SPEAKER_00: Today on This Week in Startups, Satya Patel from Homebrew joins Jason for a really deep discussion on the state of VC, generative AI's impact, why Homebrew converted to an evergreen fund with their own capital, what rules he and Jason have for investing in founders and why they might break them, and so much more. It's a great episode. Stick with us. This Week in Startups is brought to you by Mercury, where innovation meets peace of mind. Now more than ever, startups need a safe place to put their cash. Mercury offers a simple way to manage bank risk and protect every dollar, with up to $5 million in FDIC insurance and a money market fund. Visit mercury.com to apply in minutes. Squarespace. Turn your idea into a new website. Go to squarespace.com slash twist for a free trial. When you're ready to launch, use offer code twist to save 10% off your first purchase of a website or domain. And Clumio. When you're building a company, don't let backups and compliance requirements distract you. Let the data protection experts at Clumio help with immutable air gap backups that put compliance on autopilot. Visit them at clumio.com slash twist to start a free backup or sign up for a demo.

SPEAKER_02: All right, everybody. We have an amazing guest on the program today. He's been on the program before,

SPEAKER_03: but generally busy working, investing in companies. And we ask them every year and we get them every two or three. And that gentleman is Satya Patel, not Satya Nadal, a different Satya. There's two great

David Friedberg: ones I know of in our industry. And Satya Patel with us today is the co-founder of Homebrew. Homebrew is

SPEAKER_02: a venture capital firm. I think you've been at it for about a decade, right? Yeah, that's right. Same as me. I think you're on your fourth fund, third or fourth? Fourth fund. Fourth fund, just like me.

SPEAKER_07: I just started raising my fourth fund. Um, and, uh, Satya worked at YouTube. I worked at Google and

SPEAKER_13: Twitter. Google. You think about Hunter, my partner who worked at YouTube. Hunter worked at YouTube. I know

SPEAKER_07: you both, did you meet there? Is that where you were? Yeah, you did meet at Google. Right. So, uh, one of you was at YouTube, uh, Hunter, and you were at Google proper, uh, and you've invested in dozens of companies. And let's talk a little bit about Google at the start of this. What did you learn most at Google that you carry forward? And then we'll go to the second question, which I don't know if you've heard free Berg, who also was there, uh, at Google. I don't know if you guys. Yeah, of course, we overlapped and we worked together. Oh, fantastic. So you did. Um, and he's been a little bit, um, I don't want to say critical, but his observation has been big company, maybe playing on their heels a bit, maybe all this antitrust stuff. So I'd love to get your assessment of Google through the light of chat chippy T versus Bard versus Bing and the future of Google, but also that those early days and what you learned and then how that applies to company building today as you invest and welcome back to the

SPEAKER_19: program. Thanks. And thanks for having me back and being patient with me. Uh, we try to focus our time and energy on our founders. So, uh, we don't often get to talk about what we do, but, uh,

SPEAKER_23: appreciate you having me on once again. I play the long game with the great guests. Indeed. You just ask every six months until you tell us to stop asking. Well, you got the right Satcha if you wanted the

SPEAKER_19: great guests. I mean, the wrong Satcha if you wanted the great guests, but I'm here anyway. Um,

SPEAKER_25: so let's see. Uh, yeah. And I was worried you were going to want to spend a lot of time on Twitter, which I don't want to do, even though, uh, I have fond memories of my time there as well,

SPEAKER_28: but, um, let's see at Google. Yeah. So the early days of Google were incredible because the people

SPEAKER_25: who joined there in those days didn't join because they thought they were going to make a boatload of money. It wasn't clear like what Google was going to become. It was exciting because people

SPEAKER_30: joined one because during the interview process, or as you were talking to the company, you met

SPEAKER_31: the smartest people you'd ever met before, uh, who you knew you could learn from and that you wanted to work with. And two, you really believed in the mission, this mission of making the world's

SPEAKER_25: information universally accessible and useful. And, uh, the company was created in such a way that there wasn't a lot of management oversight. So when you joined the company, you were kind of let lose to go do work. Um, and so all of that led to a few things that I think about in the context of company building. Uh, one is the importance of culture and values early in the days of company building. We're big believers that that culture and those values, if you're, uh, thoughtful about them and intentional about them, uh, can be really powerful tools for long-term value creation and that whether you're intentional or not, the values and the culture of a company gets set within the first 20 employees or so. So you can choose to be intentional and be deliberate and build a culture that's defined and, uh, kind of authentic to the founders, or you can choose to be unintentional and something's going to get built anyway, uh, which you may not have any control over influence

SPEAKER_30: or influence over, uh, and may not reflect the will or the personality of the founders. Um, and we think there's a lot of power in the former and being intentional about it.

SPEAKER_25: So that's number one. Uh, number two is that you can define the culture and values, but none of that

SPEAKER_30: matters if you don't hire people that match up with those, that culture and those values. And so the quality of the first people that you hire, uh, and the fit with, uh, the culture and the values, and really a lot of that translates to alignment with the mission of the company, uh, is a really strong, you know, powerful lever in the building of startups. And then the last thing is,

SPEAKER_25: you know, a culture of trust. Um, we think a lot about that in company building as well.

SPEAKER_35: And what we find is that if you work with people who assume the best in what, in the decisions that you make, uh, in what you say, um, and give you the opportunity to kind of go hang yourself, right? Like it's not a culture of no, it's a culture of yes. Those tend to be the companies that, uh, move the

SPEAKER_25: fastest, learn the quickest, um, and have the highest likelihood of success as well. Yeah. And Google had a well-defined culture and set of values hired really intelligently. And for a long time was a place where everyone always said yes. And you rarely heard, no, um, you could take action and apologize after the fact. Um, and for me, those were the things that stood out about the early days of Google and things that we think about now at homebrew in the context of company building and the advice and counsel that we provide to companies at the early stages.

SPEAKER_37: And you did something radical around the third or fourth fund. You decided to use your own capital

SPEAKER_03: and not raise from outside LPs. Yeah, this was, yeah, I was shocked and impressed because I've never

SPEAKER_41: seen anybody do that. How has, when did you start that? Was it fund three or four?

SPEAKER_25: Fund, fund, fund four. Uh, so we made the decision in late 21, when we had to make the call on whether we wanted to raise a fourth fund or not. And so it's been about 18 months or so since we've been

SPEAKER_44: operating with the new LP model, which is no LPs and just our money.

SPEAKER_47: Uh, scary, uh, intense. Did you become a better investor? Are you more risk taking or less risk

SPEAKER_28: taking when it's your own money? Really good questions. Um, I guess at a high level, we'll see if it's a good decision or not. It's kind of the dumbest

SPEAKER_25: economic decision we could have made in the short term, right? We don't have a large fund. We don't have management fees. Uh, we are a hundred percent putting our capital at risk. So tough to know whether it's a good decision economically, at least in the short term, but in the long term, you know, our view is as venture capitalists, you have to believe that you're good pickers, right? Like you've believed that about yourself for a long time when it was your own money

SPEAKER_35: and then scout money and then the fund. Um, and if you believe that, and if you are fortunate enough to have the financial wherewithal, why wouldn't you want to be a hundred percent of the LP, right?

SPEAKER_25: That's the best economics you can have, um, uh, in terms of return is if you're putting your own capital work and you're a hundred percent of the LP and you get a hundred percent of the returns. So assuming that we're reasonably good at this, then in the long term, it should work out better for us. Uh, now to answer your question, are we more risk seeking, uh, has it been more stressful, like those kinds of things? I'd say, uh, one, we arguably are more risk seeking.

SPEAKER_30: Um, and the reason for that is because when you don't have a fund, you don't have to worry about check size. You don't have to worry about ownership. You don't have to worry about whether this investment can return the entire fund. Um, and as a result, if you're just thinking about that investment as an individual investment, and can we earn a return on this particular company,

SPEAKER_25: you can afford to do things that you wouldn't be able to do within this strategically defined box of a fund. And so, you know, by definition, I think we can take maybe not more risk, but different kinds of risk than we took before.

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SPEAKER_47: The structure of a fund is such, if I can unpack that, have you unpack that first, is that you're trying to put maybe 30 names into a fund, 30 logos, as we say, 30 companies, and then have one return the entire fund by hitting 40, 50, 60X, right? And you have some dilution maybe along the way. So a 50X, 30X, 40X, whatever it happens to be, can return the fund fees and then get you into the black. You don't have to think that way. That's right.

SPEAKER_57: Right. In a fund, you have to live by the power law, right? And we don't have to think about that.

SPEAKER_25: We'd like to, of course, have investments that return 50, 100, 200X. But if we feel like we can earn three to 10X on an investment, we could choose to take that risk if we want. Because we're not limited to just the seed stage anymore, either. We can invest at any stage we want as well with our own capital. And historically, Homebrew is a seed stage fund and it still primarily is, but we have more flexibility in terms of when we enter an investment as well. And as a result,

SPEAKER_34: our return expectations may be different.

SPEAKER_03: And you are going to continue on in terms of you don't have to, you're not a slave to fund dynamics. Amazing. And then what else?

