Very True by Verissimo

Alex (00:00)
if you take 100 companies, this is not to scale, but you get the idea. 90 of them are just going to zero, They never had a chance. Right? So now let's just talk about the 10 that matter. If you talk about the one, you're talking about a company that could either be run by a monkey or it's run by Moses and nothing could possibly go wrong. No conviction, no competition. This thing is just God's gift to startups. So now let's talk about

six through 10. So six through 10 are companies that like, if you work hard, you probably get like, you know, like a three X. Right. And like, if something magical happens, you'll get a 10 X, but they're tough companies. They're just like, they're not like total dogs. Cause that would be in the, you know,

90 and below, like these are companies that are like going to have to fight and it's going to be tough. Yeah. And like, fine. But there's money to be made. I remember I met this guy once and he runs like a $75 million fund based not in a major city. And he's like, yeah, we have an 83 % hit rate. And I was like, what? Like, was like, whoa, what's a hit? Yeah. He's like, yeah, three X. I was like, okay, that's not a hit. Right. Like that's a bunt. But

Okay, like Mazel Tov, the problem is if you want why can't you just do that and like besides the stats say that like a 3x fund is never full of 3x's for venture if you're like middle market private equity But I mean I'm 83 % fine, but that's just like what are we talking about here? The bigger issue is if you look at fund economics and the amount of time you have to spend To go from either a 1x to a 3x or a 0.5x to a 2.5x It's like it's just not economical for what you own and and by the way

You're not even governance wise structured to get that involved in the companies to move the needle as an investor. Oh, you're a board member, but you're not going to like fire three people. Like, it's not private equity. And just at that scale, the economics don't work given how much work it is. So now let's talk through companies two through five, because for me, this is the part where you actually like playing ball in the field. It's like, okay, these are the ones where if they dodge the first,

tackle. Yeah, it could be a home run. Yeah. Right. Like again, it's probably not going to be a $50 billion outcome in any case, but hey, never know. Right. Maybe a $10 billion outcome could be, but these are the ones where like, if you kind of don't mess it up completely, you're looking at like a five to 10 X and if something goes right, then you're looking at like a 20 X. Right. And if something, if you dodge some bullets or dodge some tackles, you could hit the home run and really get like a hundred X out of it.

And, you know, we're talking like billion, $5 billion outcomes. And these are the ones in my opinion, where it's actually worth putting in the work. yeah. Where like you could actually, if you get, if you can help them dodge the tackle, then they really could take it all the way. So to me, my job is like, how do I get in front of as many of those companies as possible? And then try to help them just not screw up. again, if you can dodge that first tackle or that second tackle.

by not making stupid mistakes, especially for first time founders, then like you could actually end up with a home run. And I don't know, that's my philosophy on like how you think about how to think about these companies.

this is where also there's a split where like, how much work am I going to put in as an investor to get an acquihire done so that we can say it was an exit? None. It just, doesn't matter. doesn't matter. It's like, it's a nice thing to do. And like you're found again, to be honest for the founders, it might be worthwhile just from a reputational and relationship standpoint, but I'm not going to kill myself on it. Again, I'd rather kill myself on.

taking something from a, we're going to get half our money back to like, Hey, I think we can get a three X on this. I think that's very worthwhile. Yeah. We tend to just focus on the ones where we're like, okay, that's 50 X, but you know, what's interesting for us is like, there's such a premium on talent. Like we do AI infrastructure and there's such a crazy premium on talent. Like many of our companies have cloaks have turned down the meta offers, like whatever their pref stack is.

their aqui hire amount is above that. You know, it's completely insane. And so it does do some interesting things. mean, we only we look for founders that like, we're like, hey, take our money, right? They like they don't need it, of course. And finally, say that like, mostly do multi time founders or second or third time founders like we, do have a model first time founders, but they're very special to like, think there's something really unique about them. And mostly we

we do this. we are still saying, you know, we want to get, you know, a hundred X or something here, but there is this funny dynamic that we totally haven't done the math on, which is like, what happens when a number of these companies just get aqui hired for above whatever they've raised. Well, so how do you, how do you also think about like this kind of modern acquisition, especially in AI, which is like this glorified chopped up aqui hire.

