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SPEAKER_04: Hey everybody, our guest is Everett Randall. He is a principal over at the Founders Fund, which I'm lucky to be an LP, a limited partner in their fund, run by my friend Brian Singerman, and a bunch of other interesting cats working over there, founded of course by Peter Thiel. Previously, Everett worked at Bond Capital and Kleiner Perkins. He does an interesting substack at randall.substack.com.

David Friedberg: And he wrote a really interesting piece called Playing Different Games. That piece was about Tiger Global's impact on venture capital, and we're going to talk about that today.

SPEAKER_04: So welcome to the program, Everett. Is it Everett?

SPEAKER_06: Yeah, yeah, Everett. I'm bad at saying my own name too, so I don't, I can't blame you. But thanks, Jason. I'm glad to be on.

SPEAKER_04: All right. So you're a young guy, it looks like, and you've been in venture capital how long?

SPEAKER_08: I guess four or five years now. I actually started my career at Vista Equity Partners. So even like the deep, dark candles of, you know, LBO and kind of private equity over there. And then I actually went from there to Kleiner Perkins. So I got to work with your friend Mamoon a little bit and Mary Meeker and the gang there.

SPEAKER_07: And then we obviously spun that out into what is now Bond Capital and was there before coming and joining Brian, Keith, and Peter and the gang here at Founders Fund.

SPEAKER_04: All right. Fantastic. Well, congratulations on this epic run you've had as a capital allocator. Let's talk about your piece. Explain to people who Tiger Global is.

SPEAKER_08: Yeah, so Tiger Global is what they call a crossover hedge fund. It's a tech-focused crossover hedge fund. So they invest in public tech companies mainly. So they have a very, very large, I think it's like 30 billion plus, I don't know the exact number. They have a very large public portfolio of tech stocks, but they also invest in private companies, just like you'd see in Excel, a Kleiner Perkins, a Sequoia, a Founders Fund, any of us else kind of, you know, private capital markets folks invest in as well. So they play on both sides.

David Friedberg: And so normally, a hedge fund does the public markets or big buyouts, big, big chunks. And then what we do in venture capital tends to be little bites. Early stage investing, you know, couple 100,000 for a seed round, couple of low millions for a series A, and then series B, things start to heat up, but we're in a hot market, things are getting very big, public companies are staying or previously, private companies were staying longer before being public, like, I don't know, Uber, Airbnb, taking 10, 11, 12 years to go public. So is why is the Tiger Global going downstream, or I should say upstream, going upstream to where we all hang out at the source, by you know, where the well is of, you know, all this amazing startup attention?

SPEAKER_22: Yeah, why are they doing this?

SPEAKER_08: When you think about the evolution of what I call like the venture growth asset class, and so that's kind of like everything from series B. So it's not, you know, two people in a garage at this point, it's kind of a real business, all the way to the pre IPO round and to the IPO. You know, as you mentioned, like the first part of that sequence was startups started being private for much longer. So gone were the days of like Amazon doing their series A next year, the IPO, companies were now doing series B, series C, series Ds. All the way to, you know, HIG, etc. And at first, the folks really to provide capital to the entrepreneurs that were staying private longer was like a mix of the venture firms that were, you know, climbing up the stack and adding growth funds to their venture funds. So I think Excel, you know, had like, you know, raised their first growth fund in 08. Kleiner Perkins, you know, brought Mary Meeker over from Morgan Stanley and started in 2011, their digital growth fund. And then you had kind of this like OG 1.0 version of the crossover funds in like TCV and GA, who are doing their thing all the way, you know, investing in Netflix in the late 90s. And then you had kind of these independent folks like Meritech and IVP, I think that have been around since the late 90s as well, working in this sort of part of the asset class. But that was pretty much it. And like for the last 20 years, and especially from kind of 2010 to 2018, you needed to have a good brand, like you needed to make sure that you had access to these entrepreneurs. But if you had a good brand, and you had investors that had a pulse, it candidly has not been that hard to generate really, really good returns, and kind of the series B to series IPO, because it just hasn't been that competitive. So you raise your series A from Kleiner Perkins, you're going out for your series B, and it's like, oh, like, I guess we'll just go with like Kleiner Perkins again, or we'll go with Kleiner Perkins in Excel. There's wasn't that much competition on the supply of capital providers. So from 2010 to 2018, you have a fairly limited amount of funds doing just insanely well, like it's not been very, or it's been very, very common to see funds do, you know, 3x money on money, that means, you know, you put a billion in, you get 3 billion out, whatever the fund size in that's, that's the multiple of, of how much you put in, but 3x funds, 5x funds, sometimes, you know, 10x funds, even at the growth stage, have not been that uncommon. And just like any, you know, free market, any competitive market, if we learned anything from Econ 101, when there's excess profits like this, and by the way, this is at the same time, while people in the public markets, 15% a year IRR, you know, is best in class, that gets you the gold medal that gets you happy LPs. And, you know, I think like a 3x fund over five years in the private markets, that equates to like a high 20s, you know, percent IRR. And so the returns were just much, much better in private tech than they were in a lot of other places.

SPEAKER_25: And it just wasn't that competitive, uh, for, for, you know, 15 ish years.

David Friedberg: And so, so Tiger then decides they're going to formalize this process and scale it. That's the next piece of this is they realize, wait a second, you kind of can't lose if you do the series C, D, E, even maybe down into the series B. And let's be honest, there's been an inflation. What is a series A is now a series B, what's a series B is now a series C in terms of the numbers, so, but they are not designed to write $20 million checks, are they?

SPEAKER_32: They're not, and, um, they're not, but, but you're absolutely right that, um, yeah, basically they, they, it's, it's a free market, it's a competitive market.