SPEAKER_44: And then in terms of kind of the stress,

SPEAKER_30: I think it's more stressful to manage other people's money than it is just to manage your own. So sure, we're taking risk, more risk because it's our money, but

SPEAKER_35: the responsibility and the burden of managing other people's money and having to return, you know, ideally 5X in a seed stage fund, and hopefully a lot more. That's really stressful. And it also when you have a fund and other people's money creates this feeling that you need to be competing for every opportunity out there, right? Like you can't miss

SPEAKER_66: the one that could end up being 100 or 200X returner.

SPEAKER_47: You're a slave to the power law. If you miss the Uber, if you miss the YouTube, whatever you miss, that's the defining moment of your career is the omission.

SPEAKER_35: That's right. Right. And again, with our money now, there's no FOMO, right? There's no fear of missing out.

SPEAKER_25: If we happen to miss an opportunity, it's not like we're failing all these people who gave us money. We're failing ourselves, certainly. But it's just not the same level of stress as when you have other people's money, especially other people's money like we did. We had institutional money from, you know, endowments and family foundations who are trying to do really good work in the world. And when you have that kind of responsibility and that burden and that opportunity to contribute to their legacies, that's a stressor. So we don't feel that anymore.

SPEAKER_72: How did the first couple of funds do? And was this decision based upon the returns of those funds,

SPEAKER_47: good or bad? And how did that your performance then in those first three funds contribute to your thinking for fund four? And then how much of your time on a percentage basis was taken up by fundraising management, just overall over the last decade, if you had 10 years, how much of your own hunter time

SPEAKER_78: was actually managing the LP base and raising from them?

SPEAKER_25: Yeah, listen, we started the fund 10 years ago, at the beginning of the greatest bull market in history, right? So we were really fortunate with the returns from the fund. But the returns of the fund didn't have anything to do with why we decided to make this decision. That was more a strategic decision about what we felt was necessary to be competitive in this market and how we wanted to

SPEAKER_30: spend our time and we can get more into that if it's interesting. But we had the financial wherewithal

SPEAKER_83: to be able to do what we're doing because of the returns of the funds. But that wasn't the decision

SPEAKER_35: maker. And then in terms of how much time we spent on things tied to having a fund, fundraising,

SPEAKER_25: fund administration, reporting, all those kinds of things, it was probably a good 20% of our time, at least, if not more. I mean, that even with a outside fund administrator with outside fund council, you know, our view is like, you're always fundraising as a fund manager. Yeah, right. You're always building and maintaining LP relationships. You're trying to do a good job of being transparent about the work and reporting. And of course, you have to provide financial information and annual audits and all those kinds of things. And so it is time consuming. It's one of the underestimated things about being an investor that a lot of people who are angel investors or

SPEAKER_84: want to be fund managers don't appreciate or understand is how much time you devote to things

SPEAKER_86: that are unrelated to investing. Probably, I would say on average, people spend 20%.

SPEAKER_03: Yeah, maybe 30%. Yeah, depends on where you're at in the cycle. So let's go back to Google for a second. Amazing learnings that you brought forward is, if there is something challenging about running Google today, what is it? And then how does having this incredible money printing machine, then become, in some ways, a blocker for pursuing opportunities, specifically, this AI chat, you know, chat bot sort of functionality? And have you been thinking about that? And where does it lead

SPEAKER_43: you? Yeah, probably not as much as Friedberg. But I'd say it becomes a huge challenge. You know,

SPEAKER_25: one is, you develop a culture of no, as I talked about, kind of the opposite culture in the early days. Even that, I would argue, kind of 8,000, 10,000 employees, Google became a place where the default answer was no, whether it was, you know, a manager signing off on a new project, the executives kind of green lighting an effort, wanting to make a small change or release an experiment, like all those things became much more difficult to do. And certainly at the scale that they're at today, when everybody's job has been thin sliced, right? Like when you're a young company, and there are a few people like everybody's got lots of scope. And over time, like job rules get defined really thinly. And as a result, people are very protective of their jobs and their

SPEAKER_35: responsibilities. And so it becomes easier to elbow people out and say no. So I imagine like,

SPEAKER_25: when that's the case, and you're trying to protect your fiefdom, it stifles innovation, right? No

SPEAKER_35: stifles innovation. Yeah. And so that's one thing. The second thing is at their scale, with the money making machine that they have, like anything that potentially cannibalizes the existing business is really difficult to invest in. And certainly, AI and chat GPT and all these things

SPEAKER_30: can have a profound impact on the core businesses, especially one that's reliant upon

SPEAKER_27: in some ways, the volume, in lots of ways, the volume of searches that happen, right?

SPEAKER_47: Do you see chat based, you know, back and forth AI chat interfaces as a replacement for Google search and

SPEAKER_03: for, you know, hey, here's some data plus some links to go deeper? Or do you think it's complimentary in some ways? Do you? Are you yourself using chat GPT more than Google searches is replacing some

SPEAKER_97: number of searches for you yet? Yeah, I do think that the challenge with it in relation to searches

SPEAKER_25: one is going to be in both those categories, there'll be types of searches that chat GPT is just going to be better for. And so it's going to encourage entirely new types of searches, you know, things that you maybe not wouldn't search for before, like you will search for now with with chat and AI. The second will be areas where replaces existing searches that you already did. And now you'll get a better result. And third will be where it complements them. And so there are, I wouldn't say

SPEAKER_30: like, I've been more playing with chat GPT and some of the other AI platforms out of curiosity. So I wouldn't say that they're a normal course of my behavior yet. Um, but I can certainly envision

SPEAKER_27: scenarios in which they can be better. So for example, I've been playing with lots of travel related

SPEAKER_47: searches. Travel is always one of those great searches, or great ways to judge a service like search or this because it's, it's ever changing. There's so many facets to it. Yeah, unpack what you

SPEAKER_97: learned. And travel is always one of those areas, like every new founder, when they're thinking about

SPEAKER_25: their first business idea, somehow wants to solve like social travel or making travel better. And

SPEAKER_35: it's been really difficult to do. And so it seems like one of those things that machines should be

SPEAKER_25: able to do better or in interesting ways. And so I've been playing with these products and comparing results related to travel. But that's a category of searches that does exist today. I would argue that most consumers would say that the experience is not great. And that that's a category in which certainly traditional search can be complimented, but I think potentially replaced in some powerful ways. So that's an example where and then as you know, travel is a very monetized category. Oh, yes. So that's an that's a vertical in which I have to believe Google sees itself in real risk. If it doesn't address that with chat driven products. And they had that to a certain extent,

SPEAKER_47: if we look at the mobile, how disruptive mobile was, you used to do a search, maybe in Google for travel, or for shopping, and then or for a restaurant, which is kind of related to travel. And then you said, you know what, I'll just open Uber, and I'll do my travel there. I'll open Southwest, I'll do my travel there. I'll open Amazon, I'll do a product search and a purchase there as opposed to going to Google.

SPEAKER_78: And of course, if I'm looking for a restaurant, do I need to do a Google search and then click on Yelp? Or do I just open Yelp? So they did see some headwinds there. But they still grew because they had, I guess, all this other, I guess the search pies kept growing, right? So is there an argument here that even if this happens, even the chat AI interfaces, they could be monetizable. Number one, you could figure out a way to embed links in there or close the transaction at the end of the thread, hey, do you want to buy this? And the default would be Expedia or or bits or whoever it is. So it seems like it still results in a transaction. So would it is there an argument that it won't cannibalize it that it'll just be a better experience for users that still results in a

SPEAKER_25: transaction? I think if you're Google, that's what you're hoping, right? Yeah, that you can build it in such a way that Google because consumer behavior is hard to change still becomes the default place

SPEAKER_30: you go to start your AI driven chat experience or your search, however you want to describe it. Because people are used to going to Google. And if you can deliver a good enough experience,

SPEAKER_25: maybe people don't switch, right? Consumer behavior is really hard to change, right?

SPEAKER_30: Most people think of a particular product used in a particular way, right? Like one use case addressed really well for one type of problem. That's why we have different apps for Uber versus OpenTable versus Orbitz, right? People don't use the same service for all of that, unlike in other parts of the world.

SPEAKER_25: I think people think of search and they think of Google. So the reason that search works at Amazon, I would argue they were able to build search there is because people thought of Amazon as shopping. And search is helpful in the context of the shopping use case. But I don't think people went to Amazon to start searching. Google has that behavior. And so can they harness that behavior and deliver a good enough AI driven experience that

SPEAKER_106: makes it so people are less likely to switch to other search or chat services.

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SPEAKER_47: You could very easily, uh, drop, uh, a Google, uh, the Google's chat results, AI chat results into a search. You could do a search on YouTube and you have the entire corpus there of YouTube's, uh, transcripts. Do you believe, uh, that these pools of data will be balkanized, sealed off from each other. And then Google could have an advantage in that. My gosh, they have all the, that YouTube information. They have all that Gmail information, Google docs information and other

SPEAKER_78: places like say chat GPT wouldn't even have access to it. So what are your thoughts on the pools of

SPEAKER_47: data being the new oil, Reddit, Twitter, and Quora? I believe we're all used to train chat GPT. I believe all of those have now said, Hey, it's nay on the using us as a training data. So that stuff's

SPEAKER_78: going to have to be ripped out of GPT for. So based on what, you know, and we live through in terms of fair use of content, what do you think the outcome is here in terms of who gets to scrape whose data

SPEAKER_30: and train their model on it? Yeah, it's a great question. Um, I know you guys have talked about this a little bit already, but you know, generative AI and copyright law and who's the real owner of IP.