the chopped up thing is messed up for us. You're talking about investors. Yeah. Yeah. No, windsurf is up like that. Then that's rough. we, that happens rarely though. Like I haven't, I haven't really seen it outside of windsurf. mean, a lot of it comes down to, again, it's like governance. It's structuring. Like, you sue, know, like, don't know. That's a good question. We, we, we weren't in on that. I mean, we help our founders a lot with governance in general, like with, you know, people can make a purpose trust or you can do things like this.

that can protect the mission and many of the founders are very focused on that. They just happen to be like, you know, really fantastic founders. think, I don't know what you do in that spot. mean, we do see offers. Many of our pre-seed companies get aqui higher offers for much more than they're, than they raise like right after they raise. And I think it's just like, there's such a premium on talent right now. But I don't know what you do in a scenario where they chop it up like that. Like that's insane to me.

Well, so my, we like that on the boards, but what can you do right? it founders out of the power. Yeah. You're to start suing people. No, it's not going to work. There's, there's so many like ways to go on this. Like one thing is a philosophical question is like on a basic level, why is talent so important when the tools are so good? Is it just cause you need to be so well versed in the tools or building the tools? Right. Cause it's not even the talent of regular software engineers. like, can you build the infrastructure under

like any cursor will commoditize or is continuing to commoditize a lot of traditional development. But when you are building like, you know, in CUDA, like you're sitting, you're building at Nvidia or you're building a frontier, you know, a soda model, like that, there's only so many people that can actually do that. Like maybe on the border of like less than 10,000. Why is that the case? Well, it's so different than traditional software engineering.

Like you're weirdly like, Anthropic has a good analogy around, you're like growing a creature, right? And you're, you're, you know, you're playing with like model weights and stuff, right? Like it's so different than, you know, the regular way people write code. And, know, it takes a while. mean, many of the folks have PhDs, they're researchers like this is like, you know, like back to the era of research or whatever. It's very hard, you can't just go to a bootcamp exactly and learn it.

But it will, I mean, obviously more and more people will do it. It's incredibly valuable, but it's also pretty recent. Like, you know, we have a lot of friends who are at, at open AI before they released chat and everybody was just like, you guys are weird and doing weird stuff, you know, no one care. And you're like, you got in like language model. You got a PhD in like computational language. Like don't you just want to be a level eight engineer at Amazon? Exactly. Google or whatever. And then the thing blows up.

And now there's all these different architectures and approaches to things. And it's like incredibly valuable, but it takes a while to gain the skill. And it is just something that is more. So one of the, one of the other things is like, you know, it always reminds me of that line from, uh, from wedding crashes when he goes like, Oh, big tree fall hard. You know, and, uh, I always say that the, worst thing that happened in venture, right? Like is not.

that you invest in a company that goes to zero. That's part of the math. And the other worst thing that hurts maybe even more is you invest, you don't invest in a company, right? A mistake of omission and like mistakes of commission, totally fine. Mistakes of omission, they hurt. I personally have so many that would have resulted in life-changing personal outcomes for me. And you try to learn from them, try to develop frameworks. Fine. But really the worst thing is when you invest in a company,

There are two parts of this. The first is that you invest in a company and it ends up at the end of the story being really, really successful, but you don't make any money as the early stage investor. The other thing that's terrible structuring governance and cram downs. again, an example would be like this windsurf thing. Again, it worked out in the end for all the investors perfectly fine, you just don't hear the stories. I always say, you know,

Someone was telling me like, yeah, this fund they're in X, Y, and Z companies, which everyone's heard of. So I'm sure this guy's made a lot of money who runs this fund. I'm like, maybe, maybe, maybe he invested later than you thought. Maybe he got crammed down in between round. Like you don't really know. that's the worst. Yeah. And like, that's really the worst is like, cause part of your job as an early stage investor is to be a picker is to get the access, but also part of your job is like, you got to make money at the end of the day.

So that's one. another, the other terrible mistake that can happen is like a company gets written up again. This is the big tree fall hard thing. Company gets written up 50 X and you masquerade it around to all of your LP is a darling. And then it completely gets crashing down. And we've seen that happen a number of times, often in consumer.

