The Exchanges

Q Yeah, that's really helpful, and that's a good perspective. The three pillars, um, for conviction. Yes. Okay, so I guess, like, going back to upfront strategy, while I was there, you were operating with the barbell strategy. Are you still operating with the barbell strategy, and can you explain that? Yes, I will explain it.

A Uh, I will explain it, and yes we are. So barbell meaning, uh, if you imagine a barbell that you might lift, then it's got two weights on, uh, either side and a thin bar in between them. So we invest at seed stage, and we're typically writing a three and a half million dollar check. We can write two, we can write five, but let's say the median check is somewhere between 3.2 to 3.5 depending on the vintage. And then we don't do a lot of A and B investments. I'd say almost zero. Now that doesn't mean we don't follow on. We will follow on and do our prorata, but we're not entering at the A or B round. And we have a very specific reason why, which is The market for A and B between 2010 and 2022 went up by nine X. So nine times more capital in those markets than in any other sector of the market. And as a result, valuations went up like 300%. And it just, you got priced out because if you had a two billion dollar fund You know, let's say two funds ago, they were three hundred million dollars and they were writing five million dollar checks. Now they raised two billion and they want to write twenty five million dollar checks. And you can't write a twenty five million dollar check at a 15 free, you know, and take the majority of the company. So you end up paying 60 free. And so I think that a round is the single most overvalued round in venture capital. Now, it just so happens that if…

AI assessment note: “Uh, I will explain it, and yes we are. So barbell meaning”

Q Yeah. Yeah. And are there certain positive signals that you'd like to see in founders? Cause I know, you know, we got a whole host of personalities and expertise and all of that good stuff, but what are like the main positive signals you find?

A Well, so I think, you know, we talk about three things at Upfront. We talk about product market fit, and what do we mean by that? Because it's a term everybody throws out. Um, we're investing long before product market fit. Sometimes we're investing before products even been launched in market. So by definition, it can't be product market fit, but we have to understand something about the unit economics of the business. Is it going to dramatically lower the cost? Is it going to dramatically make something more efficient? Is it going to improve convenience a great deal to customers? Is there some industry change That we expect to happen, that this is going to lead to this company being more successful going forward. So we're looking for that. Like we have to be able to explain to ourselves why we believe this is going to be big. The second bucket is, um, founder market fit. And that matters a lot to us. And the example I sometimes give is in 2008, I met two young guys out of Harvard, and they were guys, and they were launching something in the mom space. And I'm like, You're 22. Like, what do you know about breastfeeding? What do you know about colicky babies? What do you know about what moms go through? Like, it's just not authentic. And of course, that's an extreme example. It happens to be a real example, but it's an extreme example. We're looking for, like, what is your rais…

AI assessment note: “The second bucket is, um, founder market fit. And that matters a lot to us.”

Q that are traditionally capital intensive. Um, I listened to your episode on Apex, and I thought that was great. I thought you provided a really good example and reasoning behind why you're still doing it and how you debunk these misconceptions. So I'd love to hear more about maybe it's specifically with Apex and space, but what, what are the main misconceptions about these categories that are now being unraveled?

A So if you assume that you're operating a hardware business that requires CapEx, that let's say it's a 50% profit margin, just to pick a random number, and let's say your product is ten million dollars, so it's five million dollars for you to actually produce it, five million in gross margin, okay? If that five million, so your, your sales price is ten million, if I get 20% down, From a customer. If I'm producing something they really need that they can't get from other places and they put 20% down, I'm covering two out of five. So I'm covering 40% of my capex with a down payment before I start even buying materials. Then you can do stage gate payments. So you have milestones. And when I hit the milestones, you have to make another 10%, another 10%. So you can find yourself in a world in which you've shipped a product That has very limited capex risk, not zero, but limited capex risk, um, as long as you're meeting the deliveries that you set forth for yourself. Um, in, in the case of some hardware products that I'm seeing, uh, you have to invest 1015, twenty million dollars in setting up manufacturing in the first place. That's a large capital outlay, but the size contracts that they're talking about are a hundred plus million dollars. So in what category selling t-shirts and socks are you going to get to a hundred million dollars in orders in a year or two? So it's at a differe…

AI assessment note: “you can find yourself in a world in which you've shipped a product That has very limited capex risk”

Q to kind of just hone it in on the early stage fund. So let's say you do around 10 deals a year. Sometimes it fluctuates, right? Every partner maybe does two to three. Um, and then with the actual deal itself, uh, they're pretty concentrated, and you have a specific ownership, you have a specific size. Can you talk more about that and how you kind of came to that?

