SPEAKER_00: On this week in Venture Capital, we're going to take an entire hour of question. Myself and GRP's newest analyst, James Bailey, joins us.

SPEAKER_03: There is no stopping an idea whose time has come.

SPEAKER_05: But the best entrepreneurs don't stand still with an idea. They get to the business of getting things done. So step forward with your idea. And when you're ready, sit down and tell me how you want to change the world. This week in Venture Capital.

SPEAKER_08: Welcome to this week in Venture Capital. Today we're going to take an entire hour to answer questions, if you have them. If not, we're going to make them up anyway. And my guest this week is James Bailey. James is someone I'm excited to introduce to you. He's a new analyst at GRP Partners. And welcome. Thanks, Mark. I thought as people start to prep on the questions that they have, and I'll start looking in a moment, it'd be useful just to know a little bit about your background, how you got this space.

SPEAKER_12: So I graduated from Harvard and went to the Highland Consumer Fund, where I worked on e-commerce with Tom Stenberg, who's the founder of Staples.

SPEAKER_13: So talk a little bit about Highland. Boston-based firm. How big? What kind of stuff did you work on?

SPEAKER_12: It's a Boston-based firm. It's a $300 million sister fund to Highland Capital, which has done things such as kind of Gamesville back in the day, did Lycos, and kind of more recently did Quattro in the mobile space. And I think I came in as a kind of analyst to work on their practice moving technology and retail together. Tom Stenberg has an incredible network in the traditional retail world, so that I found it to be pretty interesting to move that more towards technology advantage.

SPEAKER_17: Just an entry-level job? Yep. What does entry-level look like in venture capital?

SPEAKER_12: I think that you spend a lot of time kind of moving between balancing the partner's deal flow and then trying to source your own kind of deal flow and build a network yourself. Okay. So I think that you have to balance both being a person that is very, very dedicated towards pushing deals through that is within their network, and also bringing your own to the table and kind of developing your network.

SPEAKER_22: And are you expected to have certain skills coming in, or they're just looking for raw potential and they teach you how term sheets work, how cap tables work? I mean, because you didn't come out of two years investment banking or something.

SPEAKER_12: No. I think that you learn that kind of to start with. That's the basic building blocks that you have to learn in the first, you know, two to three months. And from there, you develop the kind of financial analysis skills and more banking modeling kind of.

SPEAKER_08: And you had done an internship in venture capital at some point. Was that before Highland? Was that after Highland?

SPEAKER_27: So it was before Highland.

SPEAKER_12: I spent a summer at Excel Partners working, kind of doing a consulting project on the application platform when Excel opened, or sorry, Facebook opened the API. Okay. And so got to know some pretty luminous names in the space there.

SPEAKER_30: Right. Presidio Media Group, which actually became Zynga. Okay. It's one of the companies that I had some experience with. How big were they back then? They were 150,000 installs, and it was Mark Pincus and another coder in an office.

SPEAKER_33: It was two people. Two people. So it was tiny.

SPEAKER_26: Presidio.

SPEAKER_34: And you, of course, took 50% of the company from your personal investment.

SPEAKER_35: Yeah. Yeah. No, nobody noticed that. But it was... How did you start working with Presidio Media Group?

SPEAKER_30: So the first thing that I looked at was who was getting enough traction to really pop up in terms of the leaderboards on Facebook. Yeah. And one of the developers that was an EIR at the time developed an app that basically scraped the Facebook application data for installs and then activity.

SPEAKER_12: And so that we were able to figure out who was creating apps and what the attention was and how fast they were gaining users.

SPEAKER_08: So here's an interesting thing that often isn't talked about in venture capital, but one of the things I think you're pointing out.

SPEAKER_38: If you make an investment in a platform, and we all talk about platforms, the Facebook platform, the YouTube platform, the MySpace platform, the Twitter platform, those companies have a very unique insight into very early on who's trending up. So if you're an investor and you're on the board and you have access to that data and to the management teams talking about who's trending up,

SPEAKER_10: in a way you have access to your next generation of deal flow, right? I think you do.

SPEAKER_12: At the same time as an investor, you don't necessarily want to double down on the space.

SPEAKER_19: I think you want to encourage that ecosystem of companies and features that at some time you may co-opt or you may purchase. But I think that Excel did an interesting thing. It may not be the best for them as a venture capital firm, but as an investor in Facebook,

SPEAKER_12: not creating a fund focused directly on investing opportunities was, I think, a smart thing. Okay.

SPEAKER_41: Yeah. So you were at Highland. How long were you at Highland? I was there for two years. Okay.

SPEAKER_11: And remind me, how big did you say that particular fund was? It's a $300 million fund. Right. And it's a sister fund to an $800 million fund. Okay. With a large part of the GP being. And then you went where? And then I went to TA Associates. Okay. And tell us about TA just so people will know more about it. TA is a later stage growth equity firm, mainly focused on kind of three basic sectors,

SPEAKER_12: which would be consumer, internet and technology, and business services. It's been a very successful fintech investor over the past 15, 20 years.

SPEAKER_46: Great.

SPEAKER_47: And why LA? Why GRP? Well, my fiance's out here. Yeah. She's an actress. Yeah.

SPEAKER_49: And she happened to become pregnant, which I forced my hand and made it so that I had to move to the Best Coast and get a little sun, raise my son in a little better weather than Boston.

SPEAKER_01: Did you steal that line from me, that Best Coast? I don't know. I don't know. But he's going to be a Celtics fan, I can tell you that much. So, no.

SPEAKER_17: But, you know, like the West Coast and East Coast thing. And I jokingly, for everyone on the East Coast, because my wife's from the East Coast,

SPEAKER_52: and I always call it the Best Coast and the Least Coast. But that's just my little fun. Well, it's the right coast. That's the other way to look at it. Well, yeah, they say that's the right coast and this is the left coast, right?

SPEAKER_53: Yeah.

SPEAKER_17: You know, they always say California's the land of fruits and nuts. And they always like to point out earthquakes and all that kind of stuff. So you came out here. You've been on board about a month. We're certainly excited to have you. I can tell you we got, every time we've gone through recruiting, a phenomenal inbound list

SPEAKER_57: of people. And it's very hard to find someone who's a perfect fit for the firm because you want a combination of someone who's got good analytical skills, has gravitas, is ready, willing, and able to do some of the work that sometimes can be spreadsheets, calc, quant, research, analysis, but someone who also has the gravitas to make senior calls in the companies, right?

SPEAKER_11: I think the great part about my initial experience at a firm like Highland, I think that there's

SPEAKER_12: some very good analyst programs. Yeah. Bessemer is one. They really teach you how to kind of look for a roadmap into what a good business model is. And also, you learn the background of the financial analysis skills by basically being forced into it. It's the same as being a banker, you know, being a freshman banker. You kind of, you have to either sink or swim, and those skills you need to learn. I think that developing the gravitas is difficult because you need to spend enough time on the phone with people that are senior, that are smarter than you, and be willing to ask the questions and not feel kind of afraid to look stupid.

SPEAKER_08: Great. Well, we're going to take questions now. So if you want to get your questions coming in, you can get them in on our chat room, which is thisweekend.com forward slash live, and I'll be looking at the board. You can also send a message to at msuster, m-s-u-s-t-e-r. So I'm going to just read this live. I don't know if it'll be a good question. What kind of projected user data do you expect to see in a deck or a pitch for a social network,

SPEAKER_38: time on site, bounce percentage, page views, et cetera? What are you looking for? What have you looked for in the past or when you were involved with Accel, not asking for Accel proprietary stuff, but what do you like?

SPEAKER_60: You know, what's proof point enough for you?

SPEAKER_12: I think time on the site's very important because the stickiness is the number one thing for a social kind of site.

SPEAKER_19: You really need to see not just hits. You need to see a greater amount of actual activity on the site.

SPEAKER_12: That was something that very early on we saw with the games that Zynga or Presidio Media group was creating and that they really had activity.

SPEAKER_11: And it was the social aspect of seeing someone's face in poker.

SPEAKER_38: I would define it this way, James, is, well, first of all, I'm very, very, very public with the fact that 70% is what I'm looking for as management and high potential, right? So sometimes that requires for a consumer app that you see a ton of traction. Other times it doesn't. If you're investing in a team that you believe has high potential, but they don't yet have traction, obviously your expectation is you're investing in a smaller price.

