SPEAKER_00: look at the best managers, and they're the ones who are able to recognize when they do have one of those top 1% companies, when they've captured that magic, and they have the confidence to let that run. And I think it's something that really distinguishes the very best managers from, again, the rest of the pack, that they understand when to take money off the table, but they also understand when to let things run. And ultimately, if you are going to get those fund returning outcomes, you might only have one of those in a portfolio of 50 companies. If you sell it too early, then you've missed your opportunity there. And almost, I would look at that as a bigger sin

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SPEAKER_04: All right, everybody, welcome back to the podcast. We've got a great episode for you today. Because we have with us today somebody who's been investing in venture funds for three decades. His name is David Clark. He is the chief investment officer at VenCab. They're a UK-based fund of funds and investment advisor. If you're deep in the industry, you probably remember David went viral on Twitter, now X, when he broke down returns from 32 years of investments at VenCab. This was obviously to somebody like myself, who is a student of the game of capital allocation and trying to get better at what I do every day. Just absolutely the content I'm here for. And so, David, welcome to the show.

SPEAKER_06: Thanks a lot, Jason. I've been listening a lot to the podcast that you put out and super excited to

SPEAKER_04: finally be on one. Thank you. Well, as you can tell from my voice, I do a lot of podcasts and today I've got my raspy voice. So I'm kind of like Bob Dylan in the later decades here. I just want to get started recapping the tweet storm and your firm, VenCab, just so I make sure I level set with the

SPEAKER_09: audience, founded in 1987. You've made around 500 fund investments. So you have a certain number

SPEAKER_11: of managers and you obviously invest in them across many funds. Yep. Yep. Correct. And just to be

SPEAKER_06: clear, we probably started with a very generalist approach to venture. So over time, we've backed

SPEAKER_00: something like 110 different managers. Over the last 10 to 15 years, we've really concentrated

SPEAKER_13: those down into 12 to 15 groups. And it's those 12 to 15 groups that we've been active with for the

SPEAKER_04: last decade or so. Yeah. And concentrating in on those managers, you do that. Why? Because I've heard some people say, hey, you need to have a certain number of managers in order to hit certain

SPEAKER_16: goals. Is the goal here to hit the beta plus chance of alpha or just really go for that alpha across

SPEAKER_02: venture capital? Yeah. I think the whole conversation around alpha versus beta in venture is an

SPEAKER_00: interesting one because I think the beta in venture is, if you look at that as the median return, the average median return using the Cambridge data is about 10% IRR. And so nobody is in venture for the beta. You're only in it for the alpha. And for me, the alpha actually means the upper quartile return. But it's because of the power loan nature of venture, what we found is that actually the upper quartile is very similar to the actual pooled return for venture overall. So again, if you look at the average upper quartile boundary from the Cambridge data since 2000 or so, it's about 18%. And so what we try and do is to hit that upper quartile as often as we can and get as many funds that we invest in really over that upper quartile boundary. The challenge in venture is that it's really hard. And you know this, Jason, you've been doing this for a long time. And I think people who have come into the industry more recently have been perhaps a little less aware of that because the market's been going up and there's been a strong tailwind and everybody's been doing really well. But I think the next couple of years are going to be really challenging in the venture industry. And so the reason we concentrated down is when we looked across all the 110 managers we backed, we found the majority of those managers were only generating a median return. And there was only a handful of managers that were actually able to consistently produce upper quartile funds. And we can go into how they do that and why they do that and what the

SPEAKER_02: power load dynamic looks like, but happy to take that wherever it makes sense.

SPEAKER_04: Yeah. I mean, let's go right to that. What distinguishes people who have not just longevity, because my perception now going into my second decade is if you build a good enough brand, there's enough people who want access to this category that if they do get the 10% with the optionality of maybe doing a little better, let's face it, there are some LPs who would be comfortable with that as part of a blended portfolio. It's kind of like, I'm going to get above

SPEAKER_09: average returns with some optionality. Now, if you're really trying to sharpen the knife and get into that upper quartile and hit that 18% constantly, oof, it's really hard. So let's talk about what those funds or those managers or those brands do that makes it notable or in your estimation worthy of being in your, I think you said your top 12?

SPEAKER_25: Yeah. Let me tell you what they don't do, first of all. What they don't do is really have any lower

SPEAKER_00: loss ratio than the rest of the market. So this is not about minimizing your losses. So when we look

SPEAKER_13: across all our portfolios for an early stage fund, somewhere between 50% to 60% of deals don't return

SPEAKER_28: capital. And obviously it varies a little bit by vintage year. In the most challenging vintage

SPEAKER_00: years, that can be up at 70. In the best vintage years, it can be just below 50, but it's average in that sort of 50 to 60 mark. And even the best managers are kind of consistently around there. So venture is not about minimizing risk. This is not private equity. If we were having a conversation about private equity, we'd be having a very different conversation. Venture, as we know, is a power law industry. And so the power law really applies to what percent of companies ultimately generate the bulk of the value for the industry. And when we look at the exit data, what we found is that it's about 30 exits a year that ultimately account for more than half of the total exit value produced by all venture-backed companies globally. So we're talking the top 1%, the top 1% of exits. And as a percentage of the total number of companies backed, it's probably going to be smaller than that because obviously, we know a lot of companies ultimately don't exit. So we're talking about how do you consistently get access to those top 30 companies each year that drive the bulk of the performance that comes through to the venture industry. And what we found when we look at who are the investors in there is that there's a relatively concentrated group of managers who can consistently do that. And it's no surprise who they are. It's Saxel, it's Sequoia, it's Andreessen Horowitz, it's Kleiner Perkins. It's the managers that most people would be able to name if you asked them, who would you say are the best performing managers, the franchise names out there? And so when we look at the data, it's very clear to us. If we want to consistently capture that upper quartile return, the best way for us to do it, and I'm not saying this works for everyone. Other people will have different strengths and different approaches to the market. But certainly for us, the best way to do it is to try and optimize for those managers that are consistently able to back the top 1% companies. And we've been doing it for

SPEAKER_32: 15 years, and it works. Okay. So for your Terrific 12, I'm going to call your fund managers who are-

SPEAKER_09: Can I use that for our marketing deck? The Terrific 12 is yours. Yeah, it's one of my things, branding. Or just conciseness. So in that

SPEAKER_04: Terrific 12, what you've learned is they have the same amount of losses. They strike out, they miss their shots, just like anybody else. Six of 10 startups return zero. Big donut, they flame out.

