SPEAKER_00: okay everybody it's thursday quick intro sebastian maliby the author of the power law is going to be on the pod we do a deep dive into the history of venture capital all the great firms all the great moments sebastian did an insane amount of research for his book which is a great book he spent uh five years writing it 250 people in our industry uh he interviewed and we talked about all the legendary vc firms and what they learned it's important important if you're a founder or you're a capital allocator for you to listen to this episode and please buy his book as well stick with us it's going to be a great episode this week

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SPEAKER_05: last we have sebastian malabi joining us to talk about his book the power law which i have been calling your favorite vc's favorite book about vc uh sebastian malabi of course is a journalist and senior fellow for international economics at the council on foreign relations a washington post columnist since 1999 worked for the economist he's written other books as well that are just you know i mean this is sort of a triumph of research and access and is as we will talk about in our interview a defense of our industry and a realistic look i think at the history of it and uh what

Jason Calacanis: venture capital can and cannot do so welcome to the program sebastian malabi super excited to have you

SPEAKER_09: here thanks guys thanks for coming on uh i i heard maybe keith roboi mentioned the book when he was on this pod and i was like you know i know the history of silicon valley i've read all

David Friedberg: the books i got why do i need to read this book but i got it anyway because it keeps good uh you know

SPEAKER_12: judge of like what's a good book and i was absolutely uh delighted uh by a couple of things about your

SPEAKER_09: book number one you picked the right stories and two you threaded them together very nicely and you focused on what matters why each of these uh company why each of these venture firms uh were formed and what impact they had on the valley and as you read the book you know if you're in silicon valley i've been investing for 11 years i've been in the industry for 30 i knew 60 of the story 70 but the way you thread it together just created a nice mental model for me and framework and filled in a couple stories i never heard of i was a little uh you know not knowledgeable on the cisco dramas but one example and uh the book is so good that with the 11 people i have on our investment team i said listen i could tell you these stories over you know the next couple years on an investment team meeting everybody read the book and take notes per chapter and we're all going to just talk about it and we're going to put it to bed so everybody understands the history of silicon valley and how we got here uh so just congratulations the book is just writer to writer it reads very quickly it's a great listen by the way uh and incredibly informative so why did you write the book and how did you pick which stories to include because it the move the book the book does move briskly which is great that's what you want in a history book like this so you can cover a lot of territory uh but you had to make some hard decisions i think on what to include and what not to include so how did you pick which stories to

SPEAKER_18: include well thanks for that great intro both of you um i wrote the book for two reasons one was to explain the thought process in venture allocation as you know it's not like public markets there are no quantitative metrics i had written a book before about the history of hedge funds and intellectually that was a fascinating challenge for me to understand how in the early stage when you've got no price to book ratio no price earnings ratio none of that stuff and you're making judgments on people how do you how do you think about that so that was the first thing um to get inside the minds of venture investors by hanging out with them by hanging out with the entrepreneurs that they funded and by taking time i always take four or five years on these books and that gives me enough time to really absorb uh the culture and then the other thing i was trying to do is is show what the impact of venture capital is on tech ecosystems because there's always this question does venture create innovation or does it just show up for innovation and there's a lot of cynical people who you know just think the investors are there you know leeching off the entrepreneurs and don't contribute to anything and i think i kind of had an open mind before but when i'd done the research i was convinced that you know the network effects that uh vcs create by connecting people money and ideas are huge in terms of explaining innovation and it's instructive that the only rival to the valley really as a major tech ecosystem is china and they started with the same venture capital in fact the same companies like sequoia china is the biggest in china as well as the biggest money right so it was the same connecting up of people and ideas and money um combined with you know an investor who's seen multiple startups get started out before and you marry that with a passion and commitment and hard work and vision of the entrepreneur and you get magic um so those are the two things and you're right jason i had to kind of pick stories there's too many stories you can't tell all of them and i guess i went for stories that i thought would resonate with a lot of readers you know if it's a name that people have heard of you know the funding of apple the funding of google the funding of facebook um those stories were obvious draws because i think it's tough to get people to read things about companies they never heard of i made one exception which is you know in the early internet there was a company called uunet nobody's ever heard of that today but back in the day it was very important in getting the hardware built um for the for the internet and it kind of illustrated how you know people sometimes say well the government created the internet or you know the defense department darpa created the internet and that's kind of literally true in the sense that the early early internet was like that but you know the user base for the internet around the time the private

SPEAKER_17: sector took over was probably i don't know a million people or i mean a hundred thousand something something very very low what took the internet from being a niche product for scientists into being a household thing uh was venture capital and um axel's backing of uunet um along with a couple of

SPEAKER_23: other investors and then eventually mitch kapor right right i'm on the board of a company with and so i

SPEAKER_09: didn't know that whole story of his history and so this was like just an amazing moment for me uunet was very famous because companies wanted to get on the internet but they didn't know how to get on the backbone and bitnet and arpanet were suddenly allowed to put companies on and mitch kapor flying around on his private jet trying to get an allocation and i was like wow that's you know that's 20 years when i was just starting the industry before i kind of got started in investing whatever and so this is like one of the great moments for me in the actual book i was mountain biking in lake tahoe listening to this i re-round the i i restarted the chapter so i could listen to it twice just because i wanted to absorb uh everything there so i i've i you did a really good job on the character study

SPEAKER_28: just talking about books again and then i'll let you in here sorry i'm getting a little excited

SPEAKER_09: but i'm just curious on the formation of the book how many people did you talk to for let's say you know over an hour so five years to make this book is like that's a tremendous commitment and i like this idea that you let it kind of stew a little bit you let it brew and and you know really think about in your mind what's important but i'm curious the effort that you put into the book in terms of the number of people you talk to and then how many hours you spend with them