SPEAKER_08: And so if we know anything from econ 101, if there's excess profits in a market, you know, competitors are going to come in and compete the hell out of it until it's at an equilibrium. And so they basically came in and said, wow, you know, that there's nothing that special or, or, or, or, you know, there's no moats in this market that, that will prevent us from coming in. We know tech from investing in tech since, you know, uh, 2000 or whenever they were founded around then, uh, you know, why don't we come in, um, and do this? And so, yeah, it's like, yeah, like a $20 million check. Isn't that interesting for them? But even the 20 million check that they write that opens them up to potentially do a hundred, 200, $300 million check down the line. Uh, and by the way, it's like their very best companies, they still hold zoom, they still hold snowflake. I don't know if they were able to get in those. I don't think they were able to get in those before the IPO, but it's like, they can also hold these things and then put them in their public portfolio when they graduate from private to public.

SPEAKER_04: And so you sort of described that they're playing a different game than the VCs who are here.

David Friedberg: You did a little math around it, but just to give an idea. And I think that, um, you know, the information got some, got some information.

SPEAKER_19: From pitch book, which is a database for people who don't know of, of venture deals. And, uh, right now, if you look at tiger's 2021 private tech investments, it's outpacing traditional VCs handily.

SPEAKER_36: They've done over 60 deals to injury since 49 or so excels 40 Sequoia is 32.

SPEAKER_19: Now it's not a race to throw money away here, but that, you know, doing double Sequoia, Cotu and Dragoneer and Cotu and Dragoneer are part of this cohort of hedge funds dipping down. Correct.

SPEAKER_39: Yep.

SPEAKER_20: So in a way you have the top venture firms doing bigger deals and having growth.

David Friedberg: And now you've got the hedge funds coming down. How does a founder make the decision here and how does it affect founders? This is this week in startups after all, not this week in capital allocators, although you and I as capital allocators love to talk about this wonky stuff. What does this do to a, you know, founder with a company doing, you know, 10 or $25 million in revenue?

SPEAKER_08: Yeah, so when you get, when you're a founder and you get to 10 to 25 of ARR or, you know, if it's a software business or, or, you know, other, other sorts of revenue at that point, especially these days, you've probably already raised your seed. You've probably already raised your A and you've probably already raised your B at that point, you should probably have the investors around the table that are going to make up your board. They're going to be the people that you call at 3am when something's going poorly, uh, and that are really helping you from that kind of like investor strategic level.

SPEAKER_43: So oftentimes founders kind of get to this series C DEF phase of their business.

SPEAKER_32: And they kind of sit there and say, we don't really need more folks around the table. Um, yet around the table being the boardroom. Yeah, the, the boardroom, or it's just like, there, there's honestly a lot of baggage that comes with a lot of venture firms.

SPEAKER_08: Like, you know, you, you, as an investor at a lot of these firms, when you invest in a company, you want to get involved because it also helps your career as an investor. You want to come in, you want to join the board. So you can go and tell your other investor friends or other founders that you're on the board of this company. Um, you want them to do references for you.

SPEAKER_47: Well, it's also your fiduciary responsibility, right?

SPEAKER_46: So the less cynical assessment of that would be, you know, you, you are responsible for the money you're putting in, right? That's very true. Yeah.

SPEAKER_08: So that, that, that is a much more charitable interpretation, um, than I, but, but there is a lot of, I think like the simplest way to think about it in a framework that, that not many people think about is, is they think of kind of investors at any stage on the scale of like zero to 10, zero is not helpful. 10 is like, wow, amazingly helpful. And I actually think that the scale is negative 10 to 10, like 10 is still very helpful. Zero is not helpful, but an investor can actually mess up a lot.

SPEAKER_54: Of course you can ride the whole thing.

SPEAKER_08: Yeah, exactly. They, they can mess up a business. They can mess up a boardroom in a thousand different ways. And so if you have something good as a founder by the series C, you know, oftentimes the product that basically us as, as venture capitalists are providing what a lot of these firms are kind of selling founders, um, just doesn't really resonate. And a lot of it seems like dead weight or, or there's a lot of risk that the founder doesn't want to take on. And so if you look at tiger and they're saying, we'll do the deal very quickly, we'll do very light diligence. Uh, we're not going to take a board seat. You basically will never see us again, but we're going to give you a very good valuation. Um, and we're going to give you a low cost of capital. Uh, I think that's a product that can be pretty attractive to some founders.

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David Friedberg: To recap, Tiger says, when you're comparing us to a venture capital firm, we are not going to be on your board. We're not going to bother you, we're going to overpay and go away. Now overpay and go away. Sounds like a great deal. But that means what happens to governance or there being an adult in the room to use a slightly condescending term, but, you know, an experienced person,

SPEAKER_20: the room, you want to build girly on your board, or you want to rule off both or Michael Moritz, somebody who's Mary Meeker, somebody who's done this before and seen this movie before.

SPEAKER_19: Yeah, they be the counter argument would be if tigers just going to throw $40 million into a company 30 million go away and not care. Um, then when things go wrong, who's responsible for that LP's money. And then who helps the company and who's doing the work because tiger just gets all the benefit of buying this equity and then they don't have to do any work. That's, that's very fair.

SPEAKER_08: And, um, I think there's a very fair argument to be said that there's, there can be negative impacts of kind of the loose cheap capital product that, that a crossover like, like tiger can provide. Uh, Ho Nam, uh, who's a co-founder of Altos Ventures actually had a very good thread on this, uh, on Twitter that maybe we can dig up. Um, that was very good. I think ultimately, and it's true. It's like, you know, at times and there's going to be certain circumstances where a founder impacts them negatively psychologically and the team cycle negatively psychologically, because you have to build less of a company and you have to do less in order to get rich. And there's always just this tiger. That's like, we're not going to look under the covers. We're not going to actually diligence this thing, but we're going to give you a high valuation. Um, there's going to be situations in which they fund fraudulent companies. There's going to be situations where, uh, you know, the company gets lazy or, or you just attract the wrong people to that sort of capital. At the end of the day, I think it comes down ultimately to founder trusts and the best founders and any good founder should be able to kind of control the effect that it has both on themselves and on their team. And so, you know, if, if you're as an early stage investor, let's say, um, if you're having to ask yourself the question of if tiger comes in and gives my founder a really, really good price, is this going to screw up the company? You're probably investing in the wrong founders. Um, possibly.