SPEAKER_31: Uh, what happens when you mix these things? Um, it's a really fascinating question, but I do think there's something to be said for having access to proprietary data that lots of people care about,

SPEAKER_30: right? If, uh, Google is able to maintain the proprietary nature of YouTube data of, uh, certainly your G drive data, your Gmail data, um, and help you have a personalized algorithm

SPEAKER_25: based on your private data, that's going to be really powerful in terms of an experience, right? Uh, but that, you know, it remains to be seen whether that personal experience is a compliment or a substitute for a broader search experience. Um, but I do think that some of, for some of the most interesting kind of areas for innovation and potentially for investment are,

SPEAKER_30: how do you take the foundation models and combine them with proprietary information? What's the infrastructure needed to do that? And then how do you make that accessible in a product

SPEAKER_31: experience that is differentiated because of that proprietary data? Um, you know, I think that's

SPEAKER_47: where there's room for innovation. Yeah. This does seem like the, the big opportunity. You've got chat GPT, which is kind of like saying cloud computing, if we want to say an analogy or mobile

David Friedberg: operating systems, and then what do you do with it? Well, here's my data set. Here's the natural language model, or here's stable diffusion, whatever it is images. So here's my data, here's a model,

SPEAKER_03: and then here's some software interface, you know, uh, to wrap those two things together does seem like a unique investment opportunity. Are you seeing, uh, any way to invest in the area or do you think a lot of the, because of the pace that chat GPT is going and Bard is going, uh, at Google that a lot

SPEAKER_78: of these ideas will just be subsumed into those motherships? Well, I think every enterprise of scale

SPEAKER_27: is going to want to be able to incorporate its proprietary data into these LLMs or foundation models, right? So there was an announcement of an investment in a company called Pinecone

SPEAKER_30: that a lot of venture firms in the Valley competed over entries and ended up, uh, winning it, I believe. And Pinecone is a vector database that allows for the aggregation of all kinds of different information in the context of building these models. Um, and that kind of infrastructure is going to be really powerful and helping bridge the gap between models trained on public data and proprietary data and leading, and then combining those two to develop a proprietary model effectively. Um, and so you can see that, you know, companies like Salesforce, uh, will want to have a proprietary model, right? And, and, and sounds like they're working with, uh, opening already, uh, and chat GPT to

SPEAKER_25: help build the foundations of Einstein, which is their AI platform. Um, and every, you know,

SPEAKER_31: uh, Disney is going to want its own foundation model, especially around generative AI and its IP. Yeah. Um, which is going to try to protect really hard.

SPEAKER_03: Can you imagine like kids going and being like, you know what, make yourself into a Jedi, tell a Jedi story and then publish it to Disney plus. And then they have a contest because they,

SPEAKER_47: they used to, you probably remember this in the YouTube days. I know you weren't at YouTube, but

SPEAKER_78: there were like these moments in times where fans started writing fiction on the internet. Yeah. Then the fan fiction gave way to fan stories. And one of them was Lucas, where people would dress up in robes and do lightsaber battles. And Lucas embraced it. Star Trek fought it, Paramount fought it. And to this day, you can see all kinds of creative stories that are getting,

David Friedberg: I would say 70%, 80% of the quality of the Disney Star Wars collection.

SPEAKER_78: Um, that gaps should close and you would be able to make your own Star Wars stories.

SPEAKER_57: Um, it's already closing. I don't, I don't know if you've seen some of these like short films that

SPEAKER_25: people have been making from these generative AI platforms, but they're incredible.

SPEAKER_146: Uh, there was a short AI film, a sci-fi AI film. I'm, I guess the probably one you saw as well on

SPEAKER_07: Twitter. Um, that, uh, was trending as well. Yeah. People are starting to make these short AI stories through AI, generative AI. It's crazy. Does this feel faster than any other technology revolution that we've lived through? Is this moving faster or is it just, we were kind of bored and web three was so didn't deliver much product that we now are just enamored with this? Or is this

SPEAKER_151: actually moving as fast as it feels?

SPEAKER_153: We were desperate for a new platform for sure. Yeah.

SPEAKER_35: But I think with the launch of chat GPT three, the pace of innovation, um, is unlike anything we've

SPEAKER_25: ever seen. Yeah. Uh, we are certainly in an AI bubble, but it's also certainly true that there's going to be tremendous value created by virtue of AI. And the biggest challenge as investors is figuring

SPEAKER_27: out where is, where is that value going to accrue? Um, certainly it's going to accrue in the foundation models, which ones, you know, TBD, uh, certainly open AI seems to have a leg up on a lot of other

SPEAKER_30: folks right now. Um, but outside of the foundation models, you know, where is their value going to be captured? And, and I think that's the question that every investor, whether they've been investing

SPEAKER_158: in AI for a while or new to AI is asking and, uh, trying to figure out that's pretty wild. Um, when you

SPEAKER_47: look at companies in this space, uh, and you look at companies just in general in 2023, what, what's the market like today? Cause you and I, uh, have a very similar trajectory. We worked on technology companies, I had a little stint as a journalist too. Um, and then we started as capital allocators literally as the cycle started. Okay, here we are. The cycle ended. Do you feel the cycle has restarted properly? And what would you qualitatively say life is like for a capital

SPEAKER_78: allocator in 2023? We're a couple of months in now. So I think we got enough data compared to when you started, which was probably 2010, 2009, 2011. Yeah. Well, you might remember Jason, my first VC job

SPEAKER_25: was in 1997 when you were doing Silicon Valley recorder. Uh, so, you know, this is my third

SPEAKER_130: cycle. Third cycle for sure. Yeah. Um, so let's compare the start of this cycle and the start,

SPEAKER_47: like 97 is pretty close to the start of the, the dot com era. Let's go through these and compare what

SPEAKER_148: you're experiencing. Maybe work backwards. What's it like today? What was it like last time? And then go

SPEAKER_35: through. Yeah. So today I don't think we're in a cycle yet, honestly, cause outside of generative AI

SPEAKER_25: and maybe a couple of other areas, there's no investing happening, right? The seed market is as busy as ever. But if you're looking at series A and later, again, outside of generative AI, there's either inside rounds or there's down rounds and recaps. Okay. There's nothing else happening. Um, so we certainly are not in another bubble or another site up cycle yet. I think we're in a bear

SPEAKER_31: cycle for, uh, an extended period of time now. Um, certainly the implosion of SVB doesn't help

SPEAKER_47: things. Uh, no. So, uh, it's very, it feels very different. So late stage is indigestion working

SPEAKER_173: out all of this craziness. Yeah. Resetting evaluations, resetting expectations. How much

SPEAKER_47: long does that go on for the rest of the year? Easily. Easily the rest of the year. Okay. So two years of this craziness, and then maybe even into 2024. I expected to go well into 2024, at least

SPEAKER_25: because the other thing you're going to see is there's just not going to be a lot of liquidity, right? Like the IPO market is shut feels like for this year, and then you'll start to see it open up next year. And then the question is like, how do these companies trade? And if they trade at historical multiples, then there's still going to be a lot of cleanup that has to happen in the private

SPEAKER_33: markets, uh, before companies are in a position to, uh, earn a return for investors.

SPEAKER_03: What happens if the private companies, these ones that had these incredible series B C's and D's, uh, the market opens up for IPOs, but the prices for those private rounds in 2021

SPEAKER_47: are not supported. And the companies are still underwater four years later in 2024 and 2025. And they're still underwater, but they decide, Hey, we're going to go public. Anyway, what happens

SPEAKER_78: to all that money? They just, those late rounds just convert and they get one times back.

SPEAKER_179: Yeah. And they hope that they, uh, accrue value and grow in the public markets, right?

SPEAKER_25: Uh, you know, square is a perfect example of that, right? Uh, it went public at a price lower than its last private market valuation. And then as a public company until recently, uh, it did really well. Yeah. Yeah. Um, and I think that's what people are going to hope for. There's no question in my mind. I'm, you know, a hundred percent sure that come 24, 25, there will be a lot of companies who still have not grown into their private market valuations from

SPEAKER_30: 21 and early 22. Um, and so there will be companies that have to go public in order to generate some liquidity and get access to capital, uh, who will do it at prices lower than their prior round

SPEAKER_146: valuations. And those folks will not have a choice because the way the documents are done, they just get dragged along into the public market and they just take their one X and that's it. And maybe they have a coupon. Could it also result in chaos on those boards? Are you on any of those boards where it could get chaotic? What's it like?

SPEAKER_25: Yeah. And I think there's going to be a big divergence, uh, in points of view around the investors from the very latest stage and, you know, those who invested at the middle stage and those who invested at the early invested the earliest stages, right? Like the economic incentives are completely different. Um, and their points of view around, uh, liquidity in the short term

SPEAKER_30: versus a longterm are completely different. So there is going to be a divergence and, uh, cap table battles around how to approach some of these decisions, but, uh, founders in general have a lot of control in these situations because of how these rounds have been structured in the last few years.