SPEAKER_18: yeah i don't have exact numbers but i i think i would probably have spoken to say 250 people for one hour plus um and then there were some people who i went back to and back to and back to um and then some people who were not necessarily in the story but were kind of adjacent to it and knew it and those were people who i would you know i would meet i met them once maybe and then i would follow up on email whenever i had i was stuck on something there was a terrific academic um called steve kaplan at the university of chicago whenever i had a data issue on because as you know um understanding the right benchmark to use to compare vc performance is a debated topic and he's like he's written academic papers on different kinds of benchmarks so i i went back to him repeatedly that's one example

SPEAKER_05: but it's a bull pocket at 250. yeah talk about at what point you know as you just mentioned you go into this with an open mind you're collecting this kind of series of stories i embarked on a very you know one one millionth version of this at marketplace to try to sort of explain this weird black box of financing that's so incredibly influential and i wonder at what point in your research did threads start to emerge because you know your your ultimate conclusion is that there is 100 a lot of luck here but not entirely and i wonder like you know how far into the history did you get where you started to say okay i'm starting to do some patterns here well i remember going on my

SPEAKER_18: first trip reporting trip for this book um i don't live in silicon valley i would go in there for like a week and and stack up as many meetings as i could and i came back from the first one uh having been told a bunch of stories i would say i would meet an entrepreneur and i would say i went to see jerry

SPEAKER_17: yang and i said so why did you take money from sequoia and michael moritz and not from somebody else and you said to me well mike had soul i'm like what so what do you mean that's that's so that's not

SPEAKER_45: finance i'm sorry that can't be the source of alpha um and then i went and saw on the same trip

SPEAKER_18: i think it was patrick collison um another mike morris uh investee and i said so tell me the story about how you got funded by sequoia and he starts describing this meeting where it all hinged around his bike which he had tied up outside the sequoia office and as maritz escorted him outside uh onto the kind of threshold of the building after the interview and he spots this spike that's not normally there he says oh is that your bike patrick patrick said yes and he says what's your time on the old honda climb um and patrick gives him some time and mike is impressed and you know that's pretty good time so he's got grit and i'm again i'm like i can't really write a whole book about people investing based on on bicycle times right that's just you know and so i got a bit discouraged i came back i was kind of telling friends i wasn't sure i would do this thing because it just felt so random and it was only um after going back a few times and starting to hear sort of stories around the value add after the investment that was part of it um and stories around sort of the the way that you know you come at things with a different mindset i think if you're a tech investor from it's not how people are normally disposed to think so i i spent a huge amount of time with the north early on and the sheer ambition of his thinking that kind of parallel mindset where you know you you you see the internet coming you see that um you know connectivity needs to be speeded up and broadband i mean the bandwidth has to be broader and instead of thinking yeah it needs to be five times bigger you think to yourself it's going to be 500 times bigger and that that sheer ambition that allows you to take that big leap forward in imagination terms so i started to kind

SPEAKER_17: of get tuned into the mindset and that's when i got hooked on the subject if you're a sass or

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SPEAKER_09: you know one of the things you point out is early luck in vc and deal flow and it just got me thinking about my own career i was lucky enough to have invested early in uber and you mentioned in the book how a lot of the studies show hey if you get lucky early you get better deal flow you get better deal flow and you get a reputation you get more lps you get more lps you can write bigger checks you have more influence and thus the the defining characteristic of a great venture capitalist is getting lucky early uh and michael moritz was one of those and he came from journalism you also got uh into don valentine's crew did you get to meet don valentine who obviously passed

SPEAKER_18: recently and did you get to spend time with him it was a funny story because you know like actually many of the sequoia people i ended up becoming friends with um don valentine's first response to me kind of getting in touch was you know get lost and then double get lost you know you basically just wanted me to talk and finally um i got some friend of his um i forget who it was but somebody from from his own era uh contacted him and said hey no you i've spent three hours with this guy it's worth your time so he agrees to meet me and um he lives living in outside phoenix in arizona it's not exactly on the beaten path for me but i went there and um i was coming from a dialogue conference actually in arizona and i i got this long uber ride up to phoenix and as i was approaching i wanted to be sure i actually understood exactly how the car should get into where he lived so i called him up and he said you know what i decided not to do this meeting and he starts sort of yelling at me this is totally pointless totally pointless so i kind of calm him down on my cell phone in the back of the uber uh and um and you know i'm still talking kind of calming him down as the uber pulls up outside his house and i walk out with this phone on my ear and i give him a big smile and then he's like okay he's caught he's late night i'm there so and at the end of two hours we were great friends so i did get to see

SPEAKER_12: him and it was it was fun talk about his influence on silicon valley i think maybe you know moritz and

SPEAKER_09: doug leone who you know were mentors to me and you know rule off and you know the scouts program and everything is i got to meet those those uh gentlemen and really took a lot of notes let's leave it at that um but they took notes from valentine and you talk about valentine's very unique ability to jump in the hot tub uh quite literally yeah literally yeah uh talk about valentine and what made him so unique as an individual and his impact on venture capital well yeah the the jumping in the

SPEAKER_17: hot tub reference is that um when he founded uh funded atari which was the original um video game maker made pong for example um which was kind of like a table tennis thing on your screen the the crew

SPEAKER_18: at atari were a pretty wayward bunch you know you walked into the factory when he went around there it was a converted ice skating rink and he was coughing a bit and uh the thick smell of marijuana smoke was something that he found it difficult to fight his way through um and so you know he he he gets this you know that the the founder is known in bushnell he is this wild um sort of you know uh uh hugh hefner for tech kind of figure with uh his his board meetings take place in his hot tub and if you wanted to kind of be part of that you had to take your clothes off and get in the hot tub with him and so don valentine was invited to do that and the good thing was that he'd been a former water polo player for the navy so when he took his shirt off his authority went up not down and he got into the hot tub and um he you know he ended up doing the investment whereas the guy from fidelity ventures who didn't take his shirt off and didn't get in the hot tub at the same meeting um did not invest and i mean the serious point here is that to you know founders can be brilliant they can also be crazy or wayward or whatever anarchic mercurial and if you've got the personality of a former navy water polo player and with a physique of that but also a bit of the personality that might go with that and you're tough enough to not be intimidated um by that kind of person it opens your aperture to investments that maybe other people could do and of course there are lots of ways in which people can have a wide app and you know eq comes in lots of forms and it doesn't have to be the don valentine tough guy variety at all but i think the point of you know this is a human to human sport this is like this is not being a hedge fund person and staring at your screen this is a out there with people kind of job deals are closed in the hot tub yeah or on the bike or skiing or