But like I have reason to believe that a lot of this AI stuff will have very consumer like behavior. We were talking earlier about the durability of revenue. Yeah. The folks that serve the enterprise, I feel less this way. Certainly like, you know, open AI, like folks who serve, serve consumers in our B2C and like, you know, are getting commoditized by essentially state of the art open weight models. Like this can happen, but I do, you know, like regulated industries aren't using like Kimmy or Quinn or something, right? Like there are.

or they're using something in between it, but it is an interesting, it is a very interesting question. Just on the like masquerading around the 50 X company. I think if you do that, you should at the same time sell secondary in it and return some DPI. For sure. at least you aren't like you'd settle the And then like, you a year later, you're like, oh, by the way, what I was saying before that that's at zero and you won't be getting these You should talk about this company all the time in your update. Yeah. I haven't heard about it. What happened? Exactly.

yeah. Yeah, exactly. And how did your TVP I go down? I'll give you a preview. Actually, I wrote about this my I finally figured out how to execute secondary properly after leaving lots of money on the table in a few different situations. I had to learn from you. Mostly personally. So here's my framework that I finally figured out. And it was in the context of selling secondary in an angel deal I did years ago before I started my fund. Yeah. And there's how this is the kind of the novel idea that I recognized in that situation, which is that

When you're trading illiquid assets, you have a moment of liquidity. Yes. It's not even a window. It's just a moment. There's an offer. There's an offer. There's an offer. Hey, someone wants to buy your seed shares because someone's doing the series C and they want more ownership. Right. There's an offer on the table. There's a price. There's really no wiggle room on negotiation. There's not even wiggle room on fees for whoever's facilitating it.

or whoever has to process it and whatever they want to charge, whatever they need. You just have- for the seller, they can do whatever they want. It depends, right? Yeah, okay. So oftentimes it's a buyer only situation. Again, most secondary. If we're talking about the secondary in the high-fliers, the 100 billion-price valuation list. Yeah, that's what are. The company I sold into, I had bought into at a $25 million valuation and I got an offer to sell as many of the shares as I wanted.

at a $400 million valuation. That's more like what you're going to see in real life. Right. Because a more like almost growth equity style firm came in and like I was saying earlier, they're going to be more hands on. They want to own a lot more. The company doesn't need that much capital. The founders don't want to take that much solution. So the founders emailed the early seed guys and were like, you guys want to take some liquidity because this person wants new ownership. And that is what I call the moment of liquidity. You get that email from the founder. You basically have like a week, a moment to decide.

So here's the framework that I came up with in a normal stock. If you own Microsoft and you, again, you've seen this in equity research reports, you're either a buyer, a seller or a holder. And those are your three menu items. sell. Right. And you're in that at all times. Again, anytime you want, you can buy, you can hold, or you can sell. If you have a moment of liquidity, there is no hold. You're either a buyer, a seller. I'm going to the founder and be like,

Actually, I don't want to sell any. want to buy as much as I can also. So let me know who else responds to this. And I also want to buy and, or you're a seller and you're, there is no hold. There's not like, I'll just let it ride. That is a mistake. And I've made that mistake. Instead, what you need to do is sit there and be like, okay, it's a $400 million valuation. How much am I a buyer of this at this price?

And by the, you have to just first think about this as an angel or an SPV. I'll talk about the fun side of it later. Cause if you can't solve the simpler problem, then you can't solve the more complicated problems. Funds aren't well set up to go. Then I think to myself, okay, I live in a next best alternative world. I'm an individual allocator. I've got a 10 X in this company right now. Do I really want to buy a quarter of a million dollars of stock after dilution? Yeah. So I'm.

I put 25k into 25 million now with dilution at 400. By the way, people love to do what they think is like MOIC on post money over post money. Don't give me that garbage. Yeah. And you're like, by the way, the 25 over 400 does turn into 25 over 250. Like just be realistic. Yes. So, um, so, but I'm like, the question is not, what do I hold? No, no, no, no,

Do I want $250,000 of exposure to this at this price as if I'm a brand buyer? This is the right way to think about this. But I 250 in at 400 right now. Yeah. What I put 250. And then again, you can't completely divorce yourself from the situation and the experience of operating. Like you have a relationship with the founders. You've seen what they can do. And then you got to underwrite it at 400. Yeah. And anything you don't sell, you are effectively buying. Exactly. But by the way, you're also buying the bottom of the capital stack because you came in at seed and now it's a series C.