SPEAKER_35: Not a zero. Don't return capital. Don't return capital. About half of those probably end up at a

SPEAKER_04: zero. Okay. So they don't return capital, but it's really about the very small number of outlier exits. So when you look back, you've had how many companies across the history of the fund? And then how many companies, I think you actually did a chart here, which we could pull up, how many companies

SPEAKER_40: would fall into that power law designation? Yeah. So the data that we used has just under

SPEAKER_00: 12,000 companies. Wow. And 113 of them are fund returners. So just over 1%. So again, let's define a fund returner for the audience. Yeah. So a fund returner is a single company investment in a fund that returns the entire committed capital of that particular fund. So if you were typically an early stage fund, might invest in 30, 40, 50 companies. So it's one company that returns the entire capital of that fund. And very often, that company will do it multiple times over. So it doesn't just return one extra fund, it can return 5, 10, 15 extra fund. And so it's optimizing for those types of companies. And there's a few things that also kind of play into that relationship. It's what's the size of the exit. It's what's the size of the fund that's backed it. And it's how much does that fund own of that company at the time of exit. And those three things have to be in balance in order to get

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SPEAKER_09: twist. You must go to Gusto. Again, that's gusto.com slash twist. And so when we look at this chart, we see the 53% return under what was invested in them. Get 27% that will return the money invested

SPEAKER_04: in them, or maybe up to 3x. But as you said, a fund might have 30 companies in it, which means each company represents 3% of the capital or so. If you're just doing back of the envelope math, and so these are truly meaningless in terms of venture capital. So you have a full 80% here, almost, yeah, exactly, 80.3% that are just not moving the needle for that fund. Yeah, exactly. And then everything 3x, 5x, 10x, 10x plus, or fund returners,

SPEAKER_21: that's where you start to see the returns and why venture is so special, which then leads me to

SPEAKER_04: believe that there are factors that determine these outcomes. And I just want to run them by you. These would be theories because you do need to make a decision as an LP when you bet on GPs and as a GP when you're betting on companies to have what we would call a portfolio strategy. Each fund

SPEAKER_09: has to have a portfolio strategy. So if only 1% are fund returners and you do 30 names, how hard is it to get a fund returner? And does that not argue for maybe more names in a fund than we've seen historically? So maybe you could argue on one extreme, spray and pray on the other concentration and how you think about, in a portfolio construction, what's the right number of names? And when people

SPEAKER_50: hear me say the number of names in a portfolio, you might hear other people say logos. It means the names or the logos of the startups.

SPEAKER_00: Yeah, I think it very much depends on the stage at which you're investing. So if you're a pre-seed fund, then because the loss ratio looks different and the attrition rate is different, you need more names. And it also means you can afford to have more names because the delta between your entry value and the exit value is so much larger that it's easier in a way to get that fund returner if you do have one company that ultimately takes off and is incredibly successful. As you start to get later as an investing fund, then you do need to be more concentrated in your portfolio because ultimately the multiple you will get on any individual deal will begin to come down. And so what we've tended to find for early stage funds, and we would classify early stage funds as kind of series A and maybe sort of early Bs. For those early stage funds, a portfolio of around 30-ish names is about the right size. And you're looking at maybe sort of ideally probably 10% to 15% ownerships at the time of exit, which means that most of those early stage funds that we would be backing would today be somewhere in the region of $400 to let's call it $800 million. And so this is where the fund size versus exit size versus ownership relationship is really important. Because if you have a manager that's only ever been able to return $500 million in a single deal, and is raising a billion dollar fund, then the confidence level that they're going to be able to produce a fund returning outcome is very different to a manager that's raising a $500 million fund and has had multiple billion dollar single company returners. So I think it's being able to sort of handicap the ability of the manager to deliver those fund

SPEAKER_56: returning outcomes. And what is it that you have to believe in order to get comfortable that they can continue to do that going forward? Yeah. And so when you are investing in that series A

SPEAKER_09: to series B, 50 million to $200 million valuations in 2024 terms, I think we would both agree in order

SPEAKER_21: to get that 10% ownership, which is kind of a goal, right? Maybe even 15% if you're able to do it to get

SPEAKER_09: that 10 to 15 in a company that has a $50 million post or 100 or $200 million post, you're going to have to write, you know, somewhere between a five and a $20 million check. If you're doing 30 of those,

SPEAKER_21: you can just times, you know, 30 times 10 or 30, yeah, 10 million or 30 times 15 million might be even

SPEAKER_00: a more reasonable number. You get to a little bit of follow-ons as well. So you want to reserve capital for, you know, for your best companies to do the next round maybe. Yeah. And I don't know if you saw

SPEAKER_50: the Brian Singerman episode we just had recently from Founders Fund, or are you an LP in Founders Fund

SPEAKER_61: by chance? Are they in the Terrific 12 yet? We don't publicly disclose who we're investors with.