David Friedberg: whatever it is right we're at burning man not in a spreadsheet correct exactly that's the point i was

SPEAKER_70: making yeah yeah and it is interesting i can't confirm over and over and over i mean listen like

SPEAKER_05: you point out at the end of the book that they're like i'm not getting in a hot tub with some strange man right there's going to be versions of this that do not involve you know katrina lake talks about this actually with uh chris zaka and his attempt to have this sort of hot tub meeting culture and her being like i'm a woman and i'm pregnant so i'm not doing it so it's really interesting to sort of um um fast forward to the part where the industry does need to change in this one way and say like what is this going to look like in the future because there is a version of looking past i mean over and over in the book you talk you know you talk about how bad steve jobs smelled and and then mark zuckerberg one of the stories i'm obsessed with is this kind of the youth rebellion in which a generation of founders becomes profoundly skeptical of venture capital and just says we think they're vultures this is sort of the reason that yc gets founded in the way that it does and you tell this story that i had never heard before about zuckerberg showing up to a venture meeting in pajamas to sequoia exactly to meet with

Jason Calacanis: sequoia who is a lead i mean sequoia looms large throughout the entire book as legend full stop except in this one case where mark zuckerberg comes in there with his co-founder in his pajama pants and

SPEAKER_18: basically is like no thank you yeah yeah um so you know they didn't win all of them and in some sense you know one of the effects of being the big guy in the valley is that people end up going up against you if you're not careful if you're too arrogant and there was that moment where that was particularly the case i didn't exactly know i had this theory which which you guys may have a view on which is that the effect of the tech bubble in the 90s was was um that vcs did not retire right because they were making so much money it was going so well and so probably the average age of vcs crept up at the end of the 90s and then at the same time along comes um you know cloud and and the ability to do software startups which took less capital and you you could be younger like zuckerberg was and and still make a huge success of it you didn't have to be an experienced hardware person and so founders ages went down right at the same time that funders ages went up and that i think exacerbated this culture clash uh which was expressed both through the founding of y combinator which was a sort of revolt against the big check vc dim um and in the name of founders fund which was started the same year 2005 as yc founders fund obviously being you know we'll never find we'll never fire the founder will be founder

SPEAKER_65: friendly and that whole vibe became the the mantra yeah it's distinctly what happened i was maybe 34

SPEAKER_49: years old when this was all going down and hanging out with the principals and it really was um there was

SPEAKER_09: a third thing that happened which was angel investing culture had started to emerge now in the early days of angel investing as you talk about in the book they were like 10 like in the country and they wrote very small checks uh but then a bunch of us got together naval myself chris saka you know in that time period and started writing 25 50k checks and then y combinator was doing their thing and naval turned venture hacks into angelist so that kind of group then were able to put 250 500k checks into companies and get them going and so whenever you go before the vcs is very disruptive because now you've built the relationship with the founder and that's kind of what i built my career on that's what paul graham built his career on and the the analogy i've used is there was this great orchard of trees nolan bushnell tom perkins all these people were going and picking apples from the bush from the trees and then all of a sudden the vcs got disintermediated they stopped going to the orchard where it's kind of messy and you got to do a bunch of work and they just started buying the apples when they graduated from y combinator when they got their seed funding and once they relinquished that hard work the whole industry changed so it was actually the insertion of that third group of people who kind of got in front of it and and that's you know in some ways it's

SPEAKER_83: changed everything and then in other ways it's created more inventory and since they have bigger funds they can still get their 10 percent if they need to but it did change the dynamic where instead of nolan having the relationship or michael moritz having the relationship with yang or nolan having nolan bushnell having it with valentine now you had peter teal as an angel getting the relationship with zuck or even before that sean parker or me with travis and uber and sacca with travis and uber you know right on down the line right and that was that had happened very few times it did happen also with apple obviously and it happened with dropbox uh i think you covered dropbox as well

SPEAKER_18: um so yeah and kind of that mitch kapoor story that you were mentioning right he was the one who found uunet yeah the uunet founder didn't really like investors he wouldn't probably have taken money straight away from a full-blown venture capital partnership but he was willing to make friends with one person one individual mitch capable and then that became the bridge to series a funding

SPEAKER_64: it really i have to say sean parker it gets a doesn't get enough recognition for the sean parker

SPEAKER_09: was punk rock napster you know just partying and just how we thought and zuckerberg was the biggest fish so you have the punk rock kid who got punked by moritz with plaxo people don't know that story maybe you could tell that a little bit and that really kind of that was the pivot moment or i don't know how you talk about but a paradigm shifting moment that's the word to use so i guess when you look at venture that was the paradigm shifting moment you think i think it is yeah i mean um you

SPEAKER_18: know the molly raised the story about the pajamas and the preceding story was precisely what you just said in other words sean parker had been kicked out of plaxa um and mike moritz and sequoia had been instrumental in that and so when sean parker got to know zach you know his message was don't go near my moritz don't go near sequoia so when sequoia showed up when sequoia tried to invest in in facebook zach showed up with his slide deck which you know he arrived late um and he arrived late on purpose he arrived in his pajamas and he had this slide deck which had 10 reasons why you should not invest in my company and one of them was sean parker uh is my partner in it yeah i'm gonna quickly explain one