SPEAKER_08: Once there's more proof points, then there's going to be more inbound interest from investors and a higher price. But I really look at two things. One is customer acquisition. How do you acquire your customers today? If it's mobile, how are you getting them? If it's web, how are you getting them? How do they hear about you? Is it PR or is it affiliate deals? Are you buying traffic? You know, what's driving traffic? And number two is engagement, right? So you're going to have a natural amount of churn, a certain number of people come to your website or download your app and then churn. And I look at a zero to one day churn differently than I look at one to 30 days because there's a certain number of people who just come. They're looky-loos. They don't understand what you do.

SPEAKER_38: They download your app. They sign up for your service. They never come back, right? In the old days, we used to call it the tech crunch bump.

SPEAKER_08: You know, you'd get 65,000 users when you had an article. And then I look at how those people hold after day 30 and beyond. But really, for me, it's about looking at does the trend line go up for customer acquisition, number one, and how does retention do? I looked at a company today. I won't name them. But they produce games. They're actually a game developer. And they produce them in conjunction with people on Facebook and Hi5 who already have very good distribution.

SPEAKER_57: And so they're looking to fund the growth of their development platform. And what we know is in the next 45 days, they're going to roll out on the two games that they

SPEAKER_08: developed across two different platforms. And I said to the team, I mean, this isn't nine months away. Let's look at this together. In fact, I want to involve you in looking at it. I didn't get a chance to tell you yet. Is let's look at the data together and see how it does over the next 45 days. And I don't think necessarily it has to be hockey sick. But really, what we're going to look at is the same things management will look at, which

SPEAKER_57: is what is the data telling us? Where are we doing well? Where do we need to improve? You know, how valuable or not are these people? I'm just going to go to the next question is, what are your thoughts on using equity at recent valuations to pay legal fees? That's Mark Landai, a regular viewer. So what are your thoughts on using equity to pay legal fees? OK, so I'm going to answer this question if it's OK.

SPEAKER_08: I interviewed Dave McClure last week, and he said, we're innovating at 500 startups. And one of the things that we do is we don't charge companies legal fees when we fund them. Perhaps that is because he totally wants to innovate and say he's got a differentiator. Perhaps it's because they're investing such small amounts in the companies that putting legal fees to them would be a problem. Perhaps it's because he has a different economic model from his LPs and what he's allowed to charge and what he's not allowed to charge. I don't know the answer, but I can tell everybody, because I think a lot of people don't understand why legal fees get attached to companies. So venture capital funds, and this is whether you like it or not, I'm just explaining to you how it works. Venture capital funds usually operate on a 220 rule. Better firms sometimes can skew those numbers up, but it's 2% management fees per year, usually,

SPEAKER_57: on the funds you have. So if you have a $100 million fund, you're looking at $2 million in fees per year.

SPEAKER_08: And that is not partners pay or staff pay or whatever, it's staff and partner pay plus office expenses, travel, marketing, any investments you're doing. So it's 2% per year. And the 20% refers to carry. You know this.

SPEAKER_38: What carry means is if we have $100 million, we have a responsibility to return $100 million

SPEAKER_08: to our shareholders, and then above that, that's called the hurdle rate, above that, you know, we get 20% of the profits, okay? So 2, 20. And the model that has worked is if all of our legal fees came out of our management fees, it would end up being cost prohibitive to most firms, to many firms, not to all firms. The smaller a fund you are, the more of a cost impact it would be.

SPEAKER_57: So those costs are typically pushed into the company operating costs. So if you raise, call it $2 million, you can probably expect about $20,000 to $30,000 in

SPEAKER_08: an A round legal fees. My goal is to make that as cheap as possible. So what I often will do, just in alignment with the entrepreneur, is sometimes I'll actually

SPEAKER_57: share their lawyer. Because, look, in an A round deal, I've done 500 of these. Well, not quite 500. I've done quite a few of these. It's pretty easy for me to figure out, and I won't have to ask that many questions. And so by not having two separate lawyers, they're not getting two separate sets of fees. But on a B round, on a C round, you're just going to have to accept that it's the way the industry works. I don't think the industry is going to change, even though some people suggest it will. And I actually think it's not that big a deal, provided that you can control those costs. What is the fastest you've decided to invest in a non-seed company from pitch to closing?

SPEAKER_38: How fast did you see deals?

SPEAKER_11: I guess at later stages, probably longer, right? At later stage, I don't think we did anything that was under a month of full diligence.

SPEAKER_19: I mean, I think when I, in one very interesting case, a company was about to run out of money. We had looked at the company and done a ton of diligence about six months prior. And basically, we knew that at this price, we were very interested in it.

SPEAKER_12: And so it was about a week. It was not a long time.

SPEAKER_72: Right. I would say this.

SPEAKER_73: Sorry, I'm just writing down a question.

SPEAKER_38: So the fastest I ever did a seed investment was I agreed it on the day they came in, and we funded eight days later. Now, that's a seed investment. There's limited diligence. They didn't have customers. They had a product built. But I want to be clear. I've always said I invest in lines and not dots. And what I mean by that, James, is the first time I ever meet you, you're just a single data

SPEAKER_08: point. I don't know how you act in bad times. I don't know how things go in good times. So I like to let data, I like to let time move on. And it's okay to me if you have adversity. I like to see how people respond to adversity. So we had a company come in today that you and I spent time with. I won't name the company, but I saw them last in May. It was great to go from May to March and say, what have you achieved?

SPEAKER_57: And it's okay to say, well, they didn't say this, but if they would have, we struggled a bit on funding, this customer model didn't work or whatever, that's okay, because then we can talk about what you learned from it. But over time, that's good to see.

SPEAKER_38: So if I know the entrepreneur, if I'd met him before, if I can get all my partners lined up together because four of us need to make the final decision, I think the fastest you'll see a term sheet come together at GRP anyway is about a week.

SPEAKER_08: That'd be a term sheet to a week. It's usually for a team we know. If we don't know the team and don't know the space realistically, by the way, this is all market driven. In 2011, there's a lot of pressure because it's very competitive for deals. You might see two to three weeks to term sheet. And then the process from term sheet to closure can be anywhere from 30 days, probably at the

SPEAKER_57: least, to two months, depending on how much diligence is there. Now, I'm pretty sure, yes, it's Logan Kelly asked, can you explain the diligence, please? What diligence goes on?

SPEAKER_82: Logan Kelly would like to know.

SPEAKER_81: Well, I think we do a lot of kind of basic diligence, background of the founders.

SPEAKER_19: It's important to kind of be on board with the management team in that way. And also, you know, financial diligence, does this model work? Is the, you know, are the dogs eating the dog food? Can you see a clear path to profitability? I think that when it comes to diligence, you know, there's a legal aspect. You have to find out if they have IP, if there's something that's truly unique about the product. In large part, I think that what you're trying to figure out in diligence is validating whether your hunch around the market is true. And so that I believe that the financial diligence on the Series A can be minuscule. You don't have much traction to prove out. You're largely looking at what you think of the founders and their background, and then also how their IP fits in the ecosystem of the market that they're looking at.

SPEAKER_84: Sure. I would say this.

SPEAKER_08: What people need to understand is that there are two types of diligence. You've talked about it. Business diligence and legal diligence. What I say to people, and this is something, you know, because part of the show is about teaching people, is when you sign a term sheet, okay, sorry, let's say this. There's pre-diligence, diligence, business diligence, and legal diligence. Pre-diligence is I'm trying to decide if I want to invest or not. So what are the things that we do as VCs, right?

SPEAKER_57: We'll call friends of ours that are experts in the field. I recently looked at a music startup. I'm okay at understanding music. I don't understand it intimately. I called five people I knew in the music industry and said, what do you think about this idea? I never make those calls without telling the entrepreneur I'm going to make calls. So I like to make that pretty clear. So there's that.

SPEAKER_08: We sometimes will call a company. I made some calls to Twitter about a deal that we're looking at that we felt would require Twitter to be supportive of the idea or at least not negative to the idea. Getting company reactions that they would have to work with really matters, right? So we do a lot of that kind of stuff. When it gets to term sheet stage, you're normally asked to sign a period of exclusivity. Not everybody asks for it. Most people do. And that period of exclusivity can be two weeks, four weeks, six weeks, eight weeks.