SPEAKER_31: And so, um, they're going to have to, uh, pick sides in some of these battles. Um, and it's going

SPEAKER_25: to lead to some hurt feelings and bad blood. Uh, absolutely. And, and certainly bad behavior,

SPEAKER_146: which we're already starting to see. The bad behavior is crazy. I mean, it's, or I'm already

SPEAKER_160: having this in my portfolio, like just predatory rounds, people jumping the fence, blocking things. It's just, it's, it's gnarly and it's not fun. It makes being a seed stage investor a lot easier.

SPEAKER_197: Uh, yeah, absolutely. These situations. I think you appreciate this Jason, but for a lot of

SPEAKER_25: investors, this is their first down cycle. Yeah. So they don't know how to behave. They're still trying to build their track records. Uh, they're still trying to partner at their firms and they're

SPEAKER_47: scared. Yeah, that's, I mean, the bad behavior almost always roots itself in a lack of confidence in your career and the fear that your career is going to end because the returns are going to be so terrible and it is, this is where people, it's easy to make fun of venture capitalists. It's an incredible job in the world to anoint winners and losers and to write checks and get this 20% carry on the upside. It's, it's, it's magical and it's easy to hate on it as well. But the truth is, you know, if you're, if this is your, you're a first or second time fund manager through the cycle,

SPEAKER_57: it could be over for you. Yeah, absolutely. And, and listen, this is not bad behavior only on the

SPEAKER_25: parts of new investors. There are plenty of people who are at established firms who've been in this business for a long time, who for different reasons, it can also act poorly, right? Because they're

SPEAKER_30: fighting still for their share of the management company at their venture fund, or, you know, they have some kind of carry structure that it has some deal by deal component. They are worried about a, an LP relationship that is on the rocks or unstable. There's all kinds of reasons that people

SPEAKER_25: can be scared or can lead them to bad behavior. And it isn't limited to people who are relatively new to this business. We're seeing it kind of up and down the cap table and across firms. Are you trying to

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SPEAKER_209: you told them? No, thank you when they wanted to come into launch run for and did that make people

SPEAKER_160: like 10 times more interested in like, I know you're not taking anybody's money. But how about

SPEAKER_190: I just give you some of my money? Yeah, I mean, it was interesting in that, maybe not surprising, there are like no one's ever said that to us before everyone wants to get bigger.

SPEAKER_25: So we had a whole bunch of questions to ask you. Because we thought you might want to get bigger. We don't know what to ask you if you want to get, you know, smaller and not take our money anymore. So yeah, it was disappointment. And for us, it was disappointing as well, honestly, because we only had 10 LPs, we have been institutional from the very beginning. And we've really enjoyed working with them. And they've been incredible supporters. So it was a hard conversation to have. We didn't surprise them, we got given them, you know, breadcrumbs over the course of time that it might go in this direction. But the good news is we found ways to work with them since we, you know, sometimes because we're stage agnostic now, in many ways, we can do later stage checks and pull

SPEAKER_30: together SPVs and we rely on our LPs for that. Yeah, have you done a couple of those so far?

SPEAKER_213: Yeah, we have. We got a handful of those now. It is magical. Explain to the audience what's

SPEAKER_158: magical about the SPV process and what it does for you as a fund manager. Yeah, we're now, you know,

SPEAKER_35: Yeah, we never did it when we had LP capital, we didn't like the misalignment of incentives

SPEAKER_25: that it can create, especially when you take money from people who aren't your LPs in the core funds or not all your LPs in the funds can invest in SPVs. But the idea behind a special purpose vehicle is a fund specific to a single investment. And the beauty of that is your returns are then tied to

SPEAKER_30: just that one investment rather than tied to returning an entire fund, where generally speaking, you have to return all the capital on a fund before as an investor, you earn the economics through carry. And so with a single investment fund, it's just that single company that determines whether you earn a return or not. And then, you know, the downside of that is, every time you want to do an investment with an SPV, you have to raise capital again. So there's no pooled capital in advance that you can allocate.

SPEAKER_220: So you move smaller, you have to herd a bunch of cats. We've done 270 SPVs now. I think I've done

SPEAKER_146: more than anybody. Wow. And I actually literally started an SPV company, because I don't know if you heard, Assure Fund Management went out of business. Yes, I saw that. So I hired, and I'll announce it here for the first time, the top three tax people over there, because it really is a tax issue at the core of this. Sure. And I hired the top three tax people from Assure, or what I thought were the top three, my team thought were, and we started spvsolutions.com.

SPEAKER_47: Year one is only our SPVs, because we have a big group of these to manage. But maybe in year two, we'll let other people do it. But it's the absolute worst business to be in, is managing other people's SPVs. But it's such a powerful thing, because individuals get to decide,

SPEAKER_78: I want to invest in this, or I don't. So for somebody who's an active investor, and then they get to decide how much they put in. And they can look at our investment from our fund as a proxy for that. And we typically do 250k, 500k. And people will say, Oh, wait, you're putting 750k into this, you're putting only 100 into this, you're putting 250. Does that mean you have a certain amount of

SPEAKER_03: conviction? It's like, pretty much. Yeah. So congratulations, you've figured it out, we can put a little bit more money in. That means I might be a little more greedy. But I find SPVs are like almost the purest form of being a capital allocator, because I have to write a deal memo.

SPEAKER_07: And then we have every founder do a webinar with our 11,000 syndicate members. And man, it's just,

SPEAKER_78: I will have people come to me, Satya, and say, you've read you wrote in your book, or you said on this episode, or of your podcast, you know, this is stuff you don't invest in. And in the deal member, you're doing this. And you said, this is the proper valuation method, you've totally thrown

SPEAKER_07: that out the window. And I'm like, Yep. I have a curious, I have a book of heuristics. And I'm willing to throw some of them out when I get the vibe that I think that this is the one.

SPEAKER_27: And we say that all the time, it's important to have frameworks, but it's important to know when to break the frameworks as a venture investor, right? Yeah, you know,

SPEAKER_235: you're always playing by the framework, you're likely going to miss some incredible opportunities.

SPEAKER_236: Explain one of your frameworks or do dueling mental model frameworks here, you give one,

SPEAKER_239: and I'll give one. You give one, and I'll give one.

SPEAKER_25: For a long time, our one of ours has always been, we don't invest in solo founders.

David Friedberg: Hmm. And there's a reason that people don't invest in solo founders, but you break it sometimes. So explain why you have this heuristic, why you have this rule, and then when you break it.

SPEAKER_97: The simple reason we have the heuristic is, one, it's incredibly hard to build a startup.

SPEAKER_25: We find it's much harder to do it when you're on your own, and you don't have somebody sharing

SPEAKER_30: the battle in the battle with you. Generally speaking, companies at the early stages need to

SPEAKER_25: be able to build a product, distribute a product and build a team that distributes and builds a product. It's very hard to find one person who has all those skills. And then founders also have to be incredible storytellers. And part of their job is to eventually recruit people to their company, sell to customers, sell to investors. And if they can't get at least one other person bought in, then it feels like a harbinger of things to come. And so those are some of the reasons that we haven't invested or try not to invest in single founders, this whole of founders, but we break that rule.

David Friedberg: Yeah, you have to break the rule when you have somebody who is iconoclastic, somebody who is

SPEAKER_03: transcendent. And I have many times broken the rule. And when I do, the reason I tell our team is,

David Friedberg: this person better be exceptional at hiring and inspiring legendary people. Because if they're a solo founder, they don't get the benefit of like, I'm the business head on the three headed, you know,

SPEAKER_78: monster, and they're the tech, and they're the design. And we all come together as this, you know,

David Friedberg: incredible thing. The other one is just backing builders. So even when you have multiple founders, we have a rule, we back builders, and I actually literally bought the domain name webackbuilders.com. And we really try to find people who know how to build product, because at the early stage,

SPEAKER_78: what do you have to kind of figure it out? But then once in a while, we will find a team that's two people or even three, and there's no developer on it. But boy, they work together at

SPEAKER_07: Google envision somewhere else. And yeah, they all worked in business development or marketing. And we just say, Okay, screw it, we're gonna break that rule.

SPEAKER_25: Yeah, we've done that too. I would think we, you know, part of the skill set of building, as I said, kind of three legs of this tool of the company, one is building the product. Yeah. And so you want people who are technical or product people. But we've invested in non-technical teams. And especially in today's world, it's possible to get really far with a bunch of third party products that you assemble to build an initial version of a product and get it tested in market. So if the founding team is really deep in an area, and knows it cold, and as a vision of the world, that really resonates, but they're not technical, or they're not product people, you can still get excited about something. And so we

SPEAKER_31: similarly, we've broken that rule before as well.

SPEAKER_259: Okay, what's another one that you broke? What's another heuristic?

SPEAKER_188: I love these ones related to the founders.