SPEAKER_59: That's, yeah. Totally fine. So the Terrific 12 remain anonymous, as is Dave's one. So Brian

SPEAKER_09: Singerman was on, you know, reserving 15%, 20% of the fund to put into one name. They did it with Palantir, Airbnb, SpaceX, the rest is history. So what do you think the right number is? And what do you forefall for the reserves, if you had to put a percentage range on it? And then what do you think of this really aggro strategy of the one? Yeah, let's take that one first, because I think

SPEAKER_63: it's a super ballsy strategy to do that. Oh, yes, it is. And I think, you know, credit to the guys at Founders Fund is that they've proven that they

SPEAKER_00: can do it successfully. As an LP, I'm happy with some of my funds doing that, but I also feel I need to sleep at night. And if I had an entire portfolio that consisted of Founders Fund type bets, then I think that would be incredibly aggressive. So, you know, I look at it from, at my level, from a portfolio construction point of view to say, we want to have people in that portfolio that are willing to take really aggressive bets, and are willing to back their conviction, and to double down on their very best companies. But at the same time, we also need to have an eye on overall risk management. And from a funder fund's perspective, I can't afford to deliver a 0.5x portfolio to my investors, that puts me out of business. What we need to be able to do is to, yes, capture the upside, but also be cognizant of the amount of risk that we're taking in order to do that. And I also think it's different between, are you writing that 30% of the fund as a single check, as your first check into a company? Or are you layering it in over time, as that company is de-risking, as it's scaling, as you're getting more comfortable about the ability to execute, the size of the market, how the competition is playing out, how the economics of the business are working? I can see getting to that sort of ownership, or that sort of exposure over a period of time and multiple rounds makes sense. Single investment, as I say, perhaps one or two of the funds, but I wouldn't be comfortable

SPEAKER_67: if everyone was doing that. I think you've made a great point here that I just want to highlight,

SPEAKER_09: which is being able to invest in the company over time gives you a decision-making process at each of those waypoints to re-underrate the company, meet with management, and really get a tight worldview on what's changed. And I've really started to take that to heart as I deploy more reserves. And I've really changed my fund strategy. When I came into the business 10 years ago, when I did my first fund, you had finished up being a Sequoia Scout. Everybody was like, yeah, you just do a $10 million fund. You do 50 or 100 names, 200K, 100K, whatever, and you're done and you just hope for the best. And unfortunately, I hit four unicorns in that fund. So I thought I was a genius again. What I didn't realize was even though that fund is 5X on paper and has returned all the capital already, and I feel great about it. We looked back. If only I had saved a third of the fund, $3 million, and taken the three of the four that were breaking out, I just went back and looked at my notes and I looked at my decision-making. We knew three of them were definitive winners. It was super clear. Superhuman, Calm, and Robinhood were just exceptional companies bringing out. Density, we weren't sure because it was hardware plus software. And so we were kind of monitoring it. So I'm not certain I would have made the second bet on that. And then if I just made one

SPEAKER_04: or two of those bets, you know, 15X fund, 20X fund. So I guess my question from all of that is when you look at the seed space, are any of the terrific 12s in seed? And then how do you view seed managers specifically, people who've chosen to be at the well? I always use the analogy that we were on the orchard. We pick the apples, we put them in bushels, and then we bring the bushels to the market. And then that's the series A. So, you know, we run an orchard and we bring 100 every year, 100 of those apples to the market and we see who picks up on them. So talk to me about how you perceive seed. We went over the classic series A fund. Now let's do the classic seed fund. Is there

SPEAKER_32: one in the terrific 12? If so, how do you evaluate them? Yeah. So we don't have any standalone seed

SPEAKER_00: managers in that core manager group. However, some of those core managers will run multiple strategies, one of which will be a seed strategy. So there are seed specific funds within our... So those 12 managers probably give us 40 or so funds across the cycle. So they're doing seed early growth. There may be some sector specific funds. There'll be some non-US funds. So there'll be India, there'll be China, there'll be Europe. So there are a small number of seed fund in there.

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SPEAKER_02: The challenge we have when we are looking at seed managers in particular is that we just feel our level, our ability to pick those managers is essentially zero. We can't separate the signal from

SPEAKER_00: the noise. And I'd be interested to see how successful other LPs are over the course of the entire cycle in doing that. And that's not because we haven't tried. So I mentioned we backed something like 110 different managers. A number of those would be classed as seed managers if they were operating in that space today. And it just hasn't been successful for us. And so rather than trying to do something we're not good at and hope we get lucky, what we have decided to do is really concentrate on where we think we have a competitive advantage and where we know that we are playing in a market where if you are able to access those very best managers, then you're going to get that consistency of performance and consistency of hitting that upper quartile performance, vintage after vintage after vintage. So it's interesting. So I've had quite a few conversations with LPs who are much more active in the seed space than we are. And I know you had Michael came on one of your podcasts, you know, the guys that send down who have done a great job in pulling those portfolios together. The question I would want to ask someone like Michael is what does that look like over the entire cycle? Because I think we would certainly expect seed managers to outperform as the market in the last years of a bull market rather. So if you were looking at that sort of 17 to 21 period, there's

SPEAKER_02: no question in our minds that seed managers would outperform during that period.

SPEAKER_07: And the reason they would outperform is because the Series B and C was so competitive and people were overpaying.

SPEAKER_00: Yeah, exactly. Exactly. So they were getting markups on their seed deals very quickly. The markups were very aggressive. And in some instances, if they were able to sell some into those later stage rounds, then they're putting real points on the board and getting DPI back to their investors, which is incredibly important. It does feel like things have changed probably since the end of 21, beginning of 2022, where I think it's getting a lot harder to make that transition from a Series C to Series A. Pricing has come down. Terms are becoming much more onerous. And going back to your earlier point, if you haven't reserved, then you could be in a difficult position, particularly if one of your companies stumbles a little bit and has to raise capital where the terms are a little bit more onerous. And we've been in this long enough to remember pay to play rounds, remembering recaps. It feels as if more of those are likely to be coming through over the next 12 to 18 months. And so I think one of the things I'd be interested to see is how does the performance of those seed managers that looked really good back in the end of 21, how does that look in two or three years time when they're having to revalue a lot of their markups? And particularly for those ones that haven't reserved and weren't able to get liquidity onto some of their positions when the market was much more positive.