SPEAKER_38: I think the norm, just gut feels about six weeks exclusivity. What I say to entrepreneurs is it's hard to negotiate out of that if you want to work with

SPEAKER_08: that firm because they're committing legal fees to you. By the way, if the deal busts up, the VC pays the legal fees. Not always, but usually. Once they start committing legal fees and serious time to the legal and due diligence process, they may even be paying people to do reference checks on you or whatever. You know, they want to complete and they want to be sure other people aren't then trying to steal it away at the last minute. I tell entrepreneurs your best strategy is to split diligence into business and legal and say two weeks for business, four weeks for legal. But at the end of two weeks, I want sign off from you. And this is not legal. It's it's more reputational. I want to know at the end of two weeks, have you done all the calls you needed to do on my reference checks? Have you done all the business diligence you need to do? Have you reviewed my plans? Have you done any tech analysis you need to do? It may be three weeks, but whatever period of time that ends. At the end of that, if you confirm that you're done on business diligence, then the second period, the legal due diligence, I have no problem being four weeks. But reputationally, it's not legal.

SPEAKER_38: Reputationally, I want to know that you're done on business diligence. So if they end up pulling out of the deal, it's got to be because there's a lawsuit

SPEAKER_08: or there's some legal thing that popped up that they didn't know about or, you know, something egregious.

SPEAKER_88: I would agree. I think that the business diligence should be rather forthright and pretty much up front.

SPEAKER_89: Yeah.

SPEAKER_19: So that you're able to tell them whether you believe in their business model. And this is something that you're likely to fund given reference checks and the rest of kind of the background working out. I think it's disingenuous. And VCs often get a very bad reputation for stringing entrepreneurs along in the business diligence process

SPEAKER_12: when it's really just it's something that just reflects badly on the profession in general.

SPEAKER_38: So anyway, often I don't see people split it up. So you end up with six weeks of diligence. It's just a strategy. It's what I did as an entrepreneur. I got people to accept that.

SPEAKER_08: I think you can, too. I would always agree to it if people asked. B.D. Andral has asked about valuation.

SPEAKER_91: How are valuations set? You want to talk a bit about that?

SPEAKER_88: Well, valuations are usually set in terms of some amount of users,

SPEAKER_19: some amount of kind of traction on the site for a Series A or an angel round. Often your valuation can be based on the founders, what their background is and how much they are kind of bringing to the table. You can look at a market. But at the end of the day, it goes based on gut feel, earlier stage. Later, you can look much more at kind of not fundamental multiples of EBITDA, but generally you can kind of be looking at something in the range of 10 to 20 for a very successful, fast-growing company in a Series A, B, C, D round. And, you know, I think valuation is one of those really tricky things. We've seen a huge creep in the past two years, really, where stuff is coming far, far off of fundamentals

SPEAKER_12: as you see kind of trends on the Internet and digital media really accelerating.

SPEAKER_08: So, let me say this, any stock, public or private, and this is just stock, is worth exactly what people are willing to pay for it. There's supply and there's demand, right? We know that, right? The way that public stock markets value the stock is you have mutual funds, which are determining almost all the stock valuation these days, because retail investors are really de minimis.

SPEAKER_38: My wife hates when I say that word.

SPEAKER_52: She says, your S-A-D word. I don't know why I like it, de minimis. It's a small. It's a good mouthfeel. It is. It's small. I can feel very self-important when I say it. You feel big. De minimis.

SPEAKER_08: And so what happens is the funds that are buying stock, what they do is they look at two things, really three things, let's say. One is they look at discounted cash flows. So that's saying, what do I project for the next 10 years I believe this cash will be produced in cash? And then I discount that to today's value. Number two, they look at something called terminal value. I don't know. You must have learned this from your days in BC. For me, I had so much fricking economics in undergrad and MBA that it drove me crazy. Terminal value is the value of your company after that. The problem is most smaller companies that are high growth, the overwhelming majority of the value in that asset is in the terminal value, not in any analysis of their five-year cash flow or 10-year cash flow. Almost all the value is in terminal value. And David Sachs, who runs Yammer, I think, is the guy who once said this, that it kind of made a light bulb go off, which is that's why the third factor really matters. The minute any company stops with that rapid ascent in growth, their value drops immediately because the growth is what is people build up this terminal value in the company. And so if you're not growing, like, there's always a tradeoff in companies between profit and growth.

SPEAKER_57: So you can say, yeah, we hit profits. But if you're growing 8% a year, like, no one gives a shit, right? Unless you're, like, super big company and they're looking for GE-type growth. But even GE is growing more than that. If you have losses but you're growing revenue at 120% a year, you're going to get a lot of people interested. So there's that tension, and that tension is actually filled by venture capital, private equity, mezzanine funding, and public stock markets. That's what fuels growth. So if you look at Salesforce.com, I mean, Salesforce.com lost money for years, but everyone was investing in the growth.

SPEAKER_95: No.

SPEAKER_57: So I just want to say one more thing, James, and I'll shut up. And you've already realized this about me as I can be very long-winded.

SPEAKER_73: I like to give long answers to short questions. And he tells us to be short. I know, I know, I know.

SPEAKER_08: Private market valuations work exactly the same way with one exception. And by exactly the same way, I mean supply and demand. So over time, values at a seed investment, at an A investment, at a B investment will fluctuate. So an A round in 2008, September 2008, is priced very differently than March 2011, right? So they change based on market conditions. Why? Well, there's less demand for investments in that space. So you're raising money. You might be lucky to get someone to give you a million bucks in September 2008, right after the crash. March 2011, people are falling all over themselves to give you five million bucks or 48 million bucks, right? And that drives price up. It's competition.

SPEAKER_38: So the norm, well, the norm in a market, A round investment, historically, two and a half to four million pre-money valuation, raising $2 million. Up to maybe five or six million pre-money. If you're an experienced entrepreneur, you might be able to start by raising $5 million at a $10 million valuation, something like that. But that's the spectrum of normal. And then there's crazy valuations, right? Like if, I don't know, if Zuckerberg left Facebook and wanted to raise money, he'd raise it any price he'd want, you know, whatever.

SPEAKER_57: That's the spectrum of normal. The spectrum of normal for a B round at the bottom end, $8 million to $12 million pre-money, unless you've got huge numbers to prove otherwise, right? But if it's still all on the come, on the terminal value, $8 to $12, that's creeping up to kind of $15 to $17 in a B round, still betting on all the promise. But it all has to back into one thing, which is, how much am I going to exit this company at? And exit comes down to two things. It comes down to IPO, and there's not a huge IPO market, or down to M&A. But as an investor, if I'm going to invest at a $50 million post-money, I have to expect that I'm going to have a way to exit this company at $250 million or higher. And if I can't do that, there's going to be a collision between my investment price and my exit price. So is that long enough? Concise. Yeah, concise. Long answer, short question. Tio Guerra would like to know, what happens to equity when new money comes in? So I'm going to give you the data. Let's say you raised $1 million at a 4-pre, so someone took 20% of the company. You go out and you raise $2 million at an 8-pre.

SPEAKER_101: Describe to Tio Guerra what happens.

SPEAKER_10: Well, you'll be diluted in that your $1 million at a 4-pre, 20% of the company. Well, let's take management, and then we'll talk about equity. Management and equity. Well, they're both the same. Both the same, yeah.

SPEAKER_30: And that you'll be diluted by the 20% that was bought at the 8 million pre will end up being a greater percentage,

SPEAKER_11: whereas your $1 million on 4 will be less. Right.

SPEAKER_38: So literally, if you own 20% of the company, you individually as a manager, or you're the equity investor who put in $1 million, and if you don't participate in the next round, that actually gets diluted by a further 20%. So $2 million in divided by 10 million post money, so it's 8 pre, 2 on top, 10 post, 20% of the investment, gets diluted by 20%, meaning your 20% ownership goes down to 16%, right? So that's how it works. As an equity investor, you're actually given the opportunity to invest your pro rata amount in the new round,

SPEAKER_57: so you can protect your 20% ownership if you want to. Yep. Right, so that's how it works. So I'm just reading. I should have worn my contacts today. It would have been very useful. Another question for the audience, so that's not for me. $250K raised, pre-revenue, iPad, iPhone, app space.