Yeah. So this is the framework I came up with. when I finally, again, I feel very good about this decision. said, okay, knowing what I know about this company and what I want to underwrite it to on a growth basis, which by the way, you probably need to go to your friend who's a full-time growth investor and be like, Hey, what do you want to write this to? Cause it's so different. I can talk about follow on investing as well. That's another subject and be like, okay. So for me, what I decided was I'm going to sell.

200 I'm gonna keep 50 in the company right because I think that this is a 3 to 4 X here great and I think it's a good place to park yeah nice and then I sold 200 yeah and watches and bikes anyway and paid my mortgage fine whatever there is something I noticed when this happens though which is similar to like how people think like you know black comes up a bunch and then in roulette or whatever and they're like it must be black again and you're like it's the same all the time

where people will look at it and be like, well, if they're raising an upper on right now in 400, then probably they're about to go to like several billion, right? Because every company that goes to several billion does have these rounds. Yeah, that's a funny way to say it. also, you're a momentum trader. That's moment. It's just, or you're just like weirdly looking at a pattern. You know, it's like a weird posthoc justification

And I think basically, I think people don't see the companies that go to 400 and then go to zero, even though it's like 70 % of Sequoia's A's go to zero or something. And so they look at it being like, wow, they're raising around like, you know, an awesome, you know, they're going from 25 to 400. This is like how I would pick the winners, quote unquote. And you're like, well, maybe, but would you actually just independently of any company that raises 400 also raised before, right? And so I do think it's a nice way to think about it.

The same way you're like every spin is fresh. Like this isn't true in blackjack and poker and stuff, but like, you know, to the extent you're looking at it, like underwrite it fresh and be like, now I have to, what I invest 250 this way and sure you have some more information, but like for us, we're like, we know pre-seed and seed. We do SPVs into our A's and B's, especially when, you know, but we're like, somebody else will lead it. We might write a big check and we'll have somebody else like our friend in growth come in.

you know, explain it to us, but we're also like, cool, this isn't out of the fund. Like it doesn't make any sense. The pro ratas are so big and we're like, why would we, do this. Like fine, but it's just, like our expertise is in pre-seed and seed and we know it well. That expertise is so different. You know, maybe we can do an A, but that is so different in B's and C's and as you get further. So now for, and I wrote a blog post about this, but if we map this now to a fund investment.

We're talking about angel investment. So now you have that clear that you're a buyer or seller. Yeah. Now if we map this to like a fund and I'm pretty sure the math I gave in the fund is like, okay, let's say you wrote a $1 million check out of a $40 million fund. And now you have an opportunity to get liquidity at ⁓ and that check is now worth $20 million.

So you wrote a million in the seed. Yeah. And now they're raising around where you have a secondary opportunity. Okay. And you could sell your entire position. The offers there for $20 million. Right. And this is a $40 million fund. Yeah. This is where it gets really hard. Yeah. If, if your $1 million check is now $80 million, the answer is easy. You sell half your stake, you return all your money to your LPs and you let the rest ride. That's easy. Yeah. Now the harder question is again, you

put a million dollars in, which means you probably have 29 other portfolio companies. Now that company, again, is that you have an offer on the table. You can sell all of your shares or some of your shares

Well, our businesses and we make money on carry, but business in general that we're labeled in is private equity. Once you're above 100 or something, my favorite is when, know, he's push back on my fees and I'm like, dude, I run seed fund. not getting rich on fees. Yeah. The only way we make money is actually if the companies do well. But it's weird. One thing I will say quickly, this is insane to me. How is the market bear 2 and 20 all the way up the stack?