SPEAKER_97: Yeah, I mean, probably one of our primary heuristics is we want to only invest in founders

SPEAKER_25: who've experienced the pain firsthand. So it's hard for us to invest in founders who are coming to a problem or a market area based on academic research, or like having looked for a really good

SPEAKER_47: idea. Yes, which by the way, it was Bezos, right? Like, so yeah, you know, that Bezos didn't suffer through not being able to buy books online, he literally was like, this seems like something you could actually send in the mail, because it's not that big. And it has a high profit margin,

SPEAKER_232: like he literally did an analysis to find that.

SPEAKER_35: Exactly. Yeah, I think he was trying to decide between ties and books, right? Because ties were

SPEAKER_25: lighter and high value. And anyway, yeah, so that we have always said that we want people to experience the pain firsthand and really know the domain because they've lived in it. But we break that rule every once in a while, because you come across a team that has done so much work to learn about an area, and have some functional expertise that is relevant, but maybe not the domain expertise, and right, have this incredible insight based on the work that they've done. And you have to write the check. They figured something out,

SPEAKER_03: they have some secret space that they figured out. And, you know, when you look at it, Airbnb had no

SPEAKER_78: right, a couple of designers from RISD to come in and reboot hospitality. And if you got five amazing people who were incredibly successful in the hotel business and put them together and gave them unlimited funding, they could never have conceived of Airbnb, it would have been just, they would have never

SPEAKER_07: accepted it. You know, the other one I have is entry price matters. And, you know, I'm like, you know, it's really important, we have to have a reasonable entry price here. And then it's like,

SPEAKER_03: you know what, this founder wants 15 million, they want 20 million, the product doesn't exist, it's just in their head. But they've done it before. And they got the band back together.

SPEAKER_160: Oh, it. Here's a million bucks, there's a half million bucks. Yeah, we got to be on this ride. And, you know, I will throw out the entry price matters rule. If it doesn't, but you want to have

David Friedberg: that discipline about enterprise, which is why I took off 2020 and 21. I was spending a lot of time

SPEAKER_146: on the accelerator and our accelerator and selling secondary shares in 2020 and 2021. To be honest,

SPEAKER_30: I feel smart about that. We have always believed that entry price

SPEAKER_33: enhanced ownership matter, especially when you have a fund, it's all about the cheapest price you're ever going to get is the first time you buy. So price and ownership matter a

SPEAKER_25: lot. Airbnb leads us to a different example of a heuristic, which is, we never think about market size. Because if you had looked at Airbnb, you would have said how many people want to stay on other

SPEAKER_275: people's couches? Yeah, that's like a 1% market size. Right. And same with I remember how many times

SPEAKER_25: I had the argument about Uber with different people who were like, well, the taxi industry is only so big.

SPEAKER_30: Right. Right. So our view is, we don't think about, is this market worth billions of dollars today?

SPEAKER_25: We think about, is this market large? Meaning, is the pain felt by a lot of people? Is the pain acute? Is it a hair on fire problem or kind of a top three problem for the people who are experiencing it? And is it valuable? Can you extract some economic rent for addressing that pain over the course of time? You know what I get to that one is frequency.

SPEAKER_278: Yeah. How often do they have it, right? The pain?

SPEAKER_25: Yeah, that's a good, that's a good proxy for it, right? And what we found is in our best companies, we've always underestimated the market size. Because the great founders are able to find a way to expand the market over the course of time. So as long as you start with something meaningful enough, people will find a way. And so that's a heuristic that we are thoughtful about, and you know, you need to need to do the right assessment around whether the pain is large,

SPEAKER_47: acute and valuable. Um, right, but on occasion, we'll break you in that markets, but like, how do we define huge here? Because the great founders induce a market to exist? What was the market for podcasts before podcasts exist is like, people trading like basement tapes of, you know, audio

David Friedberg: interviews, I'm sure they were, I'm sure there were underground interviews that, you know, people traded tapes of. But, you know, I get and there was pirate radio, I guess, but how do you even size podcasting? Well, podcasting is so long tail that now, there's a podcast on every topic. And it's kind

SPEAKER_78: of like NPR has 100 shows or whatever. Okay, that was just on the long tail. I mean, there's 100,000 after

David Friedberg: that, how do you even conceive of the fact that, and you had a great investment anchor, actually, where you benefited from. Tell me a little bit about that one. And I think that one had to be

SPEAKER_19: a little bittersweet. Yeah, absolutely for me. Yeah, absolutely. Explain. No, that's an example

SPEAKER_35: of a company that believed in, uh, the value of audio content, particularly relatively short form

SPEAKER_31: audio content to start. And they wanted to build the platform for the creation, distribution and monetization of that content. And they succeeded. And they, yeah, they succeeded. Um, they sold to

SPEAKER_30: Spotify, as you know. Uh, and our view is, you know, that could have been an enormous business.

SPEAKER_31: Um, but the founders need to decide what they want the next phase of the company to be. And they decided they could have a bigger impact within the confines of Spotify. Um, it's a great outcome for everyone. So, uh, no complaints at all. Um, but, but one complaint, but there's still one complaint.

SPEAKER_47: Cause if you have a business that gets, you did a 15 X on that probably. Um, yeah, more, I think. Yeah. Yeah. Cause you invested investors. Yeah. Yeah.

SPEAKER_160: You were in the $12 million round. It sold. I heard for upwards of 200. I don't know if that number ever exactly came out. Um, but at least 200, I think. And so the pain of that is that, well,

SPEAKER_146: what if it 10 X from there and instead of a 20 X or a 30 X, whatever you have a two or 300 X.

SPEAKER_97: But the thing about, I'll say about that, Jason is like, it was never going to 10 X, 20 X, 30 X.

SPEAKER_25: If the founders weren't going to will it to that independent company. Right. So they, if they had

SPEAKER_31: decided that they were better off in the confines of another company, that was the right outcome for

SPEAKER_148: that company. I think that is a very namaste way to be at peace with it. I, this is, I think for me, one of the toughest things that I have to learn to deal with, which is, you know, sometimes founders

SPEAKER_07: take the quick win and I understand it. I did it myself with weblogs Inc when I sold it to AOL. Yeah. Um, and I needed to get that first win, but back then you didn't have secondary. And I

David Friedberg: gotta think anchor could have just sold the founders could have sold half their position and gone long, especially at that time and built the competitor. Oh man. It just would have made me

SPEAKER_35: crazy. You know, in our, in our business, it works both ways, right? Like I I'm sure you've heard that there are investors in Snapchat who wanted Snapchat to sell at a billion dollars. Um, and you know, Evan didn't and you saw what it became. Yeah. The investors benefited from that. Right. So you never know. You never know. I guess that's true.

SPEAKER_310: You invested in Mercury. Congratulations on that. Thank you. Yeah. You invested later. That was a late stage investment for you.

SPEAKER_29: Yeah. That was after, uh, we'd moved to our personal capital.

SPEAKER_02: What, what, um, let's go back to our little dueling banjos here. I have one. We will never invest in an accounting nightmare or messy cap tables, unless we will.

SPEAKER_255: So if this company is going really well and they gave 30% of their company to a dev shop

SPEAKER_03: that did a hundred thousand dollars worth of work,

SPEAKER_07: like we normally will not engage that company unless I really love it. And then I'll say, let me talk to the dev shop and explain to them why they should take a hundred thousand dollars

SPEAKER_47: and 5% of the company. So they don't screw up the cap table. There's a small slice of this and

SPEAKER_315: getting the hundred K is better than it being unfundable. So that's one for me.

SPEAKER_317: But then you, you fix the cap table before you get invested.

SPEAKER_78: Correct. I use our bank role and I say to the founder, listen, we can't in good conscience, you know, this cap table is so screwed up. You guys have 40% of the company. You gave a seat investor 30%. You gave the dev shop 30%. You don't have control of your own company and you just got to 25K a month in revenue. There's no VC who's ever going to invest in this. We have to clean it up now. So I'll put in 500K, 250 can go to buy out these existing investors. They can still have skin in the game. They get an amazing return. And then you guys get back up to 70%

SPEAKER_07: ownership. The investors own 25% and this Fakaka maniac dev shop that you gave the company to gets 5%.

SPEAKER_30: Yeah. But I'm assuming if you aren't able to clean up the cap table in that way, you're not going to

SPEAKER_31: invest, right? Yeah, I totally agree. Messy cap tables, messy accounting. Just life's too short.

SPEAKER_146: I mean, I have these accounting situations where people are doing cash based accounting for a subscription product where they sell two year subscriptions. And I'm like,

David Friedberg: not only is this a problem because we don't know if the plane's at 30,000 feet or 3,000, and we don't know if our speed is, you know, 600 miles an hour or a hundred, and this is dangerous to fly a plane like that. We can have tax issues. You can get hit with the tax bill that we don't expect. And this could be a year of cleaning stuff up. There are other heuristics that you look at. We did TAM. We did the founders, multi co-founders. We did cap tables. What else, when you go to invest, you say, you know, we can't do that anymore. We can never do that. But then maybe we'll break the

SPEAKER_326: rule. Yeah.

SPEAKER_160: Are there categories you'll never touch? I've gotten my ass kicked in direct to consumer and hardware. Those are hard.

