks. As a entrepreneur who's heavily invested in one company, your advice is spot on. You can do a better job as a manager if you're not operating from a place of fear, and if you can take 10% or so off the table and sort of cover your nest egg, if you will, or your ability to live in Silicon Valley, if that's where you're based, for example, and not fear for family or what have you. People are more creative, frankly, when they're not fearful, and removing the element of that is important. By the way, if you think about some of the structures in a lot of venture term sheets, things like back in the nineties, we often did participating preferred. It's a technique of trying to align the risk tolerance of investors with startup companies. An investor should be more risk seeking than the entrepreneur. In other words, I can withstand the complete loss of an investment more easily than they can withstand the complete loss of their baby, right? Their startup that they devoted so many years and hard work into. And so you'll find these terms that sort of rebalance that equation more towards the way the venture capitalist wants it, which is Go for it. Roll the dice. Here's a thought experiment I sometimes use when I was teaching the hot milk case at Stanford, which is imagine you pres…

AI assessment note: “As a entrepreneur who's heavily invested in one company, your advice is spot on.”