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SPEAKER_09: there they do my insurance that's all you need to know talk about tom perkins another person who most people know him by um some of the stupid stuff he said at the end of his career where he was talking about his watch being worth more money than you know 10 rolexes and he bought the biggest penthouse and he kind of said a bunch of dumb things but he also was like don valentine very aggressive and he also created companies uh and originated companies maybe talk about his impact because now we have all these venture studios trying to originate ideas but that kind of was

SPEAKER_49: tom perkins what in the 80s yeah 70s i mean that's the amazing thing so yeah both kind of perkins and

SPEAKER_88: sequoia started in 1972 and the two big innovations invention methodology were first of all you know

SPEAKER_18: roll your sleeves up get involved with the founder and be tough if you have to be tough and that was sort of the don valentine thing but the other big thing was stage by stage investing the notion that some things are just too risky at the beginning to write a big check but you can write a small check and you can do what tom perkins described as being taking the white hop risks off the table so the best example of that would be genentech um where somebody who'd been an associate at kleiner perkins as a young guy actually got fired but we're still working out of the kp offices and he had the idea of doing a biotechnology gene splicing um recombinant dna company and that was going to be genentech he identified a scientist who would be his partner who was a leader in the field and he came to perkins for funding and he said you know i need i think it was half a million bucks to get started here which in the 70s was quite a lot of money and perkins said look you know who knows if this is going to work if it does work the upside is massive so i want to be part of this but let's put a little bit of money in and instead of setting up your own lab um you can contract with a few of the existing academic labs to take to test the technology to show me that we can get across the first hurdles and he did this also with tandem computers which was you know an innovation because it was a fail-safe system where if one part of the computer crashed the other part kept it going which was essential for stuff like you know financial applications where you really couldn't have the computer go down at all and he incubated these inside kind of perkins as you described they kicked around you know ideas around um over the table in the clinic perkins conference room and it was a very hands-on thing tom perkins himself had founded um a a laser startup um so he was an entrepreneur um as well as an investor and so i think you know i was struck while i was writing the book that you know there was this narrative at um andreessen horowitz that it was a huge innovation to have only people who had been entrepreneurs become general partners by the way of course they dropped that later but it wasn't

SPEAKER_65: even new in the first place because that was pretty much the kp model way back when right well and i

SPEAKER_05: actually think that you know you it it there is this tale of these two giants war woven throughout the book kleiner perkins and sequoia where sequoia emerges as this utterly dominant firm and john door who has a phenomenal reputation who is really you know i i think i would say all over again having a second or third or fourth however many axes on having yet another act in the in the vc world right now but the kind of decline of kleiner and a bit of an implosion of john door compared to sequoia's extremely consistent success is really really interesting can you walk us through that

SPEAKER_18: yeah i mean when i got into the research you know i was thinking about what are the factors that make a successful partnership really survive and endure and you know there's sort of obvious things around you know you have to have good deal selections are being deliberate about your methods for that you have to add value afterwards and so forth and so on but the thing i kind of underweighted was the glue within partnerships and paying attention to the internal dynamics and managing those actively either in a benchmark kind of way where you say okay we're gonna have an equal partnership and therefore by definition when you would bring in a new partner who has an equal carry to the older ones the older ones are financially incentivized to invest their own time in helping the new person get started because they're going to share in whatever profits that new person can generate so it's it kind of creates an incentive to be helping each other um you know sequoia does it in a different way they've got this steward uh framework with people at the top with the title of steward and they don't do much in the way of investing what they do is they manage the company and that is a much more deliberate hands-on sort of you know thing where someone like mike moritz when he was steward steward would sit down with a partner who was new to the firm and say let me see your calendar i want to see your time management skills and so down to that kind of minutiae how are you managing your time did you need to take that meeting um so really being delivered i'm only smiling because jason does that to us now i know where it came from prepared mind having a prepared mind right so so um i think you know sequoia has endured so well because it has paid attention to that sort of internal management and sort of internal strategy like do we want to be a global firm do we want to be just series a or should we be thinking about an internal hedge fund which they've done um you know so so whereas kleiner perkins was kind of by default by around 2003-4 being run by john dore just because he was the best sort of flashiest kind of most charismatic investor not because he was wanting to be a

SPEAKER_88: manager and that turned out to be a terrible mistake in 2001 if you looked at the forbes midas list the number one investor in the world was v not costa of kind of perkins and number three was john

SPEAKER_18: door of kind of perkins so they were really dominant and by 2021 20 years later you could not find i think it was only one person in the top top 100 uh who was a kind of perkins and that was john door like around 73 or something and so they really went from hero to zero and the reason is this that is that john you know for all his fantastic vision as a technologist and his ability to kind of market that vision messianically and you know charismatically he just didn't have the sort of attention span or the bandwidth to sit down with somebody and tell them how to manage their calendar he would delegate and then be gone and you know just moving at a million miles an hour and and one thing which he did which um you know i write about quite a bit in the book is that he had this view that you know the industry needed to hire more women and of course he was right about that uh and i think it came from the fact that his wife was one of the few women engineers in the valley in the 70s um you know i'm married to a very smart wife it tends to happen that you have lots of she has lots of good friends and you know you hang out with terribly smart women all the time and i'm always kind of like the dumbest person in the room and um and i think john probably benefited from who he was married to and having a teenage daughter and he just took woman women more seriously than most of his contemporaries in in the industry and how did that go so wrong for him well he hired these women and then he failed to do the work of persuading his male partners to actually create a culture where they would thrive and so they were not given any guidance about how you learn the business and they were kind of left to sink or swim and and and they got frustrated and they were not well treated and there were sexual harassment suits as you know and so i think it shows if you don't manage the partnership