SPEAKER_111: How much do I give up? How much you give up, you know, depends on...

SPEAKER_11: Depends on the valuation. I mean, I think it's all about your traction and what market you're going after at the end of the day.

SPEAKER_46: You know, I think there's a lot of interest there.

SPEAKER_08: It goes down to supply and demand. How much are people willing to give you, and how much are they going to want to own of the company?

SPEAKER_38: Normally investors, professional investors, I tell people that the fairway is 25% to 33% as a class that people want to own per investment round. So if I want to give you $2.5 million, you know, that 7.5 pre-money is your pre-money valuation, would imply that I get 25% or the low end of the range. If I invest at a 5 pre, 2.5 million gets me 33%. So the fairway is between 5 to 7.5 pre-money. And if you have a single investor coming in, maybe it'll be 5, you know? If you have 2 or 3 guys kind of talking to you, maybe not committed, maybe it'll be 7.5. Now, if you're super hot, you can get it to 20%.

SPEAKER_08: I mean, if you're hot, you can get it to 20%. If you're super hot, you can get it lower. But usually 20% is kind of the minimum.

SPEAKER_88: I mean, I think that the 6 is the new 5.

SPEAKER_12: If you're looking at, you know, Series A's or Angel Rounds where people are raising a million on a pre-money of 5 two years ago, that would be now 6 or 7.

SPEAKER_118: So Davey Dukes thinks we're sharks for wanting 30%.

SPEAKER_38: Let me tell you, Davey Dukes, first of all, my job here is just to inform you how the industry works, okay? Oh, not me? Someone else's sharks? Sorry. He's saying, no, not you, not you.

SPEAKER_08: Okay, I just want to be clear, first of all, when I talk on the show, I really try hard to talk about how the industry works. That's the industry expectation. But I do think it's a fair trade for a company that really doesn't have a guarantee of success. Giving up 20%, 25% I think is probably fair.

SPEAKER_81: We're looking at companies with no guarantee of success. I mean, they sometimes are pre-revenue, often are just getting traction in terms of their user base.

SPEAKER_19: So we're willing to take on all that risk, but we need to own a lot of the company because you're betting on a person, an idea, and a potential market,

SPEAKER_12: but usually not a lot of actual revenue, which when you look at terminal value is what you care about.

SPEAKER_08: Somebody asked, and I'm sorry I lost who actually asked this.

SPEAKER_38: Oh, sorry, it's Weekend119, wants to know about whether investors are interested in companies that produce their own innovative content, perhaps if they don't yet have traction. And I'm going to have to sort of parse what I think the real question is here. I'm not sure exactly what they mean, but let me say this. As a first rule, you should know this as potential entrepreneurs, VCs hate content businesses. And I'm not saying that's a good thing or right. Don't shoot the messenger.

SPEAKER_08: But it's a truism. They hate content businesses. And their reason for saying they hate content businesses is they believe content's hit-driven, particularly around video or even games. You know, Angry Birds is a huge success. People will invest in it after the fact, post-hoc.

SPEAKER_38: But going in, Angry Birds wasn't going to raise a ton of money.

SPEAKER_08: But if you can build predictability into your content model, then people are more interested. We haven't talked about it publicly, but we did invest in a content business. They produce original videos. And they have shown over the last 18 months very predictable usage patterns. They're very strong in the verticals that they participate in.

SPEAKER_57: And they are investing not just in content production, but talent acquisition, content production, and distribution deals. And that's what excited us.

SPEAKER_19: Well, I think an interesting example is you look at something like ARK, which everyone's familiar with Rebecca Black right now. She's the most infamous young woman on YouTube. And 22, 25 million views, if you've got a model that works, you can continue to create content and execute against that. That becomes interesting. And I think that the investment you're talking about is a great example of that.

SPEAKER_38: So B. David Dural is still stuck on the issue of valuation, so I want to go back to it, which is he says,

SPEAKER_08: if I give up 30% of my angel round and then I've got to do an A round, a B round, and a C round, how do I end up owning any of my company by the time it's done? Fair point. Let me say this.

SPEAKER_38: First of all, try as hard as possible, if you're doing a really small angel round, not to dilute 30%.

SPEAKER_08: Angels are not expecting the exact same ownership as VCs are. They're typically writing the normal amount for a historic angel is $50,000, right? $25,000 to $50,000.

SPEAKER_60: It's possible to raise, call it $250,000 and only dilute 10%. That's possible.

SPEAKER_81: I think the most important thing on the angel rounds is really only raise what you need.

SPEAKER_19: I don't think that you want to raise a ton because you want to have that kind of runway. If you kind of look, you need proof of concept, if you're early stage, raise what you need to kind of get out a year and then come back again because smaller bites of the apple are much better because you end up with a lot more ownership at the end.

SPEAKER_38: So call it 10% to 15% if you can do it.

SPEAKER_08: And then the goal is really to make sure your valuation is continually going up so the new money comes in,

SPEAKER_132: does dilute your equity ownership, but it increases your aggregate value of what you own. Yeah. You want to be a creative at the end of the day.

SPEAKER_134: You don't need to kind of go to Take Economics 101 to see that.

SPEAKER_136: But I'll just give you the, be David Doral, I'll give you this exact example as an IPO.

SPEAKER_08: When you IPO, you're typically selling 20% of your stock. What that means is you're taking 20% dilution. But you may have had a private company that the private valuation was $500 million. When you IPO it, now that there's more demand for your stock, broader distribution of demand, the valuation may go up to a billion dollars. You may have taken 20% dilution because you raised $200 million to get there. But you now have a billion dollar company for which you own. So you own 20% less, but double the value in terms of aggregate value. But I'll give you some guidelines. Here's a funny thing, okay? Like I'm very controversial on this topic, James, is I don't believe in the co-founder model for a whole lot of reasons that I'm on record. And I know everyone else agrees with it. But let me say this, people come into my office and they want to grind me over 3% or 4%. Like, you want to own 27%, I only want to give up 23%, and you're grinding me over 4 points, right? And that's a fair negotiation, right?

SPEAKER_57: That's a negotiation we should have. But they're willing to dilute themselves by 66% before they even started doing a day's work

SPEAKER_22: by having two co-founders.

SPEAKER_88: I'll debate you on this one because I actually disagree with this. I think that often you find teams of people that work well together, that bring things

SPEAKER_19: together, it's better than the single-founder model. You find the rare Zuckerberg that, you know, is able to do it in large part by himself without

SPEAKER_12: a lot of people helping him. I just recently, actually, with Jason Calacanis, invested in the company with four founders. Right. Equal shares. Yeah. And they're willing to kind of sacrifice their own equity for a larger vision and seeing that they're larger, you know, larger than some of their parts.

SPEAKER_17: So here's the thing. It definitely works sometimes.

SPEAKER_38: What I have found is that, number one, if the teams all worked together before and they really know each other, that's fine. And the greater good.

SPEAKER_08: And if you're going to build a billion-dollar company and whatever.

SPEAKER_38: But more often than not, you don't know each other all that well. And as the company progresses, it creates a degree of instability in the management infrastructure when there's fights over direction. If, you know, normal business takes seven to ten years to get an exit, you have life events, people get married, they have kids, they lose interest, or their priorities shift, they move

SPEAKER_08: on to the next company. And what I like to tell people, James, and again, I'm in the extreme minority, start it yourself. And you've got complete ownership of direction. Give huge stakes out to other people. I mean, you can give 20%, you can give 30%, whatever, to someone who you think, like a tech co-founder, if you're tech, or a business co-founder, if the tech guy starts it, give them 30%, give them 35%, give them 40%, give them 45%. But if you fall out of love, it's your prenuptial agreement.

SPEAKER_57: And I've got to tell you, people fall out of love more times than they don't. The problem is that the winners have produced these examples that propagate this mythology, Larry and Sergey. You've got the founders of YouTube, Steve Chen and Chad Hurley. You've got the two founders of Yahoo, David Filo and Jerry Yang, right? And so we celebrate this, and everybody says it's important. And again, I know I'm in the minority. But if your goal is to maximize, sorry, you want to create a company to change the world. Let's just assume all that, right? But your goal is to maximize ultimately your returns. I think you're much better off starting it yourself. Take the 30%, 40% dilution to bring in some other people, but retain control of vision. And I just don't believe in starting a company like that you funded, owning 25%, because I can tell you for free, after three or four rounds of funding, you're going to own like five or six percent of it. And then it better be a huge company to be economically worth the seven to ten years you're going to need to put it in. And most people who do that model are first timers and naive.