SPEAKER_20: I mean, we work was on a quite a tear and then the, the sort of wild money with no, you know, conditions came in. And, and most people would argue that was putting jet fuel behind a maniac. So you might, it might actually prove your point.

SPEAKER_08: Exactly. Yeah. That's what you're talking about when I, when I mean, like, if you're up at night, like, huh, should I have given this guy $4 billion? Absolutely not like that. No, you should not have given him $4 billion. But, but you know that there's other people, um, one of our own portfolio companies, Flexport, Ryan Peterson. Yeah. Ryan is a machine. He's an A plus plus, um, entrepreneur. You know, I, I trust that guy with a billion dollars any day of the week. Um, and so, yeah, I think it comes down to quality of the founder and making sure that they're at a place, um, and a quality level where they can kind of, you know, do the damage control if that happens.

SPEAKER_55: And they seem to be deploying at a pace that is much faster than we've seen before.

SPEAKER_04: So explain the velocity of what they're doing. Cause obviously they're outpacing some venture firms here in the valley.

SPEAKER_36: And those are venture firms that have massive infrastructure in this space. They, they don't have that same infrastructure.

SPEAKER_76: Do they? They, they don't.

SPEAKER_32: And it's funny. So I, I pulled for, for this, I pulled some, some data from crunch base. Um, and this was pretty funny.

SPEAKER_08: So through April 20th, just this year. 20th, just this month tiger has been the leader co-lead on investment rounds totaling $2.5 billion. Um, they say they're saying in the first four months of the year. No, the first 20 days of this month, the first 20 days of this month, they, and of course they, they didn't do all of these rounds, but either they just did 30% of that 2.5 billion. That's $750 million announced this month with 10 days to go left in the month. That's an entire, like, you know, medium-sized growth fund at this point. So you're right that, that, that the, that the pace and the velocity is completely unprecedented. Um, and I think the best way to explain it, I actually loved what Brad said on, on the all in pod, uh, your last episode when you brought him on.

SPEAKER_79: Brad Gerstner from altimeter.

SPEAKER_08: Um, and he said something like, I believe if you own an index fund of the top 30% of technology companies over the next 10 years, you will be incredibly well rewarded. And so that kind of goes to what I think, uh, tigers ultimately doing. And I didn't touch on this that much in, in the essay itself, but ultimately they're, they're, you know, on a micro basis. Yes. They might overpay here for, for, for a deal or, or they might, you know, uh, invest in one, um, deal that ends up being a fraud or a couple of deals that ended up being fraud. But if they're able to invest in basically the broad asset class and get a well diversified, basically, uh, create an index fund of the series B to kind of pre IPO, um, asset class. I think that is a product that is very attractive to LPs. And, and like, if you came to somebody and said, Hey, if you could invest in an index fund of this type of asset, would you do it? A lot of folks would say absolutely yes. But the only way that you can do that is by adopting a strategy and adopting a way of investing where you are investing at, you know, you're turning the dial to 11 and you're, you're, you know, you're not doing as much diligence. You're not joining boards. You have basically this product to founders that allows you to come in, be like, okay, I like this founder. I'm going to write him a term sheet today, which is what they've developed.

SPEAKER_36: Well, you know, and it's not unprecedented. We obviously had, we work do this before that we had Uri Milner do it.

David Friedberg: We've had this tradition in Silicon Valley when things are super hot. People zip in and just say, I'm going to overpay. What was the last round of Twitter? What was the last round of Facebook? I'll come over the top. I'll pay more. It does not matter. I'll look like a sucker today. And I'll look like I'm overpaying today, but in the future, I might not. So thinking out loud here, the ramification for our industry is that that zone before the IPO.

SPEAKER_19: But after, let's say product market fit and getting to 25 million in revenue to pick a number, because are they dabbling in companies under 25 million in revenue? You think?

SPEAKER_08: You see it very occasionally, but very rarely are they leading around. They'll like participate with somebody, but very, very rarely. Addition will do it more. Addition has been doing some A's and stuff, but Tiger very rarely.

SPEAKER_20: So when you have Tiger sort of taking over the space and they're not the only ones, obviously, Dan Rose, formerly of Facebook and Amazon, the only person I know who worked for both base. That was and Zuckerberg, both in their formative years. And he'll let you know.

Chamath Palihapitiya: And he'll let you know that. And he was a great guest on the podcast where he explained it all.

SPEAKER_94: Great guy. Yeah.

SPEAKER_53: Love you, Dan. Sorry.

SPEAKER_94: Love you, Dan.

SPEAKER_53: Sorry. Oh, there.

SPEAKER_20: That was a young gun here throwing elbows off the bench.

David Friedberg: But what is interesting there is that area then becomes, let's say, non differentiated capital. It's just as I would tell founders 10 years ago, when you get to that time, it's like you look at the term sheets, whoever gave you the best deal, you know, highest valuation, lowest, you know, rights and change in anything to do with the company's charter and, you know, how it's run. Yep. You kind of just take whatever the best deal is, because they're, they're buying one to five or maybe 10% of the company and they're, and they're typically overpaying for it. So that means the venture game is now going to be 25 million and under that's the game.

SPEAKER_20: Or is this mean that that game 25 million in revenue to when you go public is the game? If you see what I'm saying? I do.

SPEAKER_64: And I think both are correct.

SPEAKER_08: Like, I think, I think the game has completely changed and now there is a separate game on, on the, the post kind of like series B or post mark product market fit post 25 million. And now there's a new game at the early stage. I think the early stage still resembles a lot of, of kind of what we thought of as like this traditional venture, um, asset class, uh, where, you know, you, you build really strong relationships. You join the board, et cetera, et cetera. Uh, whereas the growth market now it's funny. It's like the, the, the, the hilarious truth is that the, like one of the best investment strategies in venture growth, the series B and beyond over the last five years. Is looking at a SAS company, just meeting every SAS company you can and finding the one that is growing the fastest and paying whatever the market clearing prices. Some of the best SAS investors I know can barely do algebra.