SPEAKER_05: actively you're not going to stay on top there's that great story even actually about sequoia when it sets up its china office you know mike moritz i think gets a call that there's a dispute between the two partners who are running sequoia china and goes out there and says all right this guy's doing great this guy's not doing great they're fighting not doing great you're out fix it yeah yeah like you know

SPEAKER_18: he had this quote so you know the the main job of running a venture capital firm um is to prevent the principles from killing one another and um the other day i was uh meeting with the head of a very large venture partnership in the valley i can't say which one um who came up to me and said that was the best quote in the book because that's what he feels he's doing the whole time preventing

SPEAKER_64: principles from killing each other yeah yeah it's pretty fascinating if you don't take the time to mentor that next generation it can become lord of the flies it could become mediocrity you really do

SPEAKER_09: uh as best as i can tell and this is what i really loved about your book and really where journalism and storytelling uh is at its best i think uh and its role in the world is it makes people think right and make and it's really made me think about what matters running my own firm and one of the things i

SPEAKER_49: came to the conclusion of you know a couple years ago looking at my own early success and trying to figure out how oh how do i replicate this now you know like oh my god you hit three unicorns in your first seven investments you you got to figure out hey is it all downhill from here are you going to be able to put up any kind of numbers right it's really a curse in some ways what i realized is

SPEAKER_09: you don't have any control over uh you know the the luck you have you do have control over the process and so when i looked at the process and i read your book and i listened to it i listened to a number of chapters over and over again i plan on listening to it every year or two maybe just to reinforce some of these thoughts and there's books you know that take any one of your chapters and just tell the the full story right uh so it's i think a really great jumping off point if you wanted to double click on

SPEAKER_28: some of them to just do the story of google or do the story of yahoo etc but process is what's important

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SPEAKER_09: are the heuristics that make legendary venture capital so we have nolan bushnell you know his ability to connect with people that high eq uh then you had the founders fund you had peter thiel this guy is not exactly high eq uh to his own admission you know maybe he's on the opposite on that spectrum uh but highly intelligent but had it a thought on hey i'm going to back founders relentlessly that's going to be my brand you know then you have sequoia saying hey we're going to really work on the partnership and time management and really being ruthless about our resources and building a culture here um what in your estimation are the heuristics that make a legendary venture

SPEAKER_18: capitalist one thing i'd say is that it strikes me that um most of the people i met who were who were really successful had two out of three characteristics the three are you founded your own company um you uh have some kind of technical skill and it i mean engineering is the obvious one but it could be that you're really really seriously going to go to market or it could be kind of a business skill um and um and so and and then sort of embeddedness in other words having been to stanford or y combinator or some sort of thing that gives you a network um and i i think those you know you have to have all of them but having two out of three is very good found a company have a an

SPEAKER_09: uh an important skill like be having some virtuoso skill perhaps and then having a network i think that's accurate now there's some mechanical things then that also impact this uh and so on the mechanical side maybe you could talk to when you make the investment when you get in ownership and control because that comes up as a theme over and over again how much you know when did you get in the investment when did you get out of the investment these two things uh define you know we start talking about metrics the return the investor gets the multiple on capital you know the irr etc so those two factors seem very important then the percentage of the ownership it seems extremely important as well and then power and control so looking at those four things time in time out percentage ownership power and control how did these things factor in they're very tactical they're very mechanical i would say actually how what what heuristics can you tell us or what made the brilliant investors investments with those four variables well what strikes me is that you know

SPEAKER_18: those variables have been played in different ways over time um and so you know an obvious example is with astoria sequoia they had been series a investors from the get-go and the innovation that came as they watched yahoo in particular uh was that they figured out that if they could hold on longer and exit later um in a tech bull market that's going to be very profitable and so they held yahoo stock after the ipo um and that sort of started them on the on the road towards writing bigger checks in growth um growth deals but also doing a public markets fund and then you know ends up with their more recent thing of you know we'll be a partner to entrepreneurs from seed till forever um so so they've sort of stretched their view of of how long they want to be in it so they've they haven't been stuck with one one one opinion i'd say also that you know it's it's if you compare benchmark right which has remained a classic series a player uh with um tiger global that only does growth or until recently only did growth you know i think you see two fundamentally different kinds of thing in hedge fund parlance you call it alpha or beta really i mean alpha meaning highly skilled um specific selection of companies investing huge amounts of effort into each one that's the benchmark thing and really caring about your board service and the governance you provide the guidance you provide um limiting the number of deals you do because you don't have the capacity to do more than seven or so boards because you're diverting real time to each one versus the tiger global thing where you have a formula uh where you just sort of pick um areas that you think are going to work and you get some management consultant to tell you who are the three market leaders in that particular niche whether it's you know e-commerce in southeast asia or ride hailing in that in america or whatever it is and you go out and try and back the two market leaders and you know you you're super quick you don't really need to diligence it much beyond basic numbers it's it's not a personality game anymore and so then you can turn out masses of volume and in dollar on dollar terms you know that alpha strategy um that benchmark does can be painful because you're putting so much effort into each deal and even if the multiples are

SPEAKER_88: amazing the dollars may be less than tiger global can generate by writing way bigger checks getting

SPEAKER_18: smaller multiples but on a much higher base so i think the answer jason is that i mean maybe you got a better answer than i have but mine would be you know you can play this game in different ways

SPEAKER_05: yeah i mean having so carefully set up the idea of these disciplines the management the personal relationships getting in the hot tub thinking very carefully about how to maximize your return then all of a sudden in come masa and yuri milner and tiger global global and this kind of and we've been talking about this this week on the show the the very distorting effect of what eventually becomes rampaging capital and then how you have firms having to respond sequoia saying you know we were our benchmark saying we were always going to stay a small fund and now we have to become a big fund because that's just what's happening um talk to us about how that may have swept away discipline in