SPEAKER_49: Learning something. I see you like to backsharks. You're not necessarily one. You like someone who's driven. Of course I want to backshark. I love it. I love it.

SPEAKER_57: I like people with a chip on their shoulder. I like people who want to make money. I like people who are decisive leaders. You know why people start companies with three people? Because no one wants to take the leap alone. It's lonely. It's like, I've got to go tell everyone that I'm doing this startup, and if I fail, I'm failing. Like, there's safety in numbers. Real entrepreneurs, they're not afraid of that. You know, it's Mark Pincus. It's Mark Zuckerberg. They're not afraid. Like, I know I'm self-confident in what I'm doing. I don't like greedy founders. I like founders who will really share the equity. But if we fall out of love, mate, prenup. You stop working quite as hard, prenup. And I like that. And by the way, when I fund, I like to know who that person is, who that person in a time of crisis is that I'm going to back. Because here's the biggest problem, James, is nobody writes about this. I can't even write about it because I know places where crises happen. And I've seen them for the last five or eight years. But it'd be pretty lame to then publicly write about it when you're in the know. So it doesn't get written about. It happens every day of the week in StartupLime, I promise you. So I'm going to look for other questions. Does a sole founder need a team after building MVP but before raising seed stage? That's from Ram Vaz.

SPEAKER_38: Listen, I believe that these days in 2011, you have to have product to raise money. In the old days, you needed a good PowerPoint. People want to see product these days. So it's pretty tough to do that without a tech team. And I believe that you have to have tech as the DNA of a company. Not any company, but a VC-funded startup player in the broad tech space, right? It has to be part of your DNA. If you're outsourcing, if you're having consultants build it, you know, get lost.

SPEAKER_30: I think you need to be able to A-B test right there.

SPEAKER_19: I think you need to be able to go back as the product guy and talk to your tech and be able to kind of tweak what is not working. It's one of those things where we, you know, we've talked about this before. People that are outsourcing are much less in control of their product. Yeah. And just at a basic level, you can't make those tweaks that, oh, we saw this spike in traffic because we did this. All right, we're going to change where that header is. And it's also not part of your DNA. No. And I think that if it's not and you don't have those people to bounce ideas off of,

SPEAKER_30: you don't understand what you're capable of.

SPEAKER_52: If you're a game plan, if you're a startup founder, first-time guy thinking, or a woman thinking about raising money.

SPEAKER_38: If you're not tech, I mean, if you have, like, really no experience with technology,

SPEAKER_08: like, take three to six months, log on to lynda.com, L-Y-N-D-A, take some programming

SPEAKER_38: on the side. Like, if you don't have an intuitive feel for it, like, you know, I'm deeply suspicious.

SPEAKER_08: But if you're a business person and you've got at least some intuitive feel for product development, do some spreadsheets. Sorry. Think about where problems exist in the market from your own life experience. And Bill Gross said that himself on the show two weeks ago. From your own life experience, think about where you can solve a real problem that you believe exists in the market. You've got to be passionate about it. It's got to be something you want to see fixed. Get some spreadsheets out. Like, try to calculate where you think you could make margin in some sort of product or service that you offer. Write a basic pitch deck that outlines your strategy. Do some screen designs.

SPEAKER_38: You can do them with pen mock-ups, or you can do them with, why am I forgetting the name of that company, based in Balsamiq, B-A-L-S-A-M-I-Q, I think it is. And it's a little sketch design tool that can be used by laymen. If you have a little bit of money, and this will sound contradictory to what I said before,

SPEAKER_08: but go on to Rent-A-Coder or Odesk. Have someone in the Ukraine or Poland do a basic mock-up, okay? Now, I'm not suggesting outsourced development, but having a touch-and-feel tangible face to what you want to build helps a lot. So what you now have is a little bit of an economic model, a little bit of a pitch deck. Spend two grand on some sort of something I can touch. Do your company legal registration, which you can get done for $300 online, and then go out and recruit tech co-founder to come join you.

SPEAKER_00: Now you've got the vision, right? And that's what scares everyone is. Everyone thinks, I want to create a company, but I just don't know what to do.

SPEAKER_160: You can't get anyone to sign on with real technology. Well, it's very hard without the background to get someone to sign on with your technical

SPEAKER_19: chops to basically build this when it's just your sketches on a piece of paper. I would say that's the first thing, is to figure out your mock-up of how this is going to look before you actually go and kind of think about business plan.

SPEAKER_12: And, you know, that's got to be in the back of your head, but you have to think about product first. I mean, it's a product-driven world, as you say.

SPEAKER_08: So here's the thing, is no tech founder, not no tech founder, very few tech founders

SPEAKER_38: get tapped on the shoulder by an inspirational, excited person who has the passion, the vision,

SPEAKER_08: and, let's say, the gravitas to raise money, and say, you know what, I'd like you to join

SPEAKER_38: and I'd like to give you 30% of my company. Like, who gets told that? You know what happens, James, is people get tapped and I'd like to give you 2% of my company. The tech guys don't get asked. I mean, it happens in Silicon Valley. I'm not saying never, but, you know, what often will happen is someone will approach you and say, let's go do a company together, but they don't have the concept, right? And then you're taking the leap with them. So I think, like, a great tech person who's being offered a chance to have 30% of something that you've already gotten the momentum going, you'll find very good people who will do that. Now, you're at an extreme advantage if you're technical. Here's what I mean. If you have a bit of business acumen, like an instinct for markets, and you can do all

SPEAKER_08: the coding yourself and produce, like, a pretty nice mock-up of a product, and you have the gravitas to go talk to other people, you're at an extreme advantage, which

SPEAKER_57: is why I think Y Combinator has done so well with technical founders, because people can just get stuff working, and it's just extreme advantage. Forrest Schofield, I hope I pronounced that right, on Twitter, is asking, do you feel there's

SPEAKER_166: an untapped deal flow involving college entrepreneurs?

SPEAKER_19: Well, I mean, I think you look at Teal kind of trying to create a Y Combinator of people that are not going to go to college. And I believe that for somebody who went to college and many incredible entrepreneurs in school, I think that it's really a place where you can meet other people that have similarly disruptive ideas. I wouldn't say that it's the only way to do that, but I believe that it's some way to kind of refine your vision and your idea for what the next kind of disruption in business is. So I believe that there's a market for it, but I don't think Teal's, here, look, let me give you some money so you don't go to college, is the way to go about it. I don't mean to be overly negative, and I think that it's certainly a path, but I think that you learn a lot from your peers,

SPEAKER_12: and I think that that is missed if you go straight out of high school into entrepreneurship.

SPEAKER_08: I think that college is a time where you learn about life, you learn who you are, you learn about social relationships, you learn about separation from your parents. I think trying entrepreneurial stuff in college is great. I think even interning at a company or doing evening and weekend, great. I don't encourage people to drop out of college. I think it's four years in your life. I think you need to balance wanting to get ahead and change the world with enjoying your life and your life experiences. And when you die, you only live one life. And I always say this, in 1994, I was living in California. I was very technical. I was working on Internet protocols, which in 94 was early. All my friends were leaving to do startups.

SPEAKER_57: I always wanted to live and work in Europe, and I got the opportunity, and I moved to the south of France, and I worked in a technical role in the south of France, and I knew I was giving up startup land, but I said, look, I can do that later. I choose life. And I feel like that balance of choosing life, life's experiences, I think it makes you richer as a person, both in your professional life and your personal life. That said, if you're in college and it doesn't work out for you and you have a burning need to try it or you're just not academic or you're more of a street person or whatever, I personally don't care if the person I'm backing graduated or not.

SPEAKER_88: It's definitely not a gating issue.

SPEAKER_19: I do believe that, especially in many social things, I think that having gone to college or at least spent some time in college is important.

SPEAKER_101: Well, you dropped out once, didn't you? Am I supposed to say that? No, no. You went back and finished.

SPEAKER_19: I went back and finished, but, yeah, no, I took some time off, and actually I learned a lot about kind of life and myself and also business during that time. Yeah. I think there's no question that I wouldn't be here if I'd never taken that time off.