I'm like, 100%. People are like, fee shouldn't be this way. I'm like, bro, I didn't invent this. Go ask David Rubinstein or Steve Schwartzman. It's fine if we do 2 and 20 on ⁓ a fund under 100 or something, right? And you make some money, you maybe have a staff member, maybe not, you've got a couple of partners. But when you have a billion dollar fund and these guys are making two and 20, I'm like, how do the LPs, why isn't there a market that moves to be like, instead of making $20 million a year and you lose the incentive, why not say on a billion dollar fund, the fees are

you know, two, five, and then sure, you can take your 20 % care until you make money, right? But that's a silly. It's silly. Like I'm getting crap because I charged two and a half percent in the first three years of my fund. But I'm like, do want to see the numbers? It averaged out to less than two. Well, then what are we talking about? Right. It averages out. But I to push back on me and I'm like, yo, I'm not getting rich on fees. Like go look at a fund that scaled from being a $400 million fund to a $2 billion fund and hired one more person.

Exactly. And open one more office. And I'm like, just do the math on like vanity. So I spend all my money on flights anyway. yeah. mean, that's the thing. single largest covered by the fund. you're like, no, no, no, no, no. There's that's some basic things that are covered by the fund, but all of the actual work comes out of the management fees. Yeah. The way I, again, some people shove a lot of stuff into fund expenses. Fund expenses should be limited to fund admin, accounting fees.

Legal fees. Exactly. That's all of ours. And that's it. No, that's all we do. And I didn't even know you could do other things that some people get real aggressive. But my view is I don't want to be in a fun batting from, you know, one or two strikes. Yeah, exactly. I think about it as many shots on goal as I can. Exactly. So if I can. So my whole thing is like, look, I have to live and this is my job. And yes, it's a subscale business. It's fairly inefficient, but hopefully the upside is more than compensates for that.

Yeah. We're talking about numbers, which is like you have expenses and all this. adds up people like, oh, you know, the funny thing is the lay person or even founders often will be like, oh, you have this like, you know, $26 million fund. Like, you know, you messed up, make all this money. You don't have the money, by the way, it gets capital called. You're not sitting on 26 million. People don't recognize. And then also like, you know, you, you're making your fees. So cool.

so you're making some money to live.

so I have this friend who works in a completely irrelevant, different business. He's like a Midwest South guy, in the broader healthcare space. And he put a check in my second fund, very smart, successful, good dude, just a good dude. And I'm traveling and

He was busting my chops because people, every time I see, they see that I post like a WhatsApp status that I'm in San Francisco or I'm going to LA tomorrow. Like, do you even live in Israel, bro? And I'm like, look, I have to travel. It's part of what I got to do. You know, I don't like being away from my family. And I was like, he's like, why do have to travel? So I'm like, well, because I need to raise a new fund. And he's like, you're not good with your first two funds. I'm like, he doesn't even understand that this is not a hedge fund. Like this is, this is a closed end sequential.

Fundraising the evergreen funds that's required as are these groups is a privilege of your general Atlantic or something. Sure. Oh, they're all closed. But it just, it doesn't even make sense to do that for an early stage fund where the hold periods are like seven, eight years minimum. Of course. doesn't, it doesn't even, math doesn't work. No. And we have all the fees go down in the future, right? Because you're not actively investing. Everyone does the same thing you do, right? Which is like you have earlier fees.

Yeah, that's when you're getting paid to do it. Exactly. But I'll tell you something that's really interesting from a conversation I had with an LP, which is that I was like, Hey, should I be dropping my like years? Seven, eight, nine, 10? Sure. Should that should the fees just be zero and I should just front load everything. Well, you still have to pay admin and stuff, right? And legal, but yeah, that no admin and legal comes out of, uh, yeah. So he was like, and this is a very wise, this is my wisest LP by far. Okay.

professional LP and he was like, no, that's actually our insurance on you because in the event that you don't raise another fund, that is how you're getting paid to continue to manage the fund that we're invested. fantastic. That's actually their insurance. you're going to

Make sure that all of these things. Yeah. You're not just going to abandon ship and not reply to emails. When actually it's getting liquid, right? Like, hopefully. And that's when the difference is getting made and you're getting pushed out of things. So it gets by the way, to another idea of like, there are similarities between starting a fund and starting a company. And it definitely increases founder empathy. mentioned this in my last podcast that like there's three kinds of, ⁓ conversations you have with venture capitalists. first is non decision maker.

Yeah. The second is decision maker. Yeah. And the third is the person who started the fund. Yeah. That's us. It's awesome. And we've started a company and you started a company and that is so great for us with founders. founders find therapists and stuff. There's a, there's two big differences between starting venture fund and starting a startup. the first is that a startup, is grow or die. Yeah.