SPEAKER_18: both investing and founders yeah so i mean as you began by saying on on the podcast this is a pro hedge fund book i do believe i mean sorry a pro venture capital book i do believe that venture capital hedge funds yay vc just kidding is i believe venture capital is is genuinely contributing to innovation and i tell that story both in the us and for china but i also think that uh growth equity investing lost its way and i described this through the story of um uber you know way after jason invested uh and and we work and what i mean is that you know the game became you know you've got this founder who by the growth stage has probably already created a unicorn so you defer to this founder because they've obviously already demonstrated genius you think and right at the point where frankly the founder may be becoming a bit too pleased with probably himself not herself but you know either

SPEAKER_88: way when hubris might kick in you say i defer to you i'll do whatever you like and i don't need a board seat and in fact i'll vote all the shares i buy with you at every time i'll never get rid of you or fire you or vote against you i mean that's not oversight and i think that everybody is better with some checks and balances and tough questions being asked and partners who push them and i think that's

SPEAKER_18: true of writers who you know ought to be happy when editors tell them how to fix their prose or restructure their book or whatever it is it's painful but you need it and i think it's true of entrepreneurs who create companies and sometimes they need to be told look you've done great but the next step you're about to take could be a mistake and i think particularly since we know for a fact that managing a unicorn is fundamentally different to creating a startup and going from zero to a billion so it would be kind of surprising if without guidance the same person takes the company without any stress or difficulty or hiccup all the way through now there are people like the collisons who appear to do it without you know breaking a sweat but you know i think other cases no oversight by investors will be important and so i think that the yuri milner dst model or the massa model or the tiger global model which explicitly says it will not exercise governments is a bad thing for tech and brings disrepute on the sector and encourages critics to say well all of venture capital is a mess because look at you know look at we work which is unfair i mean actually as a series in a investment benchmark did a good investment but the later stage guys messed up because in that case it was jp morgan and these banks that wanted a relationship with adam newman and they were not going to say boo to him and that's the problem what do you think about not to jump you here but what

SPEAKER_145: do you think about adam newman getting 350 million dollars just i must admit astonished um i won't

SPEAKER_18: say more than that i haven't i haven't studied it in any depth but i mean goodness yeah you'd have

SPEAKER_49: thought that one time of behaving like that would be enough yeah uh for me uh an obvious bet for injuries and hardwits for a couple of reasons which you know build on your book what a great uh

SPEAKER_09: marketing exercise like founders fund for them to put out in the world uh we don't care what happened previously other than did you build a unicorn in a big company take it public which is you know what uh adam newman did and they have downside protections and big amounts of capital so just as a branding marketing exercise if they just return their 350 back or they double their money uh now every founder knows that you know not only will we never oust the founder we will be a home for wayward ousted founders

SPEAKER_150: it's kind of brilliant when you think about it so much like yeah do you really have one very

SPEAKER_153: would ask founders maybe yeah i do that was yeah actually oh 100 bring me the mutant x-men who

SPEAKER_154: are behaving badly and i will reform them and get incredible returns whoa whoa whoa this is news to me

SPEAKER_156: whoa whoa whoa not only i mean i'm not talking about criminal behavior we're not talking about somebody who committed actual crimes heaven help us uh but you know uh if you know if if i had an

SPEAKER_49: opportunity to invest in travis or adam newman or an ousted elon musk you know from paypal i mean

SPEAKER_09: hell hath no fury like a founder ousted i mean you can look at adam newman travis and elon and then what's um who else got ousted famously oh um sean parker uh but he really never went on to build another company but um the guy from lipling rippling uh parker conrad you know coming back

SPEAKER_83: with rippling after his first company uh zenefits okay okay but jason let me ask you a question so you

SPEAKER_18: would you would happily go for these guys and back them but wouldn't you want to see some oversight over

SPEAKER_05: them yeah i mean come on when when that announcement i'm trying to answer honestly made when the newman investment was announced you said yeah it is important to see whether you learned his lesson you did say yeah absolutely absolutely yeah i know i think there should be

SPEAKER_167: i've always believed in proper government governance and in fact you know one of my strategies has been

SPEAKER_83: to uh companies before they would normally uh do board meetings and have a series a you know investment seed stage companies uh i've said hey let's do four board meetings a year of one hour or less each just

SPEAKER_09: so you learn how to run a board so you're venture worthy and so i actually believe strongly in great governance um i also believe that when you ask the founder uh in all likelihood the best days of the of that company might be behind them so you have to be very careful um and founders you know it's it's a bit of a dance uh because you you look at a company like twitter no founder owned over two or three percent of that company you know by the time it was public and so there was no evan williams coming in or jack and saying here's how we're going to do things and then people saying well i think we should run it for profits i think we should do this you know there's just nobody you had eight people on the steering wheel and that's no way to drive a car or an airplane to ask travis and have dar what do you think uh no i think it was the right thing to do yeah so right defined how

SPEAKER_18: morally right cleaning up the company or stock price right um stock price right i i think that if if uber had not changed leadership at that point uh just like with we work um the ipo would have had to be canned and they would have they would have had to have a total i mean you know either you go right up to the wire with an ipo with a founder who's not really ipo ready which is what we work tried to do and then they had to pull back and change the leadership and regroup and be very embarrassed or you kind of get it over with a little bit earlier and you make the transition and then you know dara

SPEAKER_49: could take it through to ipo yeah i would have uh i not only would i have i did back travis to stay in

SPEAKER_09: the seat so i was 100 team travis and the reason is i believe that when you look at founders they're made through these crucible moments as ruloff calls them these really challenging moments are what make the founder now i would love to see uh travis uh after dara has done a good job uh and sometimes a great job in stewarding uber so i think they've done actually amazing if you look at the cleanup process and you look at the growth it's been great but does it have the sizzle does it have the vision does it have the new products that it would have under travis and the audacity obviously not right and so that was your point earlier like you know does the the audacious founder the pirate have the ability to run it operationally and i i think steve jobs is the perfect analogy to travis which is he got ousted and then he came back and which were the best days the best days were when steve jobs was there now was it messy sure was steve jobs difficult absolutely travis difficult hard driving yes i would love to see travis come back and run uber and cloud kitchens together and i think it would be uh if travis was running uber right now the stock price would be double if travis and cloud kitchens merged with uber which i would love to see happen i don't think it's going to happen but i would love to