SPEAKER_175: If I'm not mistaken, I think you told me that you also tried out for the Olympic swimming team

SPEAKER_24: or pre-trials or you wanted to.

SPEAKER_129: Olympic trials. I was a pretty good swimmer back in the day.

SPEAKER_12: I took some time off. I actually ended up separating my shoulder and dislocating my knee in some fun accidents.

SPEAKER_177: So if I don't exaggerate it, but you were, like, at a very high-quality level of swimming.

SPEAKER_179: Yeah.

SPEAKER_57: Which is why I still haven't swam with you. And I've always been a hack. But I do love swimming. And, but this is also a point I'd make to people is when we look for individuals, we look for competitive people. We look for disciplined people. We look for focused people, both in the people we back and in the people we hire. And, you know, of all the things that you had done, that was one of the things that we really liked is the fact that you had chosen an area to excel at and to be competitive in. And I think that's great. And I think, again, that's all, that's all part of it. That's all part of choosing life and life experiences. There's a tech guy who says, I'm a techie. I have good marketing skills. I just hate people.

SPEAKER_125: Do you need to like people to be an entrepreneur? I don't know. Do you need to like people to be a good marketer?

SPEAKER_180: I've got to, I've got to believe, yes. Who the hell are you marketing to? The machines? Listen, I'm sure a little bit of that's tongue in cheek, but I want to make you, no, no, on his part.

SPEAKER_57: But I, the reason I asked it is I think to be an effective leader, you have to be a people person. And I've often said the job of CEO in a growth business is often chief psychologist because your job is to hire incredibly talented people and incredibly talented people fight with each other. They compete for position, they challenge your authority, but they also have personal crises in their life, at home, with work, with performance, whatever.

SPEAKER_18: And if you're not a people person, I just don't see you managing through that.

SPEAKER_160: I think in any organization, you need to have the ability to manage people. And you can't be a good CEO without it. I think that it is the single most kind of clear differentiator between a good and a great CEO.

SPEAKER_64: Now, that said, there are exceptions.

SPEAKER_57: Mark Zuckerberg, I don't know him personally.

SPEAKER_38: I think even he would say, and it's probably fair to say, not a people person in the classic sense of the word. I'm not saying people don't like him. I think the effectiveness that he had as a tech person, as a tech leader, was so extreme that anyone would forgive any shortcomings in people skills. And I think it's the reason Sheryl Sandberg is there. And I think Sheryl Sandberg, it's a lot of the reason that Facebook has been able to scale and become a great company.

SPEAKER_17: I mean, the success all goes to Zuckerberg.

SPEAKER_60: I don't want to take anything away from him. But the scaling, I think, is Sheryl Sandberg.

SPEAKER_30: I would agree with that. I think that she professionalized some of the business.

SPEAKER_19: But at the same time, I do believe Zuckerberg, to be a good leader, to be someone that's a people person, they're not necessarily the same. I think that you can certainly command everything from armies to kind of groups of programmers if you're not necessarily the most affable. But the difference between that and being able to work with people to get a, you know, drive at a consistent goal every day is kind of, that's a skill you absolutely need. And I wouldn't confuse the two. You don't have to be Mr. Gladhanding, you know, EQ of 150. You definitely have to have the ability to get people to do not necessarily what they want to do, but what is going to make this company better.

SPEAKER_38: So ex-Venice would like to ask, and unfortunately it's off the screen, so I'm going to try to paraphrase, would like to know what the investment environment is for physical products, particularly in the L.A. market around B rounds. I think physical products, I tell this to people, it's a tough road to hoe.

SPEAKER_19: Well, I'll cut in on that. During my time at the Highland Consumer Fund, we looked at a lot of CPG companies. I don't know if you're talking about, you know, consumer electronics or...

SPEAKER_194: Any physical products?

SPEAKER_19: So, I mean, we just looked at a, Alief got funded today, $50 million. Yeah. So that's a great success story. I think that there are certain actual CE companies that end up doing very well. I think that you need to be very innovative, completely differentiated from your competition, even if you're taking an old format in terms of video. Flip was a good example. But I really believe that it's a harder road to hoe because you actually have physical products. Your margins are never going to be as good, and you're just going to take so much more of a leap of faith on the part of your investors. Yeah. At Highland, it was CPG companies, we needed to see a fad that was about to become a trend. Yeah. Lululemon being a great example. It's a physical products company. It's pants that make women's butts look good, and also it does yoga. But you really, you see something that it's going from a small group of people that follow this in an enthusiast culture that is changing and becoming so much more mainstream. I could jump on that, but it's still a huge leap of faith because the investment dollars are huge. So I think that your issue is you really need to show concept proof, working in different markets. It can't be something where you've got an L.A. product that sells to L.A. people.

SPEAKER_160: This needs to be something that people can see scale in a tremendous way. Distribution is important, too.

SPEAKER_17: So European founder would like to know if I share Fred's love, and I presume he's talking about Fred Wilson, do I share Fred's love for Berlin startups? Yes, no, maybe. Why? I share love for Berlin. I lived in Europe for 11 years. I used to travel to Germany twice a month. I had a lot of customers all over Germany, and Berlin, by a long shot, was my favorite city in Germany. It reminds me of San Francisco, very liberal, hip, great music scene, whatever. I'm a little bit, and please don't take this the wrong way, European people. I'm a little bit bearish on investing in continental Europe right now for a couple of reasons. One is labor rules.

SPEAKER_08: So this particular person who wrote it, who's from Berlin, will understand Betriebsrat and Betriebsübergung, both of which I learned the hard way. They are labor rules that make it very difficult, even in a startup company, to have labor flexibility to hire and fire. We've had a lot of problems with this in France. And French rules on being able to reduce workforces in bad markets is a problem. I think it's harder to get scale in Europe because country by country you have to build individual teams, individual laws and legislations,

SPEAKER_57: and the ability to have even just multi-language stuff. So German guys don't like English guys coming over and selling them product and vice versa. It's just, look, I built a company in five countries, so I experience it firsthand. If that said German company, and this will sound like a very American-centric view of the world, and I don't mean it to, but if that German company had ambitions to get base camp in Germany and then target U.S. entry, I'd feel a lot better about it. But it's not for Americanism. Again, I like to tell people this. My father's from South America. I'm a dual citizen of the U.K., U.S. I've lived abroad. I lived in Japan, you know, whatever. It's not Americanism. It's knowing that I can get a scale of a large market, knowing that I can be closer to the deal and influence more of their biz dev and outcomes, be closer to the teams, knowing the labor market rules, knowing who the exits are going to be. All of those things are things that make me more interested. You'll know this. We're looking at a European company right now. And I love the company, and my biggest consideration is, can we assemble the U.S. team to help them enter the U.S. market? And as it happens, for the guy who wrote that, right now we are looking at the investment analysis and the U.S. team assembly at the same time. And if we can make them come together, I hope we do this investment.

SPEAKER_19: I think that to that point, any startup today, not any startup, but most startups today have to take a global view pretty early in their lifestyle. So you have to be focused on maybe a certain market, but at the same time, executing against that, you need to have a pretty quick global focus. I see the issue of being in a small market as very much centered around where is the talent coming from, and also what are you looking to kind of expand upon. It's with Brazil and kind of the South America, you can look at it as a whole. But, I mean, I look at companies that are game developing down there, such as Vostu or Mentes, and I feel like the labor laws are not the same. I feel like they're still based in the U.S. mainly. And I think that to that point, you really have to have a more kind of world-centric focus when you're expanding or when you're starting a company. So Berlin startups, you might as well look at that as Europe startups. I believe that you have no great advantage by being focused there, but at the same time, I believe it's a big issue.

SPEAKER_08: You can build a nice business in Germany. It just may not be something that a U.S. venture capitalist would be looking to fund early in its cycle. Webster-esque would like to ask, we keep talking about gravitas, can you define gravitas? Now, Webster-esque will know because I've talked to him about gravitas before and what it means. I mean, look, here's the deal. For most entrepreneurs, here's the things you need to get done to really succeed. You need to hire great people. What does it take to hire great people?