No days off, every minute in a minute wasted. lot of pressure at all times. But if you raise 5 million bucks, let's say out of the gate, you spend a year on it and it's just not clicking. You can literally just be like, you know what? We burned a million bucks. We're going to give back 4 million. I know. I saw something just the other day. Awesome. You're like, we don't want to do this anymore. We hate each other now. We just have, we got other job offers. We just don't like this. And you can do that.

Venture fund. I saw somebody do that and then they invested in the next company. the, know, the, the fund that got their money back. They started another one and it was, they were like, cool, we'll give you back the money. Yeah. Going way better. And it was super thoughtful. And you can always do that or you can decide to become a surf boat. Like who cares? Venture fund. can't give it back. Venture fund. Someone did do it where you can basically decide to like, not call the rest of the capital. Sure. Like you can do that. Sure. But once you've made investments,

⁓ You can't like distribute that your LPs unless you have like two LPs or whatever I even that becomes a huge hassle And especially for early stage like you're locked in your manager thing for ten years like and maybe twelve so You know

And I was trying to explain to a friend who also works in investing that like how lucky are we that we're not founders?

And we could just not work for two weeks. And like, it's fine. Right. And in fact, it might be better. Right. Right. It might be better to sit and think and to not make any new investments. Obviously, if the founders need you, like you just go up for them. But like, bro, I don't need to, again, not grow or die. So, and he was like, no, man, I got to work. And I was, I was like, no, that's not what I'm talking about. I'm talking about, it's a characteristic of the business that we were in. He's like, no, but I just need to work. I'm, he's like, it was kind of insulting. He was like, I'm not like you.

I can't just like not work. I'm like, bro, you're not understanding what I'm saying. Like it is a characteristic of the early stage venture business that you can not make an investment for six months. And that's probably a good thing. It can be my biggest mistake, by the way, biggest mistake in fund one. made too many investments. was too, I was like, Hey, I'm getting paid to be an investor. I'm going to make a ton of investments and I shouldn't have been, and I should have done a third of what I did. Interesting. And it's not against any of the companies I invested in. It's just like.

I got too excited. anyway, and so then I tried to, I had to explain it to him in like kind of harsh scenario. I was like, okay, imagine this dude. One of your kids is sick in the hospital and you have to be in the hospital with them all day, every day for a month. does your business take a hit or not? He's like, no, I'm like, okay, now do you understand? He's like, okay, yeah, now I understand.

But getting back to it, we're way digressed from the situation where you have a 20X. You can sell your entire position and it would return half your fund. An example is you have, if you have a, you know, an 80X and it would return two times your whole fund, then you sell half and it returns your whole fund and like Mazel Tov.

All your LPs got one X DPI and you still have a bunch of RVPI, right? And you have a bunch of other irons in the fire. So part of it is, is this your biggest kind of early winner or not? people, you know, people use the term short selling because they think it's betting against the stock, but it's literally selling. Selling and short, people say shorting. What you're doing is you're short selling. That is what you're doing. It's just a question of if you already owned it or not. So if you own it,

And you sell it, you are shorting the company. Now again, you may not be based on what we said earlier, betting that the company is going to go down. You may just not think that the ROI is great for the next liquidity moment. And so my view on it is, and this is, you mentioned this earlier basically, but you

are paid to, turn $1 million checks into $50 million checks. That's the goal. That's what you're supposed to be doing. So now you've turned a $1 million check into a $20 million check, which is you doing your job. Now you've got a new decision ahead of you. Can you turn a $20 million check into an $80 million check? That's not your job. And by the way, for someone like me that like, I worked at NEA and that was my job.

Sure. But it's not my job right now. Right. And it's not how I've wired my brain to focus. Right. So I've really got to go to maybe my old colleagues at NEA and be like, Hey man, how do you underwrite that? Right. And that's a really hard thing to do to figure out like, Hey, maybe you want to sell this. Maybe our ROI is not there. Fund life matters. If you're in year seven, then you probably do. And by the way, if you've already, let's say returned one x you probably do want to sell. I think where you get caught in a trap is like,

If you feel like this might be your big winner and you don't want to short sell it, like that's really tough. Cause you have the decision at almost every company though that goes up, right? Like somebody goes and does an A. And again, is it way out over at Skis? Do you think they're selling garbage? I don't know. Like, and a lot of it, by the way, that's selling secondary piece goes back to there's this great Fred Wilson case study where like he was in Coinbase obviously first and he.