SPEAKER_19: No, we've always said that too, but we've made exceptions in those areas. And, you know, sometimes that works out all right. You know, Cruise, which we were early in, I can't remember,

SPEAKER_30: I think you were an investor, right? Hardware. It started as a hardware aftermarket kit, right? That turned out just fine.

SPEAKER_332: That was a quick flip for you, was it not? Yeah, it was two years, I think, something like that.

SPEAKER_220: Isn't that weird when that happens? You invest in something, two years later, you just get this, you know, five, 10, 20 X.

SPEAKER_333: Yeah. It's crazy.

SPEAKER_310: Crazy. And you're sending money to your LPs early and they're like, what happened? And you're like, you know how we told you it's 10 years? We got lucky. It's like, we got lucky. Sometimes weird stuff. I had this happen, was a great podcasting app called Swell. Just love the interface of it. I put a quarter million or a half million dollars into it. And I just was like, oh, this is the one. Like, I love podcasts. This is 10 years ago. I don't know, nine, 10 years ago. And then Apple's like, you know what? Podcasting's important. We'll buy that company. And I was like, oh, no, no, no, no, don't sell. And they're like, yeah, we're doubling your money. Good news. Doubling your money. Like your situation. Right. I was like, that's, that's the worst thing I could ever hear is double.

SPEAKER_97: It's interesting. I don't know if you've experienced this, but our very best companies almost to a T have all almost gone out of business several times in each of their paths.

David Friedberg: 100%. If you're not almost going out of business, you're not audacious enough in all likelihood to be an outlier. So Uber existential moments, Tesla existential moments, Airbnb, they had the crucible moment when the person trashed the apartment and they had it later in their life with COVID. I mean, these, these companies have so many existential moments, uh, that you have to deal with

SPEAKER_07: in terms of psychology, what have you learned about founder psychology? Have you started to have,

SPEAKER_78: we're talking about our mental models, things we'll never do, the heuristics. We like, we like to think

SPEAKER_07: about thinking as investors, but let's just go to archetypes of founders. A lot of people want to believe there's one type of founder. And I, and I do have this archetype and this heuristic. We're not going to invest in abrasive people who are just cantankerous and just brutal to deal with,

SPEAKER_150: unless they're incredibly high performing, you know? And it's like high performer. If you do,

SPEAKER_07: you do the four quadrants, like high performer, low performer, easy to get along with, difficult

SPEAKER_78: to get along with. Don Valentine did this quadrant famously. And he was like, where do you think we

SPEAKER_152: make our money? And it's like high performer, hard to get along with. I mean, it's almost always the case.

SPEAKER_148: What are the archetypes that you found and the ones you love working with and the ones that maybe founders can learn from that this type of founder fails often or more often?

SPEAKER_30: So another heuristic we have is that we'll never invest in a round that doesn't have a lead investor. Explain why.

SPEAKER_25: When we were a fund, we were often that leader co lead investor, and now we are less often. And the reason for that is, we believe that if there's a responsible party as lead investor, then there we know that somebody is paying attention and more and just as importantly,

SPEAKER_30: also know that there's somebody that the founder feels responsible to outside of the company.

SPEAKER_25: And if they're willing at the earliest stage when we typically invest to have that kind of obligation, responsibility relationship, we think it says something about

SPEAKER_30: their perspective on company building and on the time and energy it's going to take to build this

SPEAKER_25: company over the long term that is indicative of the kind of founder that we want to back in the days likely to have the most success. So that's a heuristic that we've always had.

SPEAKER_97: I love that, by the way. To your and then to your 4x4 or Don Valentine's 4x4, our largest companies,

SPEAKER_25: Chime, Plaid, Gusto, Shield, Bowery Farming,

SPEAKER_30: I would say that all those founders fall in the high intellect, high EQ box. And none of them are in the cantankerous bucket. Now it's hard to know, you know, if that's selection

SPEAKER_25: bias, uh, or if it's, uh, something that has been a predictor of success for them or what it is, but we, we, we haven't had the experience that you've had, um, in terms of the cantankerous folks

SPEAKER_83: who've knocked it out of the park. I've had both. There are some people who are just incredible,

SPEAKER_120: high EQ, want to make everybody feel great, soft power individuals. Uh, but man, I, I kind of think when we look back on this founder friendly and I'm using air quotes right now, moment in time, there has never been a more duplicitous, deceptive, dishonest, double dealing term in the history

David Friedberg: of our industry. Absolutely. That what people say is founder friendly is just actually giving the worst support to a founder to say. It's a lack of support. It's a lack of support is what's defined as founder friendly, no lead investor do a party round. So nobody's in charge. So nobody cares that you're running out of money. Uh, don't do board meetings. Don't give information rights. Don't share information with people who have more experience than you, who have backed you

SPEAKER_318: and have the bankroll to give you more money and create an adversarial relationship. And this did

SPEAKER_78: start a little bit inside of YC where there was a sort of like, I know Paul Graham had bad experiences and those bad experiences are real. He had bad experiences with VCs, but for every bad experiences, I think there's a hundred other great experiences. And then to, I think it just, it kind of got away with itself, which was if I can get 50 investors for 50 K each, I'll do that. Why have somebody put in a million and then say, we have to have four board meetings a year, or I have to write a monthly

SPEAKER_25: update. Jason, when we started homebrew, we wrote early on a blog post around the value of boards at the seed stage. We said from the very beginning that if you take a check from homebrew and we're the leader co-lead investor, there will be a board created will likely be the board member. You can choose for somebody else from the investor syndicate, but there will be a board created. And so many people, founders less so, but investors told us you'll never win an investment. Like nobody's ever going to want to work with you. And, you know, 10 years later, not only do the results prove them wrong, but I think we feel vindicated by some of the things that have happened at these companies that have had no oversight over the last few years, right? Like where you're seeing fraud or misrepresentation or excessive spending without limit or bad hiring or whatever it is, right? Like, uh, again, it comes back to the, that heuristic that we talked about, which is if a founder is unwilling to have a lead investor, uh, let alone a board seat, but a lead investor at the

SPEAKER_31: seed stage, uh, then we think that, you know, that's an investment we're not likely to make.

SPEAKER_41: What is the new advocate for six a year at that early seed stage? What, uh, board meeting? Yeah. How many?

SPEAKER_201: Oh yeah. Uh, usually, uh, an hour, uh, probably an hour and a half word meeting four times a year.

SPEAKER_02: So like literally the ask and the recommendation 90 minutes times four, not a math genius, but it's

SPEAKER_78: about six hours. And if you say it's going to take 10 hours to prepare for each board meeting, which I think would be a lot at this stage. I mean, we're talking about 46 hours, one week of the

David Friedberg: year is spent being thoughtful and considering what we've accomplished in the past three months, what we want to accomplish in the next three months and talking it out as adults in a room who have a

SPEAKER_318: vested interest in seeing this succeed and making sure that risk of ruined things like insurance and cap tables, accounting, HR are not forgotten because a lot of founders have never done that stuff before. So think about all the unnecessary mortality in our space. It's literally like infant mortality. Like we could just have an incubator here and just a basic rules of the road. And I'm amazed.

SPEAKER_78: I get into these seed stage board meetings. We copied you. We did the same exact thing. Hey, if we own five or 10%, let's just four board meetings a year. We tell them one hour to 90 minutes each, same exact as you. And it could just be product. We can do product at one. We can do HR at one. We can just have a theme or you can do quickly product HR, you know, challenges, whatever you

SPEAKER_07: want to do. Um, and my God, the amount of times that we have, um, saved a company from flipping the car. It's countless. It's countless.

SPEAKER_179: Yes. I mean, I think all the companies that we've worked with would tell you,

SPEAKER_30: even if they're hesitant going in, like it proved to be valuable because all it is, is

SPEAKER_97: a 90 minute step back from the day to day of the business once every three months to focus on one or two strategic topics that you probably won't make time for otherwise, because you're dealing with all the crap that you deal with in the day to day of the business and having a couple of other people to help provide perspective on those topics. Like who wouldn't want

SPEAKER_160: that? It literally like, if I said, Hey, you could buy this service for $10,000 a year.

SPEAKER_78: The same, if you had a hundred people and you said, Hey, $10,000 a year, you could buy this

SPEAKER_03: quarterly, you know, coaching session, um, or you can have it for free. Like people would pay the $10,000 for that. So, I mean, it's, it's hilarious.

SPEAKER_25: To your point, I think like all this, uh, rumor and anger and whatever it was, got wrapped up around this notion of what a board and a board member is. And, uh, it's, and, and the work to dispel it

SPEAKER_97: is really hard. Uh, but I think it's becoming clear to a lot of people. And then, and to your point, like for every one bad example, there are so many good examples. Um, which is why I was kind

SPEAKER_25: of never a question for years around the creation of a board. Um, and the, the idea of having active investors. Um, and then we got into party rounds and then in the last 10 years, kind of boards with

SPEAKER_83: no board, you know, companies with no boards. Um, or yeah, I mean, look at FTX, who was on the

Chamath Palihapitiya: board of FTX? I mean, who was, who was on the compensation committee? Who was on the audit committee?