SPEAKER_67: Yeah. This seems to be a leak in a lot of the early stage managers' games that they don't take

SPEAKER_50: advantage of the secondary opportunities as they're presented. And man, looking back on it, we took

SPEAKER_09: advantage of a number of them very strategically. My only regret is that we didn't have a proactive unit doing it. And it's a little bit dicey because being out there trying to sell your position in your startups can create a natural amount of tension between a founder and an angel investor or seed investor. So I think that's why many of them are reticent to say, I'm going to sell my shares or just

SPEAKER_21: even 10% of them or 20% of them because they haven't communicated that to the founders upfront their

SPEAKER_00: strategy. Yeah. I even think it's a harder decision when to sell in some instances than whether to invest in the first place. Because the other thing is you go back to the power law nature of venture and Sequoia didn't become Sequoia by selling its best companies early. They did it with Apple and John Valentine said, we're not doing that again. You look at the best managers managers and they're the ones who are able to recognize when they do have one of those top 1% companies, when they've captured that magic and they have the confidence to let that run. And I think it's something that really distinguishes the very best managers from, again, the rest of the pack, that they understand when to take money off the table, but they also understand when to let things run. And ultimately, if you are going to get those fund returning outcomes, you might only have one of those in a portfolio of 50 companies. If you sell it too early, then you've missed your

SPEAKER_02: opportunity there. And I would look at that as a bigger sin than perhaps not investing in it in the first place. And we've seen a number of managers, I think, that have done that. And I think that's

SPEAKER_00: one of the things we look at is, are they really able to identify who are the key value drivers in their portfolio? Can they double down on them? And do they recognize how to play the long game in terms of letting that value compound over multiple years?

SPEAKER_76: Have you seen a manager sell their position and then subsequently the company go to zero or crash

SPEAKER_09: and burn? In other words, they made like the great trade, you know, this thing became FTX and they sold FTX and not to pick on Sam Bankman-Fried now serving in a correctional facility. But if you

SPEAKER_21: were in FTX and it went to 20 billion, 10 billion, whatever it was at, and you were a seed investor at 25 million or 10 million and you sold your entire position, my Lord, you might look like a genius right now. Have you seen that happen where somebody sold and it went to zero or something similar to zero?

SPEAKER_00: Not in private companies. What we have seen though is companies that have gone public, either via traditional IPO route or more recently via a SPAC deal, where the VCs have been able to get liquidity shortly after lockups had expired. And 24 months later, that company is in a very different place. You know, you look at the market caps of some of those companies that went public in the 19, 20, 21 vintage, and they are, they're pretty low. And so that tends to be more of what we've seen rather than taking early liquidity in a private company and then that company going to zero.

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SPEAKER_59: faster. Yeah. The one I can remember was we were my understanding was that benchmark cleared their position or a very large portion of it. And we work before it went public, you know, uh, maybe in the

SPEAKER_50: built, you know, many billions of dollar range. And, uh, they might've been the only winners in that

SPEAKER_83: aside from Adam Neumann getting a buyout miraculously as well, which is crazy. It's interesting as we're having this conversation, I've come to the conclusion, balancing all these factors that

SPEAKER_21: if you're a seed fund and you sell 10% once or twice or three times, you'll never be in a position to explain to LPs or yourself and sleep at night that you sold too much in a winner. And you will have locked up enough of the win after you've sold 10 to 30%, 10% two or three times that you'll feel, you know, pretty great. If the thing does become like, I don't know, I don't pick on any companies,

SPEAKER_50: but Buzzfeed, I saw it was for nothing like less than their cash. I don't know. You remember those

SPEAKER_83: days when the dot com era, when companies were worth less than the cash they had in their bank account, absolutely crazy moment in time. So I'm accustomed to that, but this time around in the cycle, I'm going to, I'm already started this discipline inside my firm, which is we're tracking all the secondary offers that are coming into us. They were like, Hey, we have a name, we have a buyer.

SPEAKER_50: I'm like, tell me the number. And now I, can you get on the phone? I'm like, I'm too busy on the phone. Just tell me the number. If you want to have a relationship with our firm, you know, all these, like, you must get some of this, right? Like some of these, like, I don't know if they're shady, but there's just like weird underbelly of private company sales going on and the hustlers, you know, try to buy a position, sell a position, whatever. We see the same on, on LP stakes.

SPEAKER_00: Oh, really? Yeah. Yeah. We do get people contacting us saying, what would be your pricing on, on, on an LP stake in this particular fund? And sometimes they have a deal there that they're, that they actually are able to talk to people about. And sometimes they're, they're perhaps looking for a bid in order to then go back to potential sellers and say,

SPEAKER_100: I've got a buyer who'll do this at X pennies on the dollar. Oh, that's gnarly. Yeah. So they're

SPEAKER_50: working both sides of the marketplace. Hey, you know, I hear Jason mentioned his first fund is 4.95X. Would you have an interest in taking a strip? And then they come to me, oh, we might have somebody, oh, that's a really interesting approach. Yeah. I, I started to, you know, during this last two years, as things were, you know, how do I say it? Uh, chaotic. Um, I did have a lot of folks pitching me on these strips or getting me liquidity. I said, well, I personally don't need liquidity. I'm a worker,

SPEAKER_83: you know, I've done okay for myself. So I'm heads down, but you know, for shits and giggles, yeah, tell me, tell me what this is. And they're like, well, we can get you the GP,

SPEAKER_106: a little bit of money. So I want to ask you a question might be uncomfortable or on, you know, maybe uncouth in some ways when you look at GPs and they start to make money and money changes everything, especially for humans. How does that affect their psychology? And how do you parse that? You know, somebody hits a home run and they had another home run and they're a GP, how do you know they're going to stay in the game and be aggressive? And, and how do you assess that? And is that an actual issue with fund managers, you know, over the 30 years you've been watching it?

SPEAKER_108: In other words, retirement, work ethic, you know, uh, desire, hunger, et cetera.