SPEAKER_83: see that i think the company would be worth 150 billion dollars right now as a public company

SPEAKER_181: i uh think sebastian's cat vehemently disagrees okay sebastian you look like you're in shock

SPEAKER_168: sebastian's like after all that stuff i love this conversation

SPEAKER_05: yes totally does this track with everybody that you've talked to in venture capital what jason's

SPEAKER_18: saying right now um i think it's you know the ideal is you've got a founder who has both the audacity and the discipline and understands that audacity should not be applied to your compliance function or your you know financial reporting function that was what you know girlie was saying to travis um and i think god he was right and had travis listened he would have stayed in the job but if he wasn't going to listen in the end he had to leave um now could he come back and be fantastic because he learned the lesson through the crucible moment yes i agree with that i think it i i think and in that sense i get what you mean that adam we adam newman might be you know no venture bet is sure but maybe it's a good venture bet to back him a second time because you learn from being kicked in the teeth once i mean i do i feel like after having talked to

SPEAKER_05: 250 people in silicon valley you can't be shocked to hear from jason that someone would back travis again or sebastian again i mean right like you're talking about exceptional difficult sometimes extremely smelly

SPEAKER_168: people steve jobs you mean steve jobs in that case

SPEAKER_136: smells wonderful mistaken for steve jobs that's nice of you right no no i just meant you know when

SPEAKER_05: you when you line them up it's like the it seems to be that a big message in your book is overlooking

SPEAKER_147: a lot about founders yes you're right you're right i i i i i'm suitably corrected yeah

Jason Calacanis: well i mean i'm still not arguing it's a good idea to invest in adam newman don't get me wrong but

SPEAKER_18: it's certainly investment is sure i think you know yes um yeah i mean it it feels like

SPEAKER_53: you know uh heads you might make 25x and tails you lose 1x right so on that basis give them a chance

SPEAKER_49: that is the you know as defined the power law and you know you chose to name the book the power law

SPEAKER_09: which is your success in venture is defined by your outlier hits period full stop if you get a bunch of singles and doubles nobody cares the returns are going to be de minimis or you know uh okay but you know nothing to write home about you could have just put your money in an index fund if you were an lp i'm curious what you learned about lps and why they're so attracted to this space and then what you think the future of venture capital is given the massive innovation we saw with y combinator

SPEAKER_49: angel as syndicates uh angel investing becoming like a you know more of a a sport and a practice you know from just a small number of people to tens of thousands of people doing it uh you know maybe even crypto and and some of those innovations uh if you think they're going to be sustainable what's

SPEAKER_18: what's what do you see going forward here yeah well as you know i mean if you look at the period from the dot-com crash through to the 2022 crash the um endowments that did the best were the ones that had the most allocation to venture and so burden or you know some quite sort of outlier colleges you wouldn't have necessarily predicted would be superstars became that because they really focused on allocating to venture and i think that's a lesson that won't be forgotten quickly so you know some people have made an analogy between the the winter in in the valley between sort of 2000 to 2003 or four and i don't think that's going to repeat itself because i think this time around the lps are more locked in they've they've had great returns for 20 years and they're going to forgive you know a bad fund so if you ask me you know tiger global what's the future the future is more of the same they had couldn't they can they can be down 50 or whatever it is it won't matter to their fundraising i i i predict um because it's it's a model that worked for so long before it went wrong um and then the question is whether the lps push into uh other horizons and my sense from chatting to lps is is yes they are hungry to um to try crypto um to try backing angels to try backing solo vcs to push the envelope and you know the other thing is that for for a an endowment these are small checks so you can afford to think in that parallel way and you know and there's a knowledge that if you get in on the ground floor with a new solo vc and it works you know you'll be kind of grandfathered into the next seven funds if you say no early on you may not be let in later um and so i think i think there is

SPEAKER_53: this risk hungriness which hasn't gone away just because of a market correction i was curious your

SPEAKER_49: thoughts on china yeah they seem to have stolen the and sequoia seems to have imported uh you know this uh entrepreneurial model xi jinping seems to be less uh enthralled with the concept of competing with jack ma for his q rating and you know um being lauded by the citizens uh the populace of china so

Jason Calacanis: so much so that yeah the way that you brought that up and jack ma has now been like disappeared and xi jinping went to silicon valley and visited like the way that you set that up to jason's point

SPEAKER_05: contrasting with what's happening now to venture-backed companies in china is fascinating yeah i mean it you

SPEAKER_18: know if you think about covert zero in shanghai and the willingness of the xi regime to court you know serious disaffection from this really wealthy middle-class city by just forcing people to shut down um and you know be barricaded into their apartments and sometimes not have food available i mean i was told a story i was hanging out with some chinese venture people a few months ago who had managed to get out of the country somehow and um they told me the story about kathy ju right who's one of the investors in my book um and she has done fabulously well as a venture investor and she lives in shanghai and she sent out these we chats saying hey i don't have enough food anybody got any food i could be spent they went viral because like this billionaire is saying i got not not enough food and so the the willingness of the regime to do something which is you know economically crazy and suicidal and in a way socially and politically quite risky because you don't want to lose faith and buy western vaccines um is is huge i mean they're willing to go a very long way um to kind of maintain what they see as the sort of pure political path that they want and if you think about that zero covered mentality and you map that onto tech i'm not sure that anytime soon they're going to walk back from their current clampdown i feel like it's just sort of visceral for them that you can't have