SPEAKER_25: Like they are not, they are not quants they're not, you know, deeping, you know, digging into spreadsheets, but they can connect the dots on a net new error chart.

SPEAKER_08: And they know how to do like net dollar retention and logo retention. Those three things are all that have mattered for the last five years. Um, and so it is this entirely new game at the growth ish stage that is defined, I think by scale and by the ability to move very quickly. And that is why you've seen co2 kick a lot of ass in the last three years, or you've seen tiger kick a lot of ass in the, in the last three years, because they're built for it. Like their firms literally had been doing high velocity, high scale investing for decades in the public markets. And they are more, much more kind of able to bring that down into private markets and, and play this sort of game. Um, then, then folks that, you know, really look like venture firms, but have been dabbling in growth. Um, just because they, they, you know, it's an easy way to, to make returns and kind of bolt on. Um, so I, I do think it's, it's a different game on both sides, but I also think that like, that there's plenty of situations and plenty of founders that are still not going to go with the tiger crossover type product at any round. Um, and we can go into that as well, but, but I'll stop there.

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David Friedberg: Yeah. You did make a nice analogy here to retail with Tiffany JCPenney and Walmart. Yeah.

SPEAKER_94: I'm sure this made you a lot of friends, but you're basically saying Tiger Global is the Walmart of this. And I can say Amazon.

SPEAKER_105: I had to make it like a backhanded compliment. You know, I can't give them too much credit. Yeah, exactly.

David Friedberg: You've learned well. Um, so and then Benchmark or Sequoia being the Tiffany, like, you know, or Founders Fund or Founders Fund. Yes. I mean, listen, I'm an LP in both Founders Fund and Sequoia.

SPEAKER_104: So I'm not in Benchmark. Happy, happy LP.

SPEAKER_106: Yeah.

SPEAKER_104: Yeah. How very happy. Actually, I just got a, I just got a couple of shares in a company called Uber because it turns out Founders Fund was in this other company called Postmates. So it worked out. Okay.

SPEAKER_53: I was like, oh, or more Uber shares coming over. Okay. Well, okay. Oh, sure. I know how those work.

SPEAKER_36: Uh, so tell me a little bit about this, uh, analogy here. I'm pulling the graphic up for those of you watching on YouTube or the video version of the podcast.

SPEAKER_08: Awesome. Yeah. So, so when I was thinking about what was happening in venture, really what came to mind, and this came from kind of like my, my PE days thinking about like non tech businesses, but over the last two decades, you've seen something called the middle squeeze, um, in, in kind of consumer retail. And it was driven by these really low cost, really hyper scale, really convenient, um, new businesses that popped up or, or at least scale to, to kind of the scale that they're at. So Costco, Amazon, Walmart. And what happened was you have, uh, this bifurcation of consumer spending, um, where, you know, people that want to spend on, uh, luxury brands are going to spend on luxury brands because it's a flex because they get to show off to their friends because it makes them feel warm and gooey inside. Like they're going to buy the iPhone. They're going to buy the Tiffany ring for their girlfriend. They're going to do those things. And then on the other side, you now have the Walmart's Amazon's Costco's of the world, which not only, um, are of such scale that they can pass on a ton of cost savings to you. Um, they're also just way more convenient. You know, you, with Amazon, you're getting the, the, the shirt or the jeans or whatever you want, uh, the toilet paper in one to two days. And so what you saw in retail was there was all of these, uh, retailers, JCPenney, Macy's, all of these things that kind of just existed mostly because Amazon, Walmart, et cetera, didn't exist. Like you didn't really have another place to go and get, uh, you know, a cheap sweater, um, that was still pretty high quality.

SPEAKER_25: But with the emergence of Amazon and Costco and Walmart, there really ceased to exist to be a reason to go to a JCPenney. It's like, if you get just as high of a quality of a shirt from Amazon and they ship it to you in one day, why the hell are you going to go to the mall? Yep. You know, 30 minutes from your house and, and go buy a JCPenney sweater.

SPEAKER_23: And so, which by the way, JCPenney, pro professor Galloway's number one pick to beat Uber and Airbnb. That, oh, that guy.

SPEAKER_32: It's so dumb. You just go, you, you, uh, yeah, whatever he's doing, you take the other side of the trade and that might be like the best hedge fund in the last 20 years. Uh, for sure.

SPEAKER_114: I mean, he thought JCPenney was going to crush everybody. It's like literally the dead zone. The dead zone.

SPEAKER_19: Yeah. It's literally the dead zone. Um, and just to put, you know, um, a number on this, uh, my research team said in pitch book, they saw that in April tiger had done 26 deals, which is a deal a day, including weekends. So, you know, how does not, not a lot of sleep.

SPEAKER_120: Yeah.

SPEAKER_19: I mean, I'm trying to figure out how, how many people do you think they have addressing this?

David Friedberg: I mean, there's two or three notable people mentioned in their information story, but what do you think the scale of their company has to be? They're not negotiating and they're doing clean terms, which is really smart on their part because that takes, what is that two thirds of the work out of it. And they said they're not, they're going to do light diligence.

SPEAKER_19: Yeah. Which is a little dangerous, but okay. They do light diligence. They do standard documents. They overpay. I mean, you probably took, you know, 60 or 70% of the work out of traditionally coming to a deal. Right. Um, because you know, getting to the price is half of it and then paperwork and rights are the other half or, you know, another quarter. So what do you, what do you think it takes them to, to do a deal, to find a deal, to process a deal or other VCs just calling them saying, I hear you overpay. There's a company for you to overpay.

SPEAKER_08: I, I don't know if there, there's, I'm sure there's some of that, but I think there's, there's two things that, that are necessary in the market for this to work. And then there's their infrastructure. So the two things, the first is the fact that there's this filtering mechanism. Sequoia does a series, a founders fund does a series, a Greylock and Dreesen. If these firms do a series A or a series B, you're probably.