SPEAKER_00: Yeah. I, I don't know if you remember a firm called cross points. Um, so, um, they invested in, again, this, we're going back to the sort of late nineties here, they invested in brocade, they invested in, uh, Ariba. They, you know, these guys were up there with the sequoias and the kleiners in terms of the performance that they, that they were able to generate. And in 2001, 2002, they just said, look, we're done. We've made enough money. We're not interested in doing this anymore. And I think one of the partners went and bought a motor racing team and actually having that honesty to say to their LPs, you know, we're done. We're not, you know, we've made enough money where that's, that's us finished, I think is, is quite refreshing. Um, and, and it, it is a challenge when you're looking at GPs that have been successful individually, there are, there are certain GPs that, you know, are going to do this until the day that they die. You know, it doesn't matter how much money Vinod Kozler makes on his investments, that guy drag him out of the building. He will be investing in companies and, and, and, and working with founders until the day he can't. Yeah. And I think there are a number of people within the venture industry that are like that. Um, and I think they're doing it more because it's a passion and, and the money is just a way of keeping score. They're super competitive. They want to win. They want their companies to win. They want to beat the guy down the street and, and they'll keep doing this until, um, until they're not able to. And so I, I do think it's important that you, you do have a relationship with your, with your GPs. So you get a better sense of what they're doing it for. But I also think as organizations, it's really important to continue to bring new blood into the partner group. And one of the things we've seen, um, with, with good firms that have fallen away, it's happened because they haven't handled the succession properly because you get senior people who are still taking the bulk of the economics, their name might be on the door, but they're no longer doing the work. And they're not getting out of the way to allow that next generation to come through and to put their footprint on something. So if you look at the very best multi-generational firms, they've done a really good job in handling that succession. And, and keeping the, keeping the senior partners involved, but doing it in a way that where it's much more in a mentoring capacity rather than still being the, you know, the, the, the deal maker in that organization. So I think that's something that's really important for us to see. We want to see that new blood continuing to churn. And if we don't, it's a red flag.

SPEAKER_97: Yeah. Kleiner Perkins comes to mind as taking a couple of, I'm going to be generous,

SPEAKER_50: but taking a couple of swings at bat to do their transition. And it seems like they got it right with Mamoun, uh, Ilya. They got some great folks over there now, uh, running, uh, some pretty, some pretty good, uh, investments, but that one comes to mind and then Sequoia getting it right. Ruloff and Alfred after Doug and Moritz after Don Valentine. And they seem to have, having watched that one happen before my eyes. Cause Ruloff was my friend who, you know, I remember his first year there when he wrote the deal member for YouTube and just watching Moritz and Doug, you know, sort of mentoring him and Alfred Lynn,

SPEAKER_59: you know, and they just learned the craft of it. But I mean, I was there recently and Doug was there, you know, and I was there, I was at the San Francisco office a year ago and Moritz was there.

SPEAKER_106: So, you know, the, this idea that people have transitioned, they seem to take a decade to transition at Sequoia. Whereas in other firms, maybe they're just collecting these ginormous fees. So, you know, I guess is another interesting topic for us, the allure of more fees. And, uh, how do you think about that? One of the challenges I have is people don't give me straight feedback. You know, when you're talking to an LP, they don't tell you what they don't like about your strategy or fund. So you and I have, you, luckily I, you know, I get to have you, you know, in my, in my circle here. And, um, I asked you, Hey, candidly, tell me what, what, you know, really bang on this year. I want to be better at my game. Tell me where I suck. And, you know,

SPEAKER_83: people were like, Hey, you know, in this market, should you get 25% carry with a ratchet up to 30? You know, that's a blocker for some people. And I was like, Oh yeah, I never considered that. And then I asked five people. I'm like, two of them out of the five were like, yeah, that's our blocker. I'm like, why didn't you tell me? Like, nobody's telling me the truth here. Tell me the truth, you know? And, uh, so, so how do you think about fees? How do you think about carry structure? Because now I had, I also had another person who said, don't lower your fees, don't lower your carry, because it's a sign of how good you are, that you can actually close funds with 25%

SPEAKER_21: carry and then ratcheting it up to 30. So, which I'm not disclosed publicly was my carry structure, um, which I thought was fair, you know, given the seed round and my performance, but it is a blocker for some people. So you just basically, it's a non-starter that they would participate with you. How do you think about fees? How do you think about carry two arguments I've heard? Keep your carry structure high. It's a signal that you're a quality hotel, that you have a thousand dollar a night room and you don't discount it or listening to the market. Yeah. So, so I would,

SPEAKER_00: I would say pretty much all of the managers we back are, are, are, are at that premium carry level and, and they deserve it because of their performance. The, the way that, the way that we look at it ultimately is what's the net, what are the net returns back to us? And, and if the net returns back to us, um, stack up, then, you know, we're happy to pay, um, the fees and the carry that, that you need to pay in order to, to, to access that performance. So I, I think you can, you can get very, um, fixated on paying premium carry for the wrong reasons. Um, the, the, the challenge with premium carry is, is when it doesn't come with strong performance. So my preference would be to see a manager that said, you know, we're starting at a 20% carry. It goes to 25% at, you know, when we return this, it goes to 30% when we return that, have your full catch up. But that means that interests are then aligned, you know, if you do well, I do well, if I do well, you do well that I'm, I'm happy

SPEAKER_100: with that. But the reality is, you know, for the very best managers in out there, they don't need to offer those terms to investors so that they're not going to do it. Of the terrific 12, how many

SPEAKER_104: are premium carry ballpark? I would say all of them. There you go. So you, you, uh, you like to stay in luxury hotels and the price is the price, uh, and you get the experience to pay for.