David Friedberg: Like compensation committee and audit committee, they come, I don't know what series B, series C, 10, $20 million in revenue. There was a company with billions of dollars sloshing around and, and by all means and all observations, we'll find out or we'll come out in the lawsuit and the criminal

SPEAKER_236: trials, no comp committee, no audit committee. I mean, this is just a, a dereliction of duty at

SPEAKER_274: highest level. Well, it just goes to show that no matter how long you've been in this business, like

SPEAKER_30: you can fall into making mistakes because you're trying to get involved with a particular founder

SPEAKER_25: or a particular company, right? Like there, there were obviously high quality investors in FTX, um, who, uh, FTX is an anomaly relative to how they probably do oversight and management of other companies they're involved with. Um, but that's the world we were living in the last 10 years, right? In many ways, the, the price of winning was to commit a number of unnatural acts. And unfortunately, some of those unnatural acts are going to lead to pain and suffering. It literally is

SPEAKER_197: going to, it is the root of all this evil. And we found, and you could tell me of this track source,

SPEAKER_47: that when we told people, Hey, we're on the board of the company and we've done six board meetings. And when they did their diligence for the series a or B or whatever it was the next round, and they were

David Friedberg: able to see the board decks or see the projections, the companies in the seed stage were at a massive advantage, had a massive advantage over the non board meeting ones because they felt more venture ready. And they felt like they would be better stewards of capital. So what did you see?

SPEAKER_97: A hundred percent. It was one of the arguments we made in that in that very first blog post is like,

SPEAKER_25: we think it'll be a signal to the next set of investors that this company is venture ready. Um, it's great practice for the founders to be able to do kind of low pressure board meetings before the big check comes from a series A investor who's going to be on the board forever, probably. Right. So like just having that practice and that muscle memory or what around what a board meeting feels like is really beneficial to founders. Um, but so there, there are lots of reasons why, uh, in reality, there's value in having a board at the same stage and lots of reasons, uh, that are made up around why it's not a good idea.

SPEAKER_146: Yeah. We basically made it super simple because we are high volume investors. We have the accelerator.

SPEAKER_78: We do seven companies in each one. We've done 28 of those. And then we started something found a

SPEAKER_209: university where we do 25 K into companies that even aren't even incorporated yet. So we'll give them the 25 K to like incorporate and get going. We have a large number of names. And what we tell

SPEAKER_381: them is if we own over five or 10%, we've changed it over the years. We'll have a board observer seat

SPEAKER_07: or a board seat option. We'll have the option at that. And then when we, we've been trying to automate people giving us their revenue. So we asked them to do a monthly update, very short, you know, like literally one pager, but if we don't get that, we'll just say, Hey, can you just give us cash on hand at the end of the month, number of full-time employees, how much revenue and how much spend. And then we'll, we'll do some math there. Um, and when we did that, we just said anybody who

SPEAKER_47: hits $500,000 in yearly revenue. So you hit that 40 K a month mark ish. We just say, you know what? We would like to elect to start these board meetings. Um, and can we set four dates for

SPEAKER_120: next year? And people like, did I do something wrong? Am I in trouble? It's quite the opposite.

David Friedberg: We've been watching you young Jedi and the force is strong and at 500 K in revenue, pretty good idea to have a board. Like I think 3 million in funds raised or 500 K in yearly revenue. You should want to have a board. You're, you're a real concern. Now you're a real, uh, business. Hey, let's talk about diversity. Yeah, sure. No, no, no. I was just gonna say we, we approached it also in a little

SPEAKER_25: bit, it kind of, in terms of helping, uh, lead the horse to water because in addition to the board seat and the board meeting, what we said is I, aside from the board meeting, we should have some regular cadence by which we talk about the actual stuff going on day to day in the business. And so, you know, we think that should be weekly or biweekly. Um, but you tell us like what's useful for you. And because we were having that very tactical conversation with people in advance of the first time we do a board meeting, by the time the board meeting comes around the first one, it feels like a very natural conversation of go from like the day to day tactical and say, Hey, like we're thinking about the long-term of the business. Why don't we have a conversation about that? And it turns out that's a board meeting, right? It just happens to be a working session. That's a little bit longer than the regular touch base and focus on a different type

SPEAKER_30: of issue than the hair on fire problem that you're dealing with, you know, in any particular day or week. And so, uh, by the time that the board meeting came around, everyone was like, Oh,

SPEAKER_25: this feels like what I might do with people on my team inside the company. And now we're just happened to have an investor here. And it kind of sold itself over the course of time. So we never had to convince anybody like now's the time for a board meeting, or we should do a board meeting. It was just kind of the natural progression of things. And again, not, you know, I'm definitely not going to argue where the world's best

SPEAKER_30: board members or anything like that. But yeah, I think it's an important sign that,

SPEAKER_25: you know, I'm on a bunch of boards now. What we said, the other commitment we made to the companies when we made the investment, the seat is like, we'll stay, we want a board seat, but we'll step off your board at the series B, because when you have a series A and series B investor on the board, you really don't want three VCs on your board. And we've been working with you long enough where we'll have a long standing relationship with you. Turns out, it's a surprise

SPEAKER_97: to us, you know, more than half the boards I'm on now, either in a formal board seat or as a board observer or post series B.

David Friedberg: Of course that you, you did a good job, but they want to keep you around. Why wouldn't you want to keep somebody who supported you early around? It's good for the spirit of the company. It's good to have, you know, somebody who knows the entire history. I'm on two boards that became unicorns

SPEAKER_78: and both of them, we were the lead seed investor and well, one of them, we were the lead seed investor density. We put the first 400 K in and the second one grin, we incubated. And in both those

David Friedberg: cases, I've been on the board and I could have stepped off, I guess, and let the other series B

SPEAKER_232: investors, series C investors, you know, and I get a free ride, but I'm like, I just want to be there with the founders when they ring the bell at the NASDAQ. You know, I just, I think it just speaks to,

SPEAKER_97: yeah, it just speaks to like the vast majority of board interactions are good. And I think most

SPEAKER_83: founders with those board interactions find real value. Hey, the industry wasn't, I'll wrap on this,

SPEAKER_120: because you've been very generous with your time. Screen door, you started, I guess, this program to help maybe change the face of VC a little when you and I came into it. Let's face it, it was a lot of Stanford MBAs, Harvard MBAs, Wharton, it was a pretty clubby. Yeah, even just when we started.

SPEAKER_03: Yeah. Uh, I think they look mostly like me and sometimes like you, I think you would, you're Indian, I take it? Yes. Yeah, I wasn't sure. Uh, so if you're Indian, like, I think that was

SPEAKER_120: kind of the first, uh, underrepresented group to maybe be allowed into the, the, the club, typically white male space, congratulations, but black women, Hispanic women, people of color,

SPEAKER_310: generally that it's been, it was pretty, it's pretty sad. Yeah. Um, you've, uh, tried to turn that around. Tell everybody about, uh, screen door partners.com, uh, is the domain name and screen

SPEAKER_419: door is the name of this effort. Tell everybody what you're trying to do here. Yeah. Um, so to

SPEAKER_25: your point, kind of where VC dollars go, who makes VC dollar decisions is still unfortunately, largely unchanged from when the industry started and certainly doesn't reflect, uh, the population more generally. Um, when we started homebrew, we decided very early on that it was never going to be

SPEAKER_30: larger than the two of us. And so we didn't have the option of building a firm and kind of changing the nature of the industry by hiring a bunch of people. And at the same time, as we were building

SPEAKER_25: homebrew kind of, as we mature, uh, we were being approached by new GPs every single month, every single week. Um, and a lot of them came from underrepresented backgrounds, maybe surprisingly, people trying to break into the industry. Uh, and the number one thing we heard from them was, well, there's no shortage of advice for us, but there's absolutely no money.

SPEAKER_246: Um, thanks for the meeting. Yeah. Would have preferred a check.

SPEAKER_35: Exactly. Thanks for all the praise, but still need a check. That's right. Um, and then Hunter and I are big believers that, you know, we're all standing on the

SPEAKER_25: shoulders of giants in technology, right? Like everything in technology was built on the backs of somebody else who came before us and a back of technology that came before us. Um, and we've benefited from this virtuous cycle that's existed in technology and VC with LPs providing capital to VCs, VCs providing that capital of founders, founders hiring employees, those companies going on

SPEAKER_97: to be successful and that wealth and that knowledge feeding back into the ecosystem. But that virtuous cycle has only been accessible to small segments of the population, folks who primarily look like me and you.