SPEAKER_25: Okay. In terms of like, you know, like the founders probably good, the financial, it's probably not a fraud. It doesn't mean it's totally not a fraud. There's definitely been frauds that, that really great firms haven't picked up on, but there is this really nice filtering of like, okay.

SPEAKER_08: You biome. Yeah. Oh yeah. Um, or.

SPEAKER_126: I don't think founders fund got caught up in that one. I think that was an Andreessen Horowitz jam.

SPEAKER_08: I, yeah, I do not believe we were in that one. Um, so yeah, hopefully we, we, we keep a clean track record, but, uh, but yeah, you, so you have already this filtering mechanism.

SPEAKER_25: And then what we talked about earlier around, there's also this like excess returns in this market, or at least there has been, who knows if there will be in the future. But there's been a lot of kind of like room for error where it's like, even if you overpay a little bit, sure.

SPEAKER_08: Maybe you get 20% IRR instead of like 30%, but that's still fine. Um, so those, those two things need to exist in order to do all this. And then the infrastructure, which I think, and some of this will probably be hearsay. So I apologize to the tiger folks if any of this is wrong.

SPEAKER_25: Um, but it starts with outsourcing. So they outsource basically anything that is not an investment decision. And so for research, um, you know, they hire consultants. I think it's Bain that the rumors that, you know, that they're Bain's largest, like, you know, financial services client, you know, eight figure contract with, with Bain.

SPEAKER_08: And so Bain is just coming to them every month. Um, and it's saying, Hey, here's this market that, that, you know, all of these good VCs just invested in.

SPEAKER_25: Here's every single competitor. Here's all the emails of the CEO. Here's everything that you need to know. It's like that alone. So they would have diligence work. Yeah. So they, they tee it up.

SPEAKER_131: It's almost like Bain is their associates. Exactly.

SPEAKER_25: It's very much like you have, you know, 30 associates. They're just off of your balance. I mean, they're still on your balance sheet as an expense, but like, you know, you're not having to like mentor them. They're not headcount. They're not in the office. Yeah, they're not in the office. They're not, they don't have your email address. Exactly. Uh, exactly. So you have a lot of outsource work both on that side. And then also on like the NDA diligence, I think they have, you know, probably like an army of lawyers to do all that. And so you get this really efficient engine where if you already have the filtering from good venture firms and you already have a lot of this other stuff, you can kind of just go in, meet a founder, say, Hey, I want to see X, Y, and Z, um, off the shelf financial metrics. Um, and then you can kind of make the decision right there. Uh, and, and that, that is what allows them. I mean, if you think about it, it's like you could do a couple of investments a day. If all you needed to do was, was meet with, with folks and take an hour to look at financials and then everyone else does everything else for you.

SPEAKER_04: You know, it's almost as if they figured out a way to take the serious CD and E companies and make them publicly traded securities.

David Friedberg: Right. Where they can just throw a check into them, like through the Robin Hood app or something.

SPEAKER_137: Yeah. Maybe they have an app that they've built out. That's Robin Hood for private companies.

SPEAKER_103: Tell me about who loses in this. Who's the loser in all of this? Because clearly the companies benefit, the employees of the companies benefit because they don't suffer dilution.

David Friedberg: They build a war chest.

SPEAKER_19: Obviously as an angel investor and a person who owns an accelerator and does series A and maybe sometimes keeps it a parada in series B, this is like mark it up. Let's go. Yeah. Let it ride. Sure. You want to take like, you know, my little, my little plot of land here and you want to build a skyscraper on it? Build a way.

SPEAKER_46: Yes. Let's do it. Break ground. So who loses? Yeah. The, the, the, who loses.

SPEAKER_08: So, so the, the, the reason why I really wrote this piece, um, was every single week for probably the last six to nine months, I would talk to an investor friend at some fund and we would have the tiger conversation. And it was like, oh my God, we lost a tiger. Can't believe this founder is taking the term sheet. Um, you know, oh my God, they're overbidding. They, you know, we couldn't get through our diligence process, just all these excuses. And, you know, eventually I kind of stopped like, you know, nodding along. Um, and I respond and I'm like, well, one, do you really think that these people that have been very, very successful for two decades in the public markets just come into the private markets and lose 50 IQ points? Probably not. Probably not.

SPEAKER_25: And then two, like, what are you really offering founders that they can't offer founders? Um, if you don't have the brand, if you don't have the signaling, if you don't have a lot of these like really special things that really only like five to 10 firms have. Uh, in, in, in, uh, in the U S at least, I don't know about Europe or other, other places. Like if you don't have those things, like, what are you really giving them? That is better than what tiger can give them. And when, when you dig, even just on those things, a tiny bit, it was very clear that many folks in the industry just hadn't thought critically at all about the state of this, uh, the state of this asset class.

SPEAKER_08: So for me, it was kind of like, wow. Like a lot of people are, are kind of riding blind, um, and are asleep at the wheel.

SPEAKER_25: Um, and so I, you know, I'm not gonna like name names. I don't at founders fund. We try just to care about our LPs or founders and ourselves, and we don't really care what, what other folks are, are doing in the industry. But, um, there's kind of these like common attributes. And so, um, you can kind of tell a firm if they are really, really pitching a lot of value, add services. Um, if they don't have the brand of like a top five or top 10 brand where you're really signaling to the market. Wow. Um, you know, founders fund is investing in this company. There's probably 10 X upside left after this.

SPEAKER_08: There's probably something very special about the business. And if you haven't, if you're not nimble, if your organization structure, isn't, um, set up such that you can adapt to the business. And adapt to these new competitive realities. That is what you like that.

SPEAKER_25: That is what happened to JCPenney. Like JCPenney one, you know, they went through bankruptcy. They tried to come back, but they couldn't, they didn't have the management. They didn't have the employees that were ready to be nimble and really shed a lot of that weight.

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David Friedberg: Two big ones, 2,000 bucks right in your pocket. Go to secure frame.com slash offer slash twist. That's secure frame.com slash offer slash twist for $2,000 off.