SPEAKER_00: The bigger thing for me though, is, is, is less around the fees and carry. It's more about fund size. And I think one of the challenges we've seen with, with the cohort of managers that we do back is, is like everybody else in the, in the industry, they have scaled their fund sizes over the, the last, um, two or three cycles. And now you start to, the challenge for us, it goes back to the equation we were talking about earlier, you know, exit size versus ownership percentage versus fund size in order to get those fund returners. And so one of the things I'm hopeful for, and we are starting to see it a little bit, we've got one or two managers that are coming back with new funds in the market today. And they are right sizing their fund sizes to some extent. And so I would be, for me it's, it's less capital is better than more capital. You know, we've seen that with companies, the whole issue around what Southbank was doing. You know, I grew up in the venture industry in the late nineties, where a lot of funds increased their assets under management pretty drastically, and it didn't work out. And so my, my default position is, is in venture, less capital is better than more capital. You need to have enough. You need to be able to do the math we were talking about, you know, 30 shots on goal, be able to lead those A rounds. So there is a minimum size that works. But I also think there is a concern that if you get too big, you just become a capital allocator rather than a venture investor. And it goes back to what are the sort of returns your LPs are looking for. If you're then getting the big checks from the sovereign wealth funds, then they're probably

SPEAKER_100: happy with that median venture return. We need to do better than that.

SPEAKER_50: Not all LPs are looking for the same thing. Some would like to get the average because the average is better than other averages and they want access to this. And average, like as we started our

SPEAKER_21: conversation average with the chance of alpha is a great concept for them. And you did see that with Andreessen Horowitz go into 10 billion plus under management, 20 billion assets under management. At least that was the perception here in the Valley. You know how that's turned out. I don't have their fund returns and except maybe for the press, you know, dunking on fund managers. They don't understand the J curve, which I don't know why, but you may not going to believe this Dave, but somebody didn't understand somebody on the internet made a mistake and I felt obligated to go fix that and correct it. But journalists were all looking at like Andreessen Horowitz leaked data or something. And that was

SPEAKER_83: like misinformation about, well, this is year three or four of that fund. And I'm like, the fact that that fund has any IRR, do you know what the J curve is? And just started asking these folks, you know,

SPEAKER_142: if you're a journalist, you don't know what the J curve is. Listen, what we do is unique in the world. And so, and the J curve, did the J curve go away for a decade? Is that the problem in our industry?

SPEAKER_00: Yeah, it did. And it was interesting. Every three months we do a review of all of our funds. We just did it yesterday. And what was really interesting was that when we were looking at the investments we've made in our current fund, which is fund 16, 90% of those investments were below one X, they were in the J curve. And that's the first time we've seen it for probably six or seven years. The J curve prior to that had been compressed and in some instances had disappeared altogether. Whereas this time round, it's back. And while that might seem counterintuitively for me, that's a positive. Absolutely. Because it means less money's coming into the industry. It's harder to raise capital. Only the best companies are going to be able to do that. So the level of competition for the best companies is going to go down. Their ability to be more capital efficient because they're being forced to do more with less is increasing. Their ability to recruit the best talent is increasing because that talent isn't as thinly spread. So the fact that we're seeing a J curve in years one, two, three of the investments we've

SPEAKER_146: made recently, I take as a positive. Yeah. Constraint makes for great art,

SPEAKER_83: you know, and deadlines make for great art. This is something I've learned in my career. I was listening to an interview with Bob Dylan and, you know, arguably blood on the tracks. Okay, I'll go back to Bob Dylan today. I don't know why, but yeah, blood on the tracks. I mean, a seminal album and they were, you know, asking him like, how did, you know, he hit this magical album, you know, tangled up in blue shoulder from the storm. This is really great, great tracks on there.

SPEAKER_148: And he said, yeah, you know, Columbia records, I owed them a record and they were going to sue me and I had gotten a big advance. And so I had to give them a record. And so my manager said, Bob, you're going to have to pay a big settlement if you don't get that record out. So I went to the studio and I recorded it. It's like all these top reporters, absolutely crestfallen at the

SPEAKER_97: inspiration. Blood on the tracks is, you know, had to return the advance or had to get this thing out the

SPEAKER_63: door. Yeah, no, it's, it's, I was going to say it's, it's crazy. It's, it is, it's crazy. You

SPEAKER_101: know, the, the, the, what, what it takes to, for that inspiration to happen. You just never know.

SPEAKER_83: And then I remember at the turn of the century, uh, the digital camera came out, the Sony VX 1000. I had met this kid, Bennett Miller. He did a documentary called the cruise at Sundance. And there was this big debate. Well, now, because you weren't using film socket, you didn't have to get it developed that we would see this incredible Renaissance where anybody could take this VX 1000

SPEAKER_21: shoot on digital and you could do a hundred takes. So no longer did you have to worry you would get better art because, and it turned out the constraint of having to ask your investors for more money to develop more film, to get an extra day of shooting, the constraint of only being able to shoot for 10

SPEAKER_83: days on an indie film or, you know, 45 days on a medium sized film or whatever it is constraint

SPEAKER_21: made all of those artists, directors, set designers, actors focus. And that's my perception of what's happening right now is the constraint of LPs constraint with the founders having only a certain

SPEAKER_83: amount of money to deploy. Everybody gets a smaller budget. Everybody gets really focused, make better art, make better startups. It's just, yeah. It's clear as day to me, you know? Yeah. Yeah.

SPEAKER_02: No, it's, it's, it's, it's really interesting. I just, just one comment on, on the sort of fund sizes

SPEAKER_00: and, and, and what you were saying about, about a firm like, like Andreessen, that again, there's a, there's a, there's a, there seems to be a bit of a narrative growing around, um, sort of VC Twitter that it's, that it's, it's impossible to get fund returners on a billion dollar fund. So we just had a look at our data, um, to see how many, um, how many times we've had one company return a billion

SPEAKER_40: dollars back to a fund. Um, and, and there's been, uh, nearly 50 instances, five, zero, five, zero.

SPEAKER_159: Wow. Yeah. Five. I can name them. Yeah. It's Facebook, Uber, Robin hood. Yeah. I mean, it's hard to get a billion dollars. What's app. Yeah. You can coinbase. Coinbase. Sure.