SPEAKER_25: Um, and so we, we took all these data points and we said, well, there seems like a real opportunity here to build a product. You know, we come from product backgrounds, so we try to identify white space, um, to build a product that maybe doesn't try to bring people into the existing virtuous cycle, because that seems slow and difficult to scale, right? Like the big platforms hiring their one

SPEAKER_201: underrepresented partner and giving them a checkbook and proving themselves over the course of time,

SPEAKER_47: et cetera. Uh, it's a decade long wait in line. Yeah. Multi-decade wait in line. And we saw what happened, you know, at Kleiner Perkins with that, without pointing fault at anybody. They tried their

SPEAKER_209: best to try to, you know, diversify the firm. It didn't work out. And listen, there are lots of

SPEAKER_97: good efforts underway because that is important change still, but we just want to try something different. We said, well, what if we tried to recreate the virtuous cycle? What if we try to make it

SPEAKER_25: possible that the people who are in this virtuous cycle from day one are people who come from underrepresented backgrounds? And so we looked at that cycle and said, well, the right entry point or the right way to kickstart it might be to put underrepresented venture managers into business because they're empirically more likely to back underrepresented founders who are more likely to hire underrepresented employees. And if those companies become successful, then that success is going to

SPEAKER_97: yield more dollars and more advice for people who look like the other people in that virtuous cycle. So that's our theory of change with ScreenDoor is a lot more people can be impacted a lot more

SPEAKER_25: quickly if we as ScreenDoor, which is effectively a fund of funds, helps put underrepresented venture managers into business. So we try to find underrepresented managers who are raising their first funds, provide them with anchor institutional capital, combined with advice from GPs who are still practitioners, but who have been in their seat before but are now on their third, fourth, fifth funds. So people like Charles Hudson at Precursor, Kanye Macabella at Kindred Ventures, Kirsten Green at 4Runner. These are people who are spending real time advising our managers and helping with the diligence of them. And we started that fund of funds a couple of years ago, we've backed 11 managers so far. We just hired a full time managing director, we have big plans for what ScreenDoor can be over the course of time. But the high level objective is to be the leading LP for underrepresented managers in the venture business with the idea of changing, not just the face of venture capital, but the face of

SPEAKER_33: technology by virtue of empowering underrepresented VCs.

SPEAKER_47: It's amazing. So every time you meet a new fund manager, or a GP, somebody wants to break into this, you will do an SPV or something and pass the hat or just pass the hat amongst you and

SPEAKER_174: everybody just makes a commitment?

SPEAKER_97: No, no, we have raised funds from traditional institutions. So our LPs are Princeton, Harvard,

SPEAKER_25: Northwestern, Duke, Virginia, major endowments, a certain number of family foundations, who, for them, we're solving a real problem, too, because their institutions are so large that they can't write small checks. Most of these funds are smaller than 100 million, right, as first time funds.

SPEAKER_430: Yeah, 10, 20, $30 million funds.

SPEAKER_25: Yeah, it's hard for these institutions to evaluate managers who don't come from traditional backgrounds, right? The traditional path has been to apprentice at a big platform and spin out and

SPEAKER_27: start a fund, right? And these people don't come from those backgrounds, for the most part, and don't

SPEAKER_25: have traditional investment track records. And so they have given us capital to help them identify these and train these managers so that they can support them directly as their funds mature and

SPEAKER_83: become larger. And so we're solving a problem, we think, for both sides of the market.

SPEAKER_209: Yeah, it's really commendable. I think it's exactly the right strategy. Waiting in line is bull****. It takes too long. You get marginalized inside of these firms, from what I've seen. Often, they're not given check writing ability. And then you're spending all this time and I hate to use the term, but I feel like a lot of firms, it's like token handouts where they'll put people into positions and call them a partner, but they're not even meeting with founders or writing

SPEAKER_07: checks. So I feel like this is the clear path. And actually, we are also LPs, or I should say,

SPEAKER_151: I'm an LP in Monique's cake ventures. So it's great to support her. And exactly. I mean, our,

SPEAKER_30: our view is that we are an economic vehicle with a societal mandate. And we intend to deliver

SPEAKER_25: outsized returns via these managers and demonstrate to people like there's a untapped,

SPEAKER_30: unrealized economic opportunity here, and we want others to follow suit, hopefully.

SPEAKER_07: Yeah, I also think like these managers, because this opportunity is so hard fought, like I feel in a certain way, it was very hard for me to break into this. But I just feel and might be my own imposter syndrome. Even at this era, I feel like I got to work twice as hard, because I didn't go to Stanford or whatever. I mean, now,

SPEAKER_209: I do have a lot of those folks want to come work for me. So that's kind of rewarding.

SPEAKER_197: What do you think of the whole Silicon Valley bank thing? And sort of what's happened?

SPEAKER_25: It was probably the biggest self inflicted wound that any institution has ever delivered to itself.

SPEAKER_197: Unbelievable, right? I mean, the stuff that's come out since we're sitting here.

SPEAKER_47: And now they're saying like, they knew the risk they were taking, there were alarm bells going off at the end of the show, the Washington Post story yesterday. But apparently, this was kind of a known

SPEAKER_310: problem inside the firm. And they were aggressively trying to just make returns to make the stock pop. And I think we'll find out in the postmortem that

SPEAKER_28: I also but I think it was a communication

SPEAKER_25: misstep as much as a risk misstep, right? The risk is real, like that happened in the past, but like, and they got to a certain point. But if they had done the private placement,

SPEAKER_30: or the public fund in private, right now said when it was already done,

SPEAKER_25: Yes, and communicated strength to the market.

SPEAKER_30: You know, in theory, could have prevented a run, because the run is just a lack of confidence, right? Right.

SPEAKER_232: But you can't blame anybody who has, you know, payroll to hit on Monday from saying,

SPEAKER_451: you know what, I've got $1 million or $2 million here and my payroll is $300 or whatever, I got no choice.

SPEAKER_97: And it's a shame because there's a reason people worked with SVB that are not about it being like

SPEAKER_31: the clubby Silicon Valley bank, right? Like, we had to move, we were Silicon Valley bank customers as a fund. And we've had to move our banking temporarily to another institution, we've subsequently moved a bank

SPEAKER_130: back to Silicon Valley bank. And the other bank, Silicon Valley bridge bank?

SPEAKER_30: Yeah, right.

David Friedberg: What is it going to be? What is it going to be now? Is it is the Silicon Valley brand going to still exist?

SPEAKER_30: No, it's been acquired by the other bank. And so there is their brand now.

David Friedberg: But the thing I'm trying to figure out, are they going to keep that high touch culture? Or are they just acquiring it? And they're just like, Hey, well, here's our standard

SPEAKER_19: offering remains to be seen. I don't know. But like, simple things like our, you know, temporarily

SPEAKER_25: new bank, they can't do batch wire processing, which as a fund, if you're trying to make a distribution to your LPs, as an example, makes it impossible. Right? Yeah, there's a huge list of wires we need

SPEAKER_97: to get done, get to work. And then on a more personal note, like my first mortgage was through Silicon Valley bank, because nobody understood the value of equity or understood

SPEAKER_456: a K one, I didn't have a w two. Right? They were the only ones who could underwrite that risk.

SPEAKER_25: Right? So both from a personal standpoint and professional standpoint, there are lots of reasons to work with SVB. And it's going to be a major gap in the market if nobody can fill those shoes,

SPEAKER_33: or they can't continue to operate the way they operate. Yeah, I, uh, my first two mortgages

SPEAKER_188: came from Silicon Valley bank for my office space. And then for my first house, I still have one of those. I still have the office space one, although I'm selling the office space because

SPEAKER_302: San Francisco, we still live in the house that we bought with Silicon Valley bank mortgage.

SPEAKER_160: I'm getting barbecued online on Twitter. People took a clip of me saying how delightful it was to

SPEAKER_232: work with them. And I'm like, uh, yeah, they came over, they pop bottles of wine. That's a liability I have with them, not the other way around. I'm, I'm, I'm not short the stock along the stock.

SPEAKER_07: I have like the tiniest of mortgages, but that's their liability, not mine. And they did such a wonderful job of, like you're saying, assessing a VC's net worth and future revenue streams and

SPEAKER_96: saying, okay, yeah, it's reasonable that this VC, their revenue is spiky K ones come in. Ooh, Uber distribution. Oh, Robinhood distribution. Oh, no distribution for two years. Oh, huge distribution

SPEAKER_07: this year. Like it's a different lifestyle. And they, uh, they were, and this was early in my VC

SPEAKER_97: career when all my, all my value was in Google stock, right? Yeah. Like they, they understood how to look at Google stock and no other bank would even consider it. No, they would just be

SPEAKER_197: like, what, how do we do that? Yeah. It's, uh, sad to see it happen and completely unnecessary or

SPEAKER_236: listen, such yet great to have you on the program. I will see you next year. I'm booking it for next

David Friedberg: year. If you make it, you make it. If I, if it takes me another two or three years, that's okay too,

SPEAKER_468: but we'll do a portfolio review next time. I don't want to. It's great to chat and thank you

SPEAKER_310: for sharing all this information. And just, if you want to have one of the great legendary investors now in their second decade with their own money, their own skin in the game, I give no higher recommendation than the team at homebrew. They are in it for the right reasons. They don't need to work.

David Friedberg: They're already done well for themselves. They do it because you love it. You have a passion for startups and company. That's how we want to spend our days. And that's as great as it gets. You know,

SPEAKER_310: when you have an investor who is that passionate, uh, it means they're focused on your success. So, uh, you want to pick your investors wisely and one of the wisest decisions you can make.

SPEAKER_160: And I mean this sincerely is homebrew. Great job. I appreciate it. All right. We'll see everybody next time on this week in service. Bye. Bye.