A Sure. I don't think there's one strategy fits all. There's different ways to do venture, and I don't want to say that our way is the right way. It's just what we've been doing for 28 years. It's worked, and we want to keep doing it and have a consistent strategy. There are some people that would like to do smaller checks with this size fund. They don't want to take board seats, and they want to have a wider top end of funnel. And their hope is, I don't know, maybe I deploy 750 K or a million dollars into the next Uber. Right. And so that's the strategy. And I can't say that's wrong. There's been amazing funds built with that strategy. And I don't want to say it's exactly their strategy, but that maybe the start of first round capital, the start of founder collective, like true ventures. There were some firms that were just excellent at that. And their strategies have changed over time. Our strategy has always been high conviction. Low number of deals. Hunting in industries that we know, not just anything generically, but staying very focused in our swim lane of what we know. High conviction. Join the board and be an active participant on the board for 10 to 12 years. And as you very well know, I have two boards that I'm on that I've been on for 13 years. So, right, like, I'm deeply committed, uh, over the long haul. I have other boards I've been on for eight years. And these ar…

AI assessment note: “Our strategy has always been high conviction. Low number of deals.”

Q about this a couple of times, um, but the window to IPO and exit has elongated a lot, and now we're getting to a PE-ification, very hard, I don't know why I just said that, but of the market, and so there's a lot of restructurings that are happening, or they're just being private longer, or going away, so what are you seeing in terms of exit opportunities for companies?

A Um, well, first of all, what I would say is that IPO is what everybody used to want, and it was like when I was younger as a CEO, your dream was to IPO. But the structure of the market was very different back then. You had a whole industry, you had investment bank analysts that would cover small cap companies, they would do analysis on small cap companies, You could be in the market and have coverage and have investor base that cared about you. But over the last 20 years, you have more, uh, automated trading. Uh, you have more mass dollars moving to the biggest, uh, investments, um, building index funds. And, ah, the investment banks that used to cover small caps don't exist anymore, so you have almost no analyst coverage. It's just not cost effective for them to do so. So if you go public and you have no analyst coverage, and you don't have institutional investors looking to pile into your company, how does someone discover that your shitty little company exists from a stock perspective? Unless you just happen to keep growing, ah, really strongly. Um, and even if you read the analyst reports, like, go look at any tiny little company that does its quarterly filings, and you go read the analyst reports, and they're just AI bots writing stupid articles that say nothing, um, because no one's covering it. So going public, if you don't have coverage, and you don't have an institutio…

AI assessment note: “going public, if you don't have coverage... is worse than being private.”

Q I'll be a little objective. I do think that Upfront has a wonderful management style and the structure in which that you created at the fund was really fun to learn from. So that being said, I'd love to get into the structure of the fund and what it's like. So how do you manage, you know, partner meetings to deal execution? And we can kind of start from there.

A So first of all, you need to know, um, you do know, but your listeners need to know, uh, we actually run three funds and we run three fund strategies simultaneous. We have a seed program. We have what we call early growth. And we have a secondary program. Okay. So we do all three activities. Each of them are distinct, but they're all related. So let me cover what that means. Seed for us is about a three hundred million dollar fund. And we raise a fund every three years, and we've never gone faster than three years, Molly, and you, of course, know that. Um, I think it's really important to have time diversity, and time diversity gives you two things in venture. Number one is you get, like, bull markets, and you get correcting markets, so on balance, you're making sure your entire fund isn't deployed when valuations are high. So if you deployed your entire fund in 2021, I mean, good luck getting returns out of that fund. Uh, and just to tell you, 25% of all funds deployed their entire fund in twenty-twenty-one. 25%, one in four. The median time to deploy in twenty-twenty-one was 1.7 years, okay? So what that means is most of your fund was deployed in twenty-twenty-one, and maybe you caught the first half of twenty-twenty-two when the market hadn't corrected. To contrast us, and I'm not saying we're great. We just have a strategy and we stick to it. Uh, our fund will be a three an…

AI assessment note: “we actually run three funds and we run three fund strategies simultaneous.”