SPEAKER_162: Uh, Airbnb, Roblox, Pinyodo, UiPath, Slack. Uh, some of them are still unrealized. So, you know,

SPEAKER_83: Databricks, Figma, Stripe, Stripe comes to mind. Yeah. Yeah. It makes sense when you think about it. It's so hard to hit a deck of corn. That's the other thing, like a $10 billion company, everybody thinks that they're, I think because of the paper corn, you know, I just had Aileen Lee on the pod three weeks ago. I mean, it's such a bounty of knowledge on the spot. Uh, and, you know,

SPEAKER_21: she was talking about the paper corns and we were trying to estimate of whatever number of unicorns out there. She thinks it's like 40, 50% are not going to reach unicorn status again. What do you

SPEAKER_59: think it is? Unicorns from the last cycle that will not get billion dollar evaluation again?

SPEAKER_02: Yeah. I mean, I, I, I, I don't have any visibility into putting it into putting a number on it. I think,

SPEAKER_00: I think broadly, I, I, I think there's a lot of companies out there that are, that are way over valued. And one of the things we look at is, is, you know, those loss ratios. And we talked about sort of somewhere between 50 to 60% of companies not returning capital back to the funds that back them. We've seen those numbers be a lot lower in, in recent vintages. And, and my sense is that they are only going to go up. Um, so, you know, whereas for the last four or five vintage years, you know, we might be at 20 to 30%. Ultimately, I think they're going to hit those 50 to 60%. So, you know, if you're backing that into, you know, what does that mean for, for companies? I, I don't know what percent of companies are valued at a billion dollars out of the cohort that was funded over those years. So it's difficult to give you a percentage of how many of them are going to

SPEAKER_77: disappear. But I think broadly, we have to expect that things are going to get worse before they get

SPEAKER_142: better in the seed stage. It was unbelievable to me how often a founder would be able to get a bridge,

SPEAKER_83: you know, for 18 months, 12 months, and they didn't have product market fit. And this was just a new startup in the same shell of the past one, you know, is basically a hard pivot or soft pivot, but generally hard pivots. And then something happened last year where the founders themselves and my belief is when I learned from rule off, which was I give up when the founder gives up, or, you know, the day after the founder gives up, that's my, that's when I decide to give in and accept the reality that the startups is zero or whatever, we're doing aqua hire, whatever it is, they shut down.

SPEAKER_106: Yeah, we saw them all come in the last year. And, you know, we had to like, sit with the founders, recognize the effort they put in for two, three, four, five, six, seven years, and that it was going to result in a zero. And I give them all a talk, you know, I said, Listen, this is like the greatest success that you tried. And all I ask in this failure is two things. One, we shut down properly, so that you don't have tax issues and employees, everything. So just let's, let's do this properly, because I've seen this blow up in a bad way. So let's wrap up gracefully. And then number two, can I be your first phone call? When you have your next idea? It's the only two things I ask. And then let's have a dinner and you know, 30 days or 60 days, and when you lick your wounds and feel good, and let's figure out what we learned and what you want to do next. And you want to gig somewhere, I can help with that. If you need a vacation recommendation, I can tell you where to go skiing. And I just kind of like really focus on that moment, because man, having been there myself as an entrepreneur, it sucks. It really sucks to put the startup to bed. You know, I hate to say it, you know, trigger anybody, but it's like putting down a dog or something, you know, like, that feeling of like, oh, it's eminent pain and suffering I'm going to have. But I find so many VCs and so many capital allocators don't own that moment. They just disappear from the board, and they stop talking to the founder. And I just thought, well, if you want to be there.

SPEAKER_02: Yeah, one of the things that I think will be interesting again, over the next year or two,

SPEAKER_00: is it feels like we've, there's clearly been a huge influx of new entrants into the VC space, whether they're, you know, solo GPs or sort of super angels. And, you know, we haven't invested in any of them, but we've talked to a number of them. And it does feel as if there is a, you know, clearly not all of them, but a significant percentage that are, you know, almost seen as a lifestyle choice. They're doing it because they can raise a little bit of money from friends and family, and they can fund their friends' companies, and they can be everyone's favorite

SPEAKER_77: person. Yep. And, you know, when the music's still playing, you know, it's great. But when you have to tell your friend that you're not going to fund their next round, and they're going to have to lay off half their company, and actually, they're probably going to have to shut their company down, then it suddenly becomes a very, very different business. And so I think it'll be

SPEAKER_00: really interesting for us to see what happens to that group of investors that came in towards the top of the market, thinking venture was an easy asset class, when you do start to have to have those

SPEAKER_108: really, really difficult conversations. Yeah, they're just not built for it. I'll be honest,

SPEAKER_83: I'll call it what it is. You know, like, when you have to have those hard conversations, some people are built for it, some people aren't built for it. And I just don't think most people are built for it. I'll be honest, this is an extreme pursuit on the founder level, on the GP level, on the LP level, and each person, it's a little bit less extreme, but it's still an extreme pursuit. And most people are not built for the conversations we're talking about here, and how hard it is. And then I can tell you, if you do happen to be lucky enough to make it to your third

SPEAKER_106: or fourth fund, guess what, now you got a track record. Now you have every bet you've ever made, and people like yourself, who love to dive into that data. And then you will face the reckoning. You gave an extra 50k to this company, instead of giving it to a new company. Why? Oh, well, I wanted to support the founder. And this is something where I've changed my attitude 100%. I'm telling founders, the reserves are for the top 5% of performers. And then my team, because they have big hearts, and they love these founders. I really think we should put something in, hey, can we just put 50k, can we put 100k? And I have to tell them, hey, well, that 50 or 100 could go

SPEAKER_21: into the top 5%, who we know are going to on average return at 2050x. So do you want that 100k to turn it to 5 million? Or do you want to put 100k into something that we are relatively sure will just extend its life for 12 months? And this is, you know, again, not to use graphic

SPEAKER_83: analogies here. But if you know, this is, you know, person's going to die, we're doing triage. That's the way to say it. And you know, triage is not a pretty business.