SPEAKER_146: Okay, let's get back to this great episode.

David Friedberg: When I saw your piece, it immediately was cathartic for me because when I came into the industry 11 years ago as an angel investor scout, and I started placing bets, I was amazed that the VCs over the last 10 years just decided to go downstream.

SPEAKER_19: And they were like, you know what, we're not going to demo days anymore. We don't care about, you know, Y Combinator demo day and stuff.

SPEAKER_20: Just literally had somebody at a very high profile firm, who you know, but I won't say who, say to me, that's an awesome company.

David Friedberg: I totally want to be on the cap table, get to product market fit, and I will overpay for the series A or series B. But I don't want to do all the work for these first two or three years of that product market fit journey. And I said, you know, I happen to like that. And I was offered to go to one of the firms that had like more of a growth thing.

SPEAKER_20: And they were like, you know, you could instead of, you know, trying to put 25 or 50 million to work a year and 50 companies, Jake, how you can make one bet or two a year, and then just hang out the rest of the year. And it's the same amount of money being deployed. And I was like, Yeah, I just kind of like the earlier stage better.

SPEAKER_19: So basically, now there's just going to be this demarcation. If you have product market fit, if you've got 10s of millions of revenue, you're basically going to like a bank and getting financing. As opposed to in the early stage, when you really do need to have some help in terms of, hey, what's the business model here? Or, you know, why is our design suck?

SPEAKER_104: Or what, how do we grow this thing? Or do you know anybody who could be a CFO?

SPEAKER_149: Or at least it's an option, right?

SPEAKER_32: Like, you know, maybe, you know, every time you want money, maybe you don't go to the bank of cheap capital, because maybe there is somebody that can really move the needle with your business or really, you know, you really get along with an investor.

SPEAKER_08: And you're like, you know what, we're going to be $100 billion company, you know, two extra points of dilution doesn't matter. But I think it's I think it's a healthy thing for founders. And that's all we really care about, at least is like, it's a healthy thing for founders that this is available.

SPEAKER_57: And if they want to take it, they can because it's a better product than what a lot of folks are putting out there.

SPEAKER_20: In the early stage, people were lamenting, Oh, my God, angel lists and syndicates, nobody, no founders will ever do those.

David Friedberg: That's going to be negative signal. And now, of course, syndicates are a vibrant part of the ecosystem. And then equity crowdfunding, people are looking at that going, Oh, that's just silly.

SPEAKER_19: And then we saw Sahil raised 5 million a day. With no, there's no venture partner in that model. When you do a republic, or a seed invest, there's no investor, that's just the founders selling directly to the public. So do you think there's something similar or analogous here that could happen a little bit earlier? Or is the earlier stage just so much work that it's, it's not as easy as a, you know, you know, how much, what's your revenue, you know, send me your P and L.

David Friedberg: Here's your, some of your CAC. Here's your, here's your check.

SPEAKER_64: I think it'll be a mix.

SPEAKER_08: And I think, I think that because the, the every round size is getting bitter, bigger, you know, like seeds, as you mentioned there, there's kind of this, like, you know, what a seed is today used to be an A, what an A is today used to be a B. So you just have a lot more room to work with. Um, but I do think that there might be this kind of like mix of where you get the institution that you want. You get the signaling of the institution. You get the board member that you want.

SPEAKER_25: You get, um, the brand, you get all that stuff, but you still have room to involve either if it's individuals or people with rolling funds, uh, angel list, et cetera, um, also in the round. And so maybe now, instead of, uh, you know, a seed fund or a CD fund doing all of around, you have them be the lead. And then you have 30 to 40%, um, of the round also allocated to all the other things that are popping up. Cause I think there's a lot of individual value add, um, that some of these folks, especially it's like, yeah, it's like you have some people that are just absolute experts, uh, whether it's in a sector or at a function.

SPEAKER_08: And you're like, wow, like, I just want to know their, you know, marketing network, uh, because you don't know any marketers and, and that's what you're going to be focused on for the next 12 months. Why not give them a little bit of allocation?

SPEAKER_57: Like that, I think that makes a lot of sense. Um, and there's just a lot more room to work with these days than there was previously.

SPEAKER_20: It does feel to me like, um, the middle layer of this capital stack is just been absolutely squashed. You know, it's just, there's really, if you don't get into those early rounds, you're not getting into those. You're not getting into the startup end of the day. Like if you look at something like, I don't know, clubhouse, the hottest deal of the last year. Um, I mean, kind of weird, um, to have injuries and do three rounds in 14 months from a hundred million to 4 billion with no revenue and collapsing downloads. Put that in that, putting that aside. Um, you're not in that deal. I take it.

SPEAKER_159: We are not.

SPEAKER_20: We are not. Um, if you didn't get in, in that a hundred million dollar or seed round or whatever. It was like, you're not getting in now, right?

SPEAKER_19: It was like the ships, unless the founder just absolutely loves you and wants to carve out a little 25 K or 50 K check for you. Either you get in early or you don't, which in a way I kind of like, because it makes investors take risks. Yeah. Which I took huge risk in my bets. You know, I, I invested in calm and Uber and Robinhood and these things before they had product market fit. And then everybody wants to be a hero and invest in them when they're at a billion and then put them on their, in their bios. And I'm like, ah, I kind of know that you bought secondary shares on like some website. Happens all too often. Yeah. You don't get to call yourself an angel, you know, an Airbnb because you bought it three months before the IPO.

SPEAKER_08: Well, I think it brings up, um, another good topic, which is the third avenue, which is they can come in and come in over the top and really overpay just like tiger.

SPEAKER_25: And I think what, what some of these JC funny penny funds are already doing, and we'll see a lot of them do, which I think is a bad response, um, to, to kind of the, the tiger phenomenon or the crossover phenomenon is they will try to emulate it. They're going to say, you know what, we need to get in these hot deals. Let's overpay. Let's quicken our, our diligence process.