SPEAKER_38: That, you know, let's call it X factor, that thing. They're just like, someone thinks, I don't know why, but I know that guy's going to succeed. I've got to join the cause. I'm going to take a 50% pay cut for a year because this is going to be big, right? It's the person who knows how to get on VC radar screens to get us interested in talking about money

SPEAKER_08: because they just have that way about them. And when they're there, they have a presence to them. It's when they're on stage at a conference and speaking, everyone thinks, God, that guy said really clever stuff that makes me think I want to dig in and learn more. It's the person who can get biz dev deals done.

SPEAKER_57: It's the person who can get in the executive suite at AT&T or American Express or the big clients either that I'm selling to or doing biz dev deals with. And I'm not saying you have to do that in the first six months of your company, but we're looking for the core of that individual who we think can get that stuff done because it's hard to get shit done at a startup and it takes someone who can break through.

SPEAKER_134: I totally agree. I think that whatever you want to call it, I like EQ, emotional quotient.

SPEAKER_19: And I think that it's someone's ability to be likable, knowledgeable, and interesting at the same time and speak to a greater audience with some amount of poise, I think, at the end of the day. You know, why do events like South by Southwest make or break companies?

SPEAKER_27: It's because you're there in person describing what you do, why I should be interested in this, and what the product's about.

SPEAKER_08: I'll tell you a funny thing, just because I get to read the board and you don't get to see it.

SPEAKER_52: Like, there seems to be such an anti-bias towards Harvard. Like, everyone keeps saying, oh, he just went to Harvard, and that's what he means by gravitas or whatever. I don't give a shit. Veritas. I don't give a shit about Harvard. I just got to be clear.

SPEAKER_38: For me, gravitas does not come from where you went to school, what your grades were, or whatever. It's a presence. Like, it's you meet someone and they just have that stature about them. That's the only way I can describe it to people, really. And people want to know why you're wearing khakis in Los Angeles.

SPEAKER_52: We will have to shake you of that khaki habit. Khakis is a very NorCal thing.

SPEAKER_129: In L.A., it's jeans, baby. Bill's khakis. I'll give him a little shout. Or Bonobos, actually. These are Bonobos. Bonobos.

SPEAKER_216: Good startup. There we go. Bonobos is a startup.

SPEAKER_217: I know Andy done well. So, I apologize. I'm going to bugger this name up.

SPEAKER_38: But Suvaj Yoti Ghosh asks me on Twitter, on the same lines, do you think VCs will be keen to invest in business savvy MBAs?

SPEAKER_52: And do MBAs make great entrepreneurs? So, I'm going to answer this one quickly just so we can move on to the next topic.

SPEAKER_57: Guy Kawasaki has a rule which says your valuation is a million dollars for an early stage, a million dollars pre-money for every engineer in the company. So, six engineers, six million pre, minus a million dollars for every MBA in the company. So, if you have, like, six engineers and three MBAs, it's a three pre. Exactly. I love that line because it's tongue-in-cheek. I'm pretty anti-MBA. I'm pretty anti-MBA for a lot of – I have an MBA, so I'm anti-me. I think it makes people more risk-averse because they've got a huge debt to pay back. I think it doesn't teach practical and tangible skills. It does for certain trades. I'm talking about specifically for entrepreneurs. It makes people indentured servants where they have to earn too much money. It's two years out of your life that I'd rather see in the school of hard knocks at a startup. It costs a lot of money. It teaches generalist skills that are less practical. And it creates, especially for Harvard, Stanford, Wharton, the greatest schools. It produces an artificial sense of self-worth relative to your actual skills because you get such inbound demand from great companies because you are a high-potential individual. When you end up at those schools, I'd rather have street-smart, scrappy, chip-on-your-shoulder, wants to tell all those guys where they can stick it because they weren't born country clubs, silver spoon, going to the right school, and they're going to work their ass off so that one day you'll work for them. So anyway, so that's my advice.

SPEAKER_27: Wow. Not as an MBA. I'm not an MBA. And I may have plans to in the future, but at the same time, I can definitely agree with that from not having an MBA, it's an impediment in certain fields.

SPEAKER_19: In venture, there is no gating issue for MBA.

SPEAKER_27: So I believe that it's something where someone went out of their way to get a badge that they had done something that had nothing to do with the core of their vision.

SPEAKER_30: And that's okay. You do meet people there. And I know some great companies that have come out there.

SPEAKER_163: So here's the deal.

SPEAKER_26: I'm going to give a carve-out to Stanford.

SPEAKER_38: And some people are asking me to give a carve-out for Harvard Business School. And I said I'm going to go spend time at Harvard Business School to see if it's warranted. But let me say this. I have nothing against MBAs. I have nothing against MBA programs. They teach lots of good general knowledge skills. There are certain jobs. If you want to go up the ranks in McKinsey, if you want to go up the ranks in Goldman Sachs, if you want to go into certain industries, I think if you want to be a senior exec at GE someday, they're going to care about that. For an entrepreneur, I don't give a shit.

SPEAKER_225: That's exactly right.

SPEAKER_38: So I'll say that. Stanford, I give a carve-out for this reason, which is, A, a lot of the people who come teach there really either have entrepreneurial backgrounds or a lot of people are spending time there. A lot of people go to Stanford just so they can suck up that environment and be around it thinking about entrepreneurship. It's such a unique place. So I tell people, if you really are passionate about MBA and you're passionate about entrepreneurship, go to Stanford. Harvard, question mark, to be determined. Because historically it has been a breeding ground for Wall Street, which is fine,

SPEAKER_08: and a breeding ground for America's or the world's biggest companies, which is fine, and that's great. I don't think it's historically been a breeding ground for startups.

SPEAKER_81: What do they say about Harvard?

SPEAKER_10: It's Goldman, Navy SEALs, and McKinsey. That's it. There you go. Agreed there. Exactly.

SPEAKER_52: Mibbi, M-I-B-I, which I believe is Jess, if I'm not mistaken, question, I have two kids in diapers. Should I wait to start a company? Will I get funded? And do I need a co-founder or a nanny?

SPEAKER_38: Both. Both. Listen, I'm just going to say this as honestly as I can, which is we never exclude anything. The very first guy that I funded as a VC was Jason Spivak. He's my age. He's 42, I'm pretty sure. He has three kids. So, you know, just to prove the point, there are no rules. The most money GRP ever made in an investment was a woman co-founder. The company was Ulta. Returned $320 million to shareholders. In our last fund, it was the highest return. And that return was across a few funds. So, there are absolutely no rules.

SPEAKER_08: However, there are generalities. It does take an extraordinary ability for someone to really be an entrepreneur with kids in diapers.

SPEAKER_38: Because entrepreneurship is always on, all the time, evenings, weekends. It's really hard. You don't control your own schedule.

SPEAKER_52: It's high stress. And if you know that's in your DNA, you know that's in your core, you have a deal with your wife, it works out well, knock your socks off.

SPEAKER_38: By the way, there are two types of startups. There's the I want to raise VC and create a huge startup. And there's the other, which is I want to create a startup, but it doesn't have to be a $100, $200 million exit someday. And that kind of startup, of course, you know, with little kids, it's harder. My first startup, I had no kids. I wasn't married.

SPEAKER_08: During the course of that, I got married and I had two kids. Like I said, life happens, you know, while you're in a startup. Second company I started, I already had two kids. It was bloody hard. And my wife will tell you that. So now I'm a venture capitalist. I still work pretty crazy hours, but I have a lot more control. My little guy this morning had parent-teacher conference at 830. I went. And there was almost nothing that would stop me because no one was going to schedule a meeting that I would say, I'm not going to go to parent-teacher conference.

SPEAKER_210: When you're an entrepreneur, it's very hard to commit to that.

SPEAKER_19: As the son of an entrepreneur, I can certainly say that I think your time and your ability to focus on children, and not in a bad way, is somewhat compressed. And so I think that there's a tradeoff. And as Mark kind of very stutely said, there's people that are very focused on creating a VC-backed, huge kind of market opportunity business, and then there's the lifestyle business. I think there's nothing wrong with wanting to start a company, but you have to have your expectations in line of where you want this to go so that you're not disappointed when three years later you're trying to raise money, and you've got this reasonable, nice kind of small business, but it's not what people are looking at to invest in. I think that you really have to separate out what your goals are going in and what you're willing to sacrifice. Yeah.

SPEAKER_30: Having no kids but one on the way myself, we'll say.

SPEAKER_237: It's hard.