SPEAKER_00: Yeah, it's interesting. It's super important as well. Because one of the different ways we've cut our data is, you know, we've talked about what it looks like in terms of the, you know, the percent of companies that don't return capital and or do 5x. We've also looked at it by the cost basis. So how much capital actually goes into each of those companies at those different levels. So, you know, companies that return less than 1x, companies that return 1 to 3x. And what we find generally is that the underperforming managers tend to put more capital into their worst performing companies. So their percentage, so let's say they had 50% of their companies fail to return capital, they could be putting 55 to 60% of their capital into those companies. Whereas the opposite is true for the best performing funds, they actually put less capital into their worst performing ones, and they put more capital into their best performing ones. So if you were looking at, say, 5% of their companies were 10x multiples, they might have been able to put 7, 8, 9, 10% of capital into those 10x companies. And it's that nuance of portfolio management and portfolio construction,

SPEAKER_183: which I think you have to be a real kind of venture geek in this industry to really appreciate.

SPEAKER_76: Yeah, it's such a good point, man. I think it's like, it's the one for me as a manager,

SPEAKER_83: that along with doubling down, which this falls into, really the most important of my game that I have to get better at, you know, and it's, you have, it's great about talking to you and, you know, appreciate your time and the conversations we had off the program is, you can only get better at the game by studying your performance. If you're not willing to videotape yourself, putting up three point shots and have people say, listen, you know, this is what you need to change in your shot or like review game tape, you're not going to get better. And you're not going to win. And then if you don't win, you don't, you know, you may be able to fake it for two funds, but you can't make it for three or four, you know, you got to bring it. And I know the reason why these managers give it to the bottom half of the performers instead of the top half. It's because the bottom half are the squeaky wheels that run out of money that don't have a

SPEAKER_106: competition to buy their shares. So if you were to compare the bottom to the top, the top is got tons of people throwing money at them, and they may not even come to you, or they may ask you to waive your pro rata, in which case you got to fight for your pro rata, which I've become an expert at, you know, dealing with certain firms, I won't say which ones that have tried to screw me on my pro rata, but people follow me on Twitter might be able to guess literally being in standoffs with one particular fund twice, and they know who they are. But then, you know, you're, you got the other group, which is struggling to get capital. And so they ask you for capital, and founders are self-selecting for

SPEAKER_83: charisma, self-selecting for spinning a yarn, the good ones, at least, you know, but I think all of them. And so the bottom half that probably should be shutting their companies down, and they're just so good at, hey, I need you, Jake, how you supported me early, I need you to support this round, I need you to lead this round. And we don't lead these rounds, we've already made two bats on the company. I find having that conversation on the way in, two or three times with the founder, how we do our follow on investing, has helped us deliver the news, you know, a little bit more crisply later on.

SPEAKER_50: Hey, remember when we told you we only have reserves for the top 5% of performers? Here's what that looks like right now. It looks like 4x revenue year over year. What was your revenue growth?

SPEAKER_02: It doesn't, it doesn't help either that there are so many examples of really successful companies

SPEAKER_00: that have had those near-death experiences, that in the back of your mind as an investor, you're thinking, that's a good point. Just one more round, just one more round, we'll get them over. And because every company that you invest in, you have high conviction on, every founder you back, you believe is going to be super successful. And so to actually flip the switch and say, you know, it's time, it's time to call it a day, because for that founder, their most precious thing is their time. It's not the capital, it's their time, because they have a finite amount of that. And if they're spending it trying to, you know, knock their head against the wall on something that's not going to work, then they're missing doing something that could be really

SPEAKER_76: impactful. Yeah, it's just such a good point. I didn't even consider that one, because you also have

SPEAKER_83: the fund manager, the GP is like, I just want to see one more card. Maybe my hand will improve. And you know what? Yeah, sometimes it does. Sometimes you hit runner runner, and all of a sudden your flush comes in, or you hit your straight or you hit your trips and oh, yum, yum. But you do have to put a percentage on that. Listen, Dave Clark, amazing to have you on the program. I'm putting you on the schedule right now, you're going to be like one of the top guests already of 2024. So we're going to do our year end wrap up in December. And can I can I put you on the schedule for a December show? Yeah, that would be allowed. All right. Thank you, my friend. And we'll see you all next time on this week in startups. Bye bye. Hey, everybody, I talked to a lot of founders here

SPEAKER_73: on this week in startups and as an investor, and they tell me the same thing over and over again, they want to spend time together. So we've been working here on a new meetup program, we call it founder Fridays and founder Fridays are an event by founders for founders. This is an event that is hosted in cities by people like you. If you're listening to this week in startups, you're a founder. Now why is it important for founders to get together? Shouldn't you be at home just focusing?

SPEAKER_71: Shouldn't you be in the office just focusing on your startup? Well, if you get together with other founders, true founders who are in the arena building like you are, you're gonna get a lot of value from that because you can trade notes about what's working at your startup and what's not working. The truth is, if you're facing a problem, there are hundreds of founders out there who have probably solved it already. And instead of you banging your head against the wall, when you sit

SPEAKER_73: there and you talk to three or four founders, somebody say, Oh, you know what, I had that same human resources problem. Oh, I had that same technical problem. Oh, I had that same marketing problem. And they might tell you about a tool or a service that'll solve that problem for you. This happens over and over and over again, when I do founder Fridays with our portfolio companies. Now we're going to give you that same experience. But here's what I need you to do. I need you to host this in your city. So you're going to go to this week in startups.com slash meetups. That's it. And you'll see a landing page where you can sign up and you can say, I want to host in my city. Now your city may already be hosting. So you can just join that person. We're using a wonderful piece of software that we've invested in called river. You can sign up for a river account just by going to this week in startups.com slash meetups. And we're going to do these on a rolling basis. You can join an existing meetup. If it's already occurring in your city or you and one or two other founders can start your own, please go to this week in startups.com slash meetups. If you are a founder, this is for founders by founders. We vet everybody to make sure you're a founder. And if you host it, it's a non-commercial event. So this is your chance to connect. Go to this week in startups.com slash meetups.