I don't know if he was very first, but by series a he was in it. And I think he started selling by like series C. Some people sell like a quarter at every round. And I built a model actually of like walking through what that would look like in a company that raises like, let's say they raise two on 10, 10 on 50, 50 on 300 and like 200 on 3 billion. And now you're looking at like an 80 X multiple on your initial check, but then they get recapped.

You have to put another hundred thousand in just to maintain some semblance of a position. And maybe now because of the recap, whatever you're sitting at, like still like five X from where you were. But again, tail between your legs with all your LP versus if you had just said, I have to have a mechanical pre-thought out strategy. Cause once you're in the ring, it's all instincts and emotion. Right. So if you didn't pre-think through it, you're probably going to make a mistake. And by the way, you're probably going to make a mistake no matter what. That's no one.

No one sells at the top of the market. Trying to even do that, that's a mistake. That's the mistake. Thinking you're gonna sell at the perfect peak, you won't. That's just not how it works. I think this is why people do a quarter at every time. And you could argue in the same way you do index funds, don't around with this. But it's such a different, the whole game is built on having one hit this way. And then again, not only have you sold it to your LPs, but you factored it in.

You know, I think there is a difference maybe once you have returned the fund, if you've done that already, and then you're like, okay, well, we are in a business of having companies go 50, 100 X, whatever. Um, but even so, the position is helpful, right? Like it doesn't, even if you do the math on it and you saw a quarter, you know, and then at 10 X is from there, it's not so bad. keep your shmuck insurance. Exactly. You risked it in a big way. Yeah.

it is definitely an order of magnitude, more complicated when it's in a fund. Yeah. And also it matters hugely if you're like on the board. Oh yeah. Right. Yeah. Cause I think there's a few different paradigms when you're a seed investor and this can, this speaks to the fall on strategy. If you're writing 100 K checks into $10 million rounds, you're basically an angel. Yeah. We're not, we're writing, you know, 500.

$5 million checks into rounds that are like the preseeds or maybe at 15 if you're lucky often at 25 because they're like multi-time founders building infrastructure. Yeah, it's and Then there's the hey, I'm a meaningful player in the round Yeah, right, which is often where I play where it's like they're raising a four million dollar round and I'm writing a 750k check. Yeah, like maybe I'm maybe I'm a co-lead maybe I'm just like the number biggest check to fill it out like

And then there's ones where like, you know, you write a 500k check into a $10 million round and it's like, all right, you're along for the ride. Yeah. But the relationship you have with the founder in each of those cases, the way I tell it to my LPs is like, have again, cause there's a part of it's a limiting factor of like how many portfolio companies can you have? We do not as many because of this. And sometimes we'll write a $2 million check into a $4 million round. Yeah. So part of the way that I think about it operationally for me is I'm either a guy.

I'm one of the guys or I'm the guy. Yeah. Yeah. That's nice. And by the way, I'm also like, I'm pretty, I think I'm pretty low ego about these things. don't insist on board seats because I just think it's a waste of It's always better to have founders in control, think. Well, it's not even that. Where I do run into this is like, I maybe I'll take an observer seat, but what often happens is other investors come in and take board seats. Right. And sometimes they suck. Yeah. And then you're like,

Well, they give terrible advice. like, feel like I need to take a board seat. But again, the ship has often already sailed by the time this new person comes in where like they're taking a board seat. Cause okay, fine. They're writing an $8 million check into the company. They should take a board seat. wrote a 700 K check in a year and a half ago. I don't have a board seat. Maybe I'm an observer and that kind of dances in the middle. But I'm like, I don't want to take the time to be a board member. I think, and I know the real work gets done outside board meetings when the founders come to you for advice.

Also, I can't focus on a zoom call with seven people on it, think most of the things actually matter outside of the board meetings. And I think observers have a big effect on it. I also just think like. Yeah, Mark Suster, said years ago if you're in the room, you have a vote, even if you technically don't have a vote. Yeah, it's interesting. You have a voice. Yeah. Yeah, I do think.