SPEAKER_08: Let's keep getting into these deals. And when you don't have the scale of tiger and you don't have the index fund where you're, you know, invested in a hundred of these things instead of six, um, you can get wiped out.

SPEAKER_43: If you, if you miss the, uh, if you miss a swing or two, uh, and this is going to be the risk for it.

SPEAKER_36: Yeah. Yeah. It's going to be the risk of ruin, right? Like you're going to overpay and entry price does matter in a smaller fund.

David Friedberg: Whereas a big fund, they can withstand it. You know, they, they hit one zoom or one air B and B or one coin base. Like they can, they can withstand this. And they're also playing with, you know, tens of billions of dollars in capital of which this is, you know, going to be 5 billion.

SPEAKER_20: Right. And it's just not going to, uh, be as much of a, an impact on it. I, I, yeah, that, what do you think of this? The, the, the clubhouse at 4 billion, how does one reconcile a company going from 1 billion to 4 billion as the number of installs goes down? There's no revenue. Uh, and just to put it in perspective, slack, Reddit, Twitter, Facebook, and LinkedIn all launch competing products.

SPEAKER_19: How does that, how would I, how would you explain that to somebody who's your friend from back in, you know, private equity days when they say, how do you explain that what's going on in your industry?

SPEAKER_08: I mean, my friends from private equity days, they, they ask me about like snowflake and they're like, it's losing money. How's a good business. And so I'm like, you were like, there, there's no hope explaining this to you, but on, on, on, on clubhouse, I don't spend that much time in consumer social. And so I, I won't have like a super nuanced view here. I will say that, you know, the last time, um, there was this many people laughing at a, uh, consumer social raise, it was probably Instagram. Um, 500 million, 500 million and being obviously, I mean, it was only two X when, when Facebook bought it, but it was amazing IRR.

SPEAKER_25: Uh, and everyone was like, oh my God, Facebook is, you know, the, so dumb, no revenue. What are they going to do with this thing now? Probably top five acquisition of all time. A hundred. Um, and so I think, I think that, that.

SPEAKER_32: The difference is Instagram was growing like a weed. That's true.

SPEAKER_25: I would, yeah, I would just be very, very hesitant. Like Indreason has gotten closer on, on this company than I think, um, many, many VCs have, uh, besides incubations. Uh, we do a lot of incubations. Other people do some incubations, but besides like a true incubation, they've been very involved in that company. And so I would just be very hesitant to throw too much mud. Uh, not that you're doing that. I'm just saying like the general, general investor sphere. Uh, when, when they, you know, they're, they're so close to it. Cause it's like, you just know, as soon as you tweet, oh man, these dummies.

SPEAKER_57: Um, I'm gonna, like, I wish I could short this company. It's going to get bought for like 15 billion or something crazy like that.

SPEAKER_04: Well, I mean, it is a very good point when you don't have complete information.

SPEAKER_20: We don't know, like maybe the top 20% of users are spending five hours a day in the app, right? Like Snapchat was one of those apps that had some level of usage that was just not seen before.

SPEAKER_36: It was revolutionary how much people were using it. So we'll see.

SPEAKER_20: I mean, the thing that makes me super confounded about that is also looking at like Discord and how great they're doing and they have the same product.

SPEAKER_19: And I've been using all of the products and I actually think Twitter spaces is better than clubhouse. I haven't used spaces yet.

SPEAKER_175: It's good. Yeah, it's good.

SPEAKER_19: The reason I think it's better is because you're kind of living on Twitter while you're doing it. And when you already have your social graph there, you can, you know how, I don't know if you're addicted. You seem a little addicted to Twitter like me. Most investors are. A little bit.

SPEAKER_179: Yeah. A little bit. Put it this way. Do you drink and gamble more or less than on Twitter?

SPEAKER_182: You do Twitter more. That's a good barometer.

SPEAKER_181: Definitely do Twitter more.

SPEAKER_182: Exactly.

SPEAKER_184: Me too. Which is good. It's saving me money.

SPEAKER_19: Exactly. But, you know, you start to look at that and it's like, oh, you know, when you're on Twitter, all of these blue check marks all of a sudden come into your room because they're already there.

SPEAKER_32: And that's kind of reminds me of, you know, like, you remember, like, did you watch Game of Thrones when it was coming out? Yeah. It was like, you couldn't be anywhere else, but like you were watching Game of Thrones and you had Twitter because everyone was there with you.

SPEAKER_25: Yep. Talking about Game of Thrones. And so it's the same. Everyone's there hanging out. But you're also getting commentary. Twitter is awesome. The two screen.

SPEAKER_19: Long Twitter. And they, they know that at Twitter. So when you're in that conversation, it minimizes it. Mm-hmm. And so you have this little bar along the bottom with the conversation and then you're zipping around and you're clicking on people in the conversation and looking at their tweets. And then you find an interesting tweet and you can share it with the group and then discord. Uh, I've just like gone down the discord rabbit hole recently. And it's deep rabbit hole. It is a deep rabbit hole. And it's sort of like discord is like if slack and clubhouse and notion and zoom had a baby and it's like all, well, maybe not notion, but it's almost like zoom clubhouse and slack put together and it is so compelling.

SPEAKER_171: And I don't know if you saw Casey, uh, formerly of, um, the verge.

SPEAKER_198: Yep. Interviewed Zuck.

SPEAKER_19: And I guess Zuck was like, I'm not going on clubhouse. They didn't sell to me and they did it on discord, which has the stage feature now.

SPEAKER_198: So you can keep everybody in the slack room and then pop up a clubhouse is really, really fascinating. That is super interesting.

SPEAKER_70: Yeah. That's why I don't spend that much time in consumer social. I'm just like, there's so many rabbit holes.

SPEAKER_204: You focus on sass? Uh, pretty much everything else.

SPEAKER_08: We're, we're all generalists at founders fund, but we, we try to go to the places where there's not that many people. I don't know. You know, if you've ever read zero to one or listened to Peter's talks on competition, we're not fond of competition either for our portfolio companies or for us when we're looking at investments. Yeah.