SPEAKER_38: I think you'll find out, but it's a lot more time-consuming than people expect. And the biggest thing, honestly, and not to be cliche about it, is the lack of sleep.

SPEAKER_52: And it's really hard to wake up in the morning when you are woken up three times in the middle of the night and you're operating on four-hour sleep and you've still got to be a peak performer. It's hard to do.

SPEAKER_47: I'll go back to my swimming days for some experience with that.

SPEAKER_38: Yeah, I'm sure you're used to that. Yeah, exactly. But I will say that, again, we do not exclude people. I think we've proven it with our investment. I'm looking for high-potential individuals. But I will say that if I have someone like Jason with three kids, my gut check is, you know, is he a hard worker? Is he willing to travel? Is there going to be an impediment to the kind of business that he or she is building? And, you know, it does give pause, right? You do spend time thinking about it. So many do have a chip on their shoulder. They risk averse, just like VCs can, and they add more to corp strategy and biz dev and people management. Many do have a chip on their shoulder. I think he's referring to MBAs. I'm guessing. Yes, it's the same guy who asked about MBAs. Listen, I don't exclude MBAs. Jason, the first guy I invested in, had an MBA. You know, no problem. And in my experience, if you don't already have an MBA and if you want to be an entrepreneur, I'm not sure it's additive.

SPEAKER_241: Yeah.

SPEAKER_38: That's all I'm saying.

SPEAKER_241: I really have nothing to add.

SPEAKER_38: By the way, if you have a ton of money and it's just not an issue for you and it's part of life experiences, knock your socks off. But the problem is that it's two years of lost wages. It's two years of lost entrepreneur experience at the right time of your life when you most likely are not yet married or having kids. And it creates this $150,000 debt obligation that makes it harder for you to do the things that you need to do. I'm going to read what else people said.

SPEAKER_64: Any thoughts on Netflix and Hulu moving into original content? That's from Ram Baz.

SPEAKER_30: Any thoughts? I mean, I think that you look at YouTube kind of getting up to near a billion in revenue,

SPEAKER_19: and it's a very attractive kind of market opportunity to have user-generated content over your platform and to monetize it. And it's working now in a way that we're trying to kind of profit off of in partnering with our company in the space. And I believe that it's not going to be the great success that they hope it will be, but that it is certainly a logical move. I think that when you look at it, there's a difference between user-generated content that is more organic. And I think that that does better with higher production value. But I think that it's not going to...

SPEAKER_08: Ram Baz is drawing a distinction, and it's one that I want to pick up on, which is there's YouTube in one bucket, Netflix and Hulu in a different bucket, and I want to describe how I see the differences. YouTube is a platform. That platform did well on UGC. But I think what they're really trying to do is drag people up to more professionally produced content, but not TV broadcast quality content.

SPEAKER_57: They're okay with short form. They're okay with three-minute, five-minute, six-minute. They're okay with racy. They're okay with things that's not as polished, right? But they want third parties to produce content. So if there's a spectrum, and let's call it the access is quality, at the top end you have broadcast. Broadcast, by the way, costs $5,000 to $7,000 per minute to produce, just numbers, okay? So a typical show could be $250,000 an episode up to $2,000, $3,000, $4,000, $5 million an episode, depending on the cast.

SPEAKER_08: That's why reality TV is working right now, by the way. It's the cost structure of it because you're not paying these huge fees like they were on Friends.

SPEAKER_57: At the low end, the stuff that we're seeing produced is $100 a minute versus $5,000 to $7,000, and that's the order of magnitude, but it's a different quality. But what you have is an entire generation who are consuming more of that content than they are TV broadcast content, and I think it's fundamentally disrupting the industry, and I'm betting big. And if you have a startup in TV that's disruptive, I'm all in, come see me or send me the plan. It has to be something truly disruptive, and, you know, probably you have to have some experience that proves why it would be of interest. But that's the platform, PlayYouTube. Netflix and Hulu were built on a totally different model. Their model said, I'm going to get access to proprietary content, whether it's TV, show, and film. I'm going to aggregate that, and I'm going to offer that to users either free and ad-supported.

SPEAKER_38: They're saying wrap. Can you tell me how much more I can run, if I can run five minutes or anything, ten minutes, whatever, but I'll wrap.

SPEAKER_57: But what they do, James, on the Hulu-Netflix side is they aggregate other people's content, and they bring it to you, either ad-supported, which is the Hulu case, or subscription model, which is the Netflix case. As you know, it started as a subscription model. Now, the problem is Hulu's existence was dependent upon its investors, the studios, giving the content either free or on an MFN basis, Most Favored Nation basis, that allowed them to offer it through the lean years before they got enough revenue. It's very hard to create that model unless you have a huge amount of money because the studios, even in the case of Netflix, are asking for large, upfront money. And that's why it's so hard in film, television, and music to build a viable business because the content owners want these huge fees up front. Now, here's what's interesting to get to Rambaz's question. I think if you can commission content, let's say Netflix, let's say that Netflix or Hulu can create the next Mad Men, can create the next Modern Family, or even a level of quality below that, maybe they don't have the money to produce it, suddenly you create a reason for someone to take your subscription.

SPEAKER_08: And Hulu needs people to take the subscription. They haven't got that model work. But we know that people pay for HBO just so that in the past they could watch Sopranos, right?

SPEAKER_57: You pay for Showtime because you want to watch Weeds or Californication or whatever. That drives the subscription model.

SPEAKER_08: So for Hulu to succeed, I think original content, not UGC, but original content is a phenomenal idea, almost a necessity. And I think Netflix should do it, and I think Hulu should do it. And it's going to require them to produce something that people want to watch.

SPEAKER_81: I think it's when they transfer from being big pipes to they're actually on the production side and a kind of value-add distributor, I'd put it that way.

SPEAKER_19: I completely agree. I think that Netflix, the bearish trade on it right now is because they are just seen as big dumb pipes.

SPEAKER_13: By the way, I don't agree that they're big dumb pipes for what it's worth. And I also think that they're trading at a pretty healthy multiple.

SPEAKER_08: I would say this to you is it doesn't mean that Hulu necessarily needs to produce its own stuff. It may commission people to produce stuff for which it options exclusive rights to a content, maybe even just for a time window.

SPEAKER_38: And that's how studios work.

SPEAKER_08: I mean, broadcast networks work, you know, you might have a Fox studio-produced TV show not aired on Fox. Yeah, and I mean that's the... So production and distribution are differently. But I think these guys really need to get some exclusive content. Look, it's a Hobbesian world in which if you're powerful and you slam your fists on the table, you know,

SPEAKER_57: and you've got some power, you can put pressure on supply, these guys need a little bit more power relative to the studios. And if you want to start charging people $10 a month, $15 a month, whatever, it's very useful to have that show that everyone wants to see like The Sopranos or Mad Men that differentiates your product and gets people signed up.

SPEAKER_12: Well, the question is whether they risk alienating the production kind of studios and also the HBOs of the world because you really, I think that in creating their own content, they may be pushing against it.

SPEAKER_38: They won't, and here's why. Studios, unfortunately today, care about one thing, get out your checkbook.

SPEAKER_08: The beauty of Netflix is that it has a product that consumers love. It has a steady subscription business that people pay for. And those two facts, the relationship with customer and the steady stream of revenue, is what allowed them to make huge upfront payments to the studios. They don't yet have the right time window. And a lot of studios are focused on VOD, video on demand, and that's become a huge business. And they're releasing stuff that Netflix can't get on its streaming products straight away. How do you start to have more leverage? Again, you have more power. For them to be powerful, they need consumers who love their product or service, pay for it, profitable revenue stream, people saying they want Netflix. The more of that, the more they...

SPEAKER_134: At the end of the day, that comes down to content, I believe. And so I think you're right. I agree that they do need to go in that direction.

SPEAKER_38: Good. Listen, I appreciate everybody who tuned in to today's show, the people who asked questions.

SPEAKER_08: I hope we answered as many of them as we can. I'll make sure to wear my contacts for next time. I actually have to read the board. James, it's been a pleasure both spending time with you over the last month since you joined, even if you went to Harvard. You know, I'm a fan of Harvard.

SPEAKER_38: I don't want to sound like I'm not. And I appreciate you coming on the show and sharing views.

SPEAKER_258: Thanks. Thanks so much. Appreciate it.

SPEAKER_05: This week, Venture Capital.