I don't know. think there's something to be said for like, you know, maybe you join later or the founder, like it's all about leverage basically. Right. And if you're going to be helpful to the founders, then great. Sometimes I just feel like I have to protect the founders against like bad actor board members. It depends on the size. will say a lot of it depends on the size of the track. Like one thing that I didn't think about before that we do now is like, it's there's a game about percentage ownership, of course, but actually often what matters is just how

How big is your check, right? When you think I want to check this guy, I want a fund returner. you can write a $2 million check into a company that raises at 75, or you can write a 500k check into a company that raises at 25. And we will often see high valuations, but

What really matters is just like, you know, of course, where can they go from here? And then if you end up writing a small check, like, you know, you write 100k, 250 into a company that can do really well. Cool. Like, you know, at 25 X whatever it it's returning the fund. Can it move the needle? You know, exactly. It doesn't actually matter. The strategy where they'll write tons of small checks. And I'm like, well, now you need multiple of them to go off. The reason that seems hard to me, the tons of small checks thing.

Again, if you think about it, the way I used to think about it is like in my, again, this was post facto justification from my fund one, but I was mostly an angel check, right? I was like 100 K checks. A couple of them, I was very involved in catalyzing the rounds and I wrote like 200 K checks in into like 600 K like angel rounds. This was a $10 million. Okay. Which was really meant to $5 million. But I think that ultimately you want to get like high upside, but like market returns.

Meaning like you really, want a five X. Yeah. Right. Like if I'm a GP, you can be the option. Like you could have it. You could have a 70 % chance of getting like a three to five X or like a 10 % chance of getting like a 30 X fund. I'm taking the five X fund at 70 % chance every time because the name of the game and venture is just staying in business. And by the way, you're unlikely to get to the 30 X fund without getting through the five X fund. Yeah. Often these great funds that you find that return 20 X plus.

They had two big winners in them or they were just tiny, tiny, tiny and crazy irresponsible allocation bet. Yeah. but the, the other thing is like, so let's think about it. It's like, if I invest in 70 companies, which I invested in 72 companies in my first fund, which was too many. I actually think 50 was probably the right number. maybe 40, 45, but were way more concentrated in our first fund. Yeah. So, and really, yeah, I probably should have just been way more concentrated and written like.

15, 500 k checks in it. So, I kind of know which those companies would have been in there. Some of my best company though. Anyway, you live and you learn, but that, that funds like doing fine. And, but the question is what is the volume of quality that you actually think you have in writing these small checks? Because if you think that I'm going to see say 10 major outlier companies in a three year span.

then, you want to be allocated into all them. It's like, obviously, stuff happens along the way. But if you say, really realistically based on my track record of the last 15 years, let's say, how many did I really see? And it was really like one a year. So maybe it's three over three years. So that's what you want to underwrite to. And then you need to make sure that you can actually get the check size slash ownership into that number of deals. And that is actually how you set fund size. Most LPs don't even ask about this, but it really should be the main thing is like,

And when I, when I went from what did you miss? I think that's a fantastic question. Cause it's great in some ways it's great evidence. If you're missing, you know, you're still seeing them of course, right? Like a lot of matters is your denominator. I think that that's not a good question. I'll tell you why is that when I'm investing in a company as a seed investor, maybe this makes me silly, but, or, or the right thing or not, but I'm not looking for a company that I think in race series a. Okay.

I'm looking for a company that I think can get to 50 million. yeah. Yeah. And so there are plenty of companies that I've passed on that have gone on to raise series A's and series B's, but like, I still don't think they're like big long-term awesome durable companies. Now, some of them are, and I just didn't see something or something changed or whatever. Honestly, sometimes I just didn't jive that much with the founders. Yeah. But a lot of them, it's like, it's just like, yo, they raised the series A

your ability to raise the next round obviously is important in that you need to raise money. Necessary but far from sufficient. Far from it. Like far from it. So you need to make actual money. This is fun. Yeah. There's so much more to talk about. Yeah. But ⁓

Yeah, lots of learnings along the way. I that's the key thing. No, I will learn a lot from you.