SPEAKER_104: I like this Logan, uh, Bartlett, uh, quote you put in from August of 2020 VC.

David Friedberg: We only invest in businesses with defensible moats and competitive advantages founder. And what differentiates you VC? Mostly our brand.

SPEAKER_108: Mostly the brand. Mostly the brand. And they're, they're, they're wearing a JCPenney sweater. Exactly.

David Friedberg: We're JCPenney vest. Uh, all right. Listen, it's great to meet you. Um, and thanks for coming on the pod. You're right. Three more of these. I think you're going to get, I don't know. What's the net.

SPEAKER_36: What's up from principal at a founder's fund.

SPEAKER_32: Yeah. Director. If I, uh, I guess I, I get, I become Mike Solana jr. I don't know if you read Mike Solana stuff, but he is our, he's our writer in chief.

SPEAKER_08: He, uh, he's the, the king of all of our content. And so, uh, you know, maybe, uh, maybe if I write a few more, I can become his protege or something.

SPEAKER_211: Well, I'll just, I apologize to all young VCs out there because I was the original investor,

SPEAKER_213: podcaster, blogger, and now you all have to do podcasts and blogging in order to get a job. So sorry about that. No worries.

SPEAKER_216: No worries. It's fun stuff.

SPEAKER_60: Did I miss anything? Any, did we miss anything important here? I think we can. Uh, no. Yeah.

SPEAKER_63: I think, I think we pretty much went over everything. Um, yeah, there's a few other nooks and crannies, but I think we, we pretty much did it.

SPEAKER_19: And what, um, and how do you work with startups? You, you find deals yourself and then you bring them to a partner and then you have to get some buy-in or what, how do they let you write checks? Do you write checks under a million? How, how do they, I'm curious how a young gun, uh, working for Peter Thiel gets to, uh, you know, find their way in the world. Yeah, no, no.

SPEAKER_08: It's a great question that one of the beauties of, of founders fund. Um, and it's, it's a way we invest to is, is just, uh, one it's like, you know, like Peter, I don't know when he invested in Mark. I think Mark was probably like 21 or 22. I'm not 21 or 22. I'm much older than that now, but, uh, but it's, you know, faith and youth, um, is, is one principle,

SPEAKER_25: but also just there's immense autonomy. And so all of us have check writing ability. Uh, it's, it's very not like we don't have Monday morning. I see we're not, you know, always trying to look for consensus. Um, everyone's out there running their own strategy. They're, they're finding things that, um, are interesting to them or they think are going to be accretive to the portfolio. And then you kind of build like a coalition. And so like, if I am looking at, um, I don't know, something that, that sells to, uh, you know, SMB restaurants, like I'm going to loop in Keith because Keith was the CEO of square. Um, and he's going to know everything about that market. So like I'll loop him in. Um, or if I'm looking at something, um, in healthcare, like I'm going to, I'm going to loop in Brian Singerman, board member at Oscar. Um, so you, like we kind of just team up a little bit like that, but a lot, you know, the young guys are doing a lot more of kind of like the sourcing and hunting. I would say like, we're running out there and trying to find what's going to be the next, uh, you know, what is going to be the next stripe? What's going to be the next Airbnb in our portfolio. And then obviously like Peter, Brian, Keith, uh, Napoleon on our team, all these partners, Trey, who, who co-founded Anderil actually, they have just like this very diverse, but like vast wealth of knowledge and experience that we kind of get to pull from. Um, um, and, and can actually really move the needle with companies.

David Friedberg: So it's kind of like this, uh, you know, what is the, what, in order to, to make a go of it at a founder's fund, what we work in six days a week, seven days a week, you put it in 60, 78 hours a week.

SPEAKER_32: To me, it's all, it's all up to you. I think that's the other beauty is that like, you know, there's weeks that I work 40 hours a week.

SPEAKER_08: There's weeks that I work, uh, you know, not, not 140, but you know, 100, 110, but it's really all up to you.

SPEAKER_25: It's like, you know, when I, when I first got hired, uh, I'll never forget. Brian Singerman basically was like, yeah, man, like we're, we're excited to have you on. Basically if you, if you do right by our portfolio and you, you find and do really, really good investments, you're going to have a long, happy career. If you don't, you'll probably just get fired. And I was like, well, at least, you know, at least I know the rules up front.

SPEAKER_36: Uh, and we don't, a lot of your contemporaries not want to work hard. I heard all these, the kids at Goldman Sachs were now one of the weekends off.

SPEAKER_57: I know what, I don't know what, what, what is about that. They, they have to, you know, do the indentured servitude thing for at least a decade before they can, before they can stop working weekends.

SPEAKER_110: How did you break into a, how did you break into venture? I'm curious.

SPEAKER_63: Uh, so it's, it's funny. I don't know. Uh, I, I didn't go to business school. Uh, well, I, so I went to Boulder actually.

SPEAKER_25: So I, I was very, very not, um, in, in this ecosystem before. So I was at Vista doing, um, software buyouts and at Kleiner Perkins, there was a partner named Alex Kerland. I don't know if you know Alex at all. He's now a general partner at Meritech. Uh, and he, um, he basically need, needed somebody to basically just cut SAS data. And like, that's all I did all day at Vista. And so that was my wedge in. I was really looking for a way to get, uh, you know, a little bit more upstream, um, as, as you called it into the, the, and just really enter the venture ecosystem. And it's quite hard to do that from, from basically anywhere else. Um, or if you don't already work in tech. And so he was looking for somebody that was just a monster at, at, at, you know, analyzing SAS businesses. And that's all I did all day. So I was basically like, I will work as many hours as you want. I will be your API for analyzing SAS businesses.

SPEAKER_08: Uh, you give me data. I give you a nice PowerPoint. Um, and, and, uh, that was kind of my opportunity.

SPEAKER_233: All right, listen, great job on the blog posts. Great job breaking it down. Good guess. Nicely done to my producers.

SPEAKER_19: And we'll see you all next time on this week in startups.