SPEAKER_88: entrepreneurs being entrepreneurs and deciding what company they want to build and being independent and building up wealth and building up power and having a voice and they just don't like that so they want to

SPEAKER_18: tell the whole tech sector look here are the here are the areas you're supposed to play in you can be in the ai sandpit you can do you know semiconductors all you like and you know up to a point vcs and entrepreneurs can work inside those sand pits but we all know that innovation consists of that lateral

SPEAKER_88: step that you're going along a path you're doing ai and suddenly you see a way of going sideways and applying ai to something different you're not allowed to do a natural step or at least there's a

SPEAKER_18: lot of political risk for you if you take that lateral step so i i think it's sort of in in the short term there's enough momentum in the chinese technology juggernaut that it'll carry on steaming ahead but in the medium term i think it's going to just be less innovative inventive you know people people can't just walk out because you know technology investors technology entrepreneurs they have they're locked in they've got illiquid wealth in the country they can't just take it with them but over time they can and over time they can tell their mentees hey if you want to make a career might you

SPEAKER_05: might think about canada i wonder um speaking of kind of sandboxes you make this really interesting point i was happy to hear as a you know newly minted climate investor um a pretty impassioned defense of climate tech investing in your conclusion in particular and you also talk about what has become almost a myth in vc that software is the only thing that venture capital can invest in talk a little bit more about that i mean certainly go all the way back to obviously semiconductor investing in the very beginning but this trap that that says these are the only investable categories yeah so through the

SPEAKER_17: arc of my book i describe how you know in the 60s with arthur rock the first successful west coast vc

SPEAKER_18: when he did series a investment expected 45 of the equity in the company in the 70s it went down to 33 with google it was 25 in in 99 i think it was the series a when you get to facebook in 2004 it was uh one eighth um so through this narrative you have a smaller and smaller share of the equity being taken by the series a investors and that made sense because you know software companies didn't need so much capital software companies could scale unbelievably quickly and create enormous multiples so if you could get a massive multiple on a smaller piece of ownership that was okay but to rediscover hard tech deep tech hardware stuff i think you know people need to escape that software template and rediscover the old template that used to exist back in the 70s or 80s when hardware investments were normal when you know venture investing meant back in compact back in cisco um and there you know a third or so

SPEAKER_17: of the series a equity was uh was deemed to be appropriate as a share that's such an interesting point

SPEAKER_05: that the equity has driven because i noticed that i mean that was very striking to me in the early chapters of the book these giant chunks of equity that these vcs were taking was the lowered equity do you think the result of kind of the backlash against vc and then we found ourselves in the

Jason Calacanis: situation where vcs were taking less equity and then really ended up you know biasing towards software multiples

SPEAKER_18: no i think i think uh you know the the software became attractive to vcs because the multiples were so big that they absolutely dwarfed the problem of having lower ownership share i mean you'd rather have you know one eighth of fate of facebook than than a quarter of most things um so i i think vcs you know saw a good deal and the whole youth revolt pushed back against vcs and kind of like like the greater competition that angels introduced into the ecosystem helped to through competition to force down the the share that um series a investors could try to grab um but you could only push it down because vcs were willing to take less in the end when push came to shove and that was because the multiples appeared to be so big i think you know the the problem now is is there's a bit of stickiness in the mindset right people think that taking 12 of the equity at series a's might be normal um on that basis it's harder to do you know longer duration deep tech um and therefore you might not do it at all i think that's a pity for the world you you want people to be doing uh hardware stuff um because of you know fighting climate change um so i think that has to be rediscovered i kicked this around actually with josh wolf of lux capital who does deep tech and he didn't really agree with me that it was a good idea to go back to a higher share um but so i i mean maybe i'm wrong maybe there are other ways of structuring this where you just have more rounds and you the founder might end up with the same dilution at the end of it um but it would be through doing more iterative rounds but i don't really see why that's better than having a smaller number of investors who are more committed you know committed to your to your path you ever think about becoming a venture capitalist while you're reading this no i mean no i don't i mean i i always go through the same cycle but i know myself well enough that you know when i'm writing about hedge funds you know i get into that headspace and i think about what it what it's like to look at the world through those lenses and when i'm writing about venture capital i do the same thing and it's super exciting and fun for me as a writer to think my way into that but i don't make the mistake of crossing of thinking i'll cross the line and

SPEAKER_226: so like a character actor you're a character author you start thinking like a serial killer

SPEAKER_154: yeah and then you're like yeah you know i don't want to be a serial i don't want to get to where jason is that he would back adam newman again i don't want to become that monster

SPEAKER_104: that if you wanted to if you wanted to when we started the interview you no longer want to

SPEAKER_49: listen this has been absolutely fantastic i bought 25 copies of your book uh it's absolutely

SPEAKER_09: fantastic book must read if you're in the venture business must read if you're on the entrepreneurial side so congratulations on on uh buying what i think will be a seminal book in the space uh and really well done just author author um you're a great writer it moves at a brisk pace as i said in the beginning uh it's a great listen and it's incredibly informative because you tease out what the important lessons are we pulled a couple of them out here i'd say what we did today on the pod is about five to ten percent of what's in the book so you if you listen to this and you enjoyed it you just go over to amazon right now and go over to audible or your local bookstore and just buy a copy and let it sit on your shelf until you know such time as you have a moment to read it but buy it right now because you will not regret it five stars from jacal congratulations sebastian on just a great great book and uh great guest on the pod appreciate you coming on yeah thanks great thanks so much

SPEAKER_00: sebastian for joining us what an amazing interview i could have gone for two more hours uh but just buy the book you got about five ten percent of what was in the book tomorrow we have a really fun friday variety show for you a little bit of ask jason a couple of founder interviews and of course

SPEAKER_235: everybody's favorite producer rachel doing okay boomer see you tomorrow everybody