VC Playbook Has Changed. Here’s What Founders Must Do ft. Ezra Galston

28:04Now you're being invited in later. Once the company is already de-risked, because you add value, you can help open up new customers, you can provide mentorship. And so founders want you on their cap table. And also, maybe you have a cool brand, and you have a Twitter following or a LinkedIn following. And so all of these angel investors are no longer taking the inception stage risk. They're getting invited in later when things have actually been de-risked by the idiots like us. And so what that has forced us to do is to rethink really just how many investments we make and to recognize that we are taking on, because so much of the game now, is tracking really talented people before they leave their jobs, calling them when they're sort of on the verge of leaving their jobs and brainstorming about what they would like to do.

28:55And then basically telling them, we'll write you a check if you choose to leave your job and then writing them a check before anything has ever been built. That's not all of venture capital, but it is a big part of the venture capital world right now. And that means you are taking on more risk than you ever have before. Now that is changing a ton in the last 12 months. One, a lot of builders have wisened up to some of the pitfalls of venture capital. And number two, because of cursor and lovable, there are a whole lot of people that can build prototypes in like a weekend or less on in their spare time without any funding whatsoever.

29:28So one of the things, I mean, this is a separate conversation, but like, we've certainly been thinking about how that affects our jobs and what the implications of that are. Now that's helpful. Do you think on the angel side front about angels coming in later, is that partly also do the rise of pre-seed as an actual stage or investment stage in terms of what angel's getting cut out, not cut out per se, but more like coming in later at like, like the seed because they're like adding more value instead of actually being like the first check in. Yeah. There's a whole institutionalization around basically around pre, whatever preceded means.

29:58I mean, we can debate like what these nomenclatures are, but yeah, like if you want to start a business now, there are hundreds of firms out there that at least on their website, we can debate, you know, in actuality, but at least on their website say like, We want to be your first check basically before you've sold anything. So yeah, that is an entire asset class. So what do you think, going through your three funds, what do you think you got right, which stood really well? What do you think has been really tough over these past few years? So in our first fund, I think what we got right is we got really lucky.

30:32The first few investments worked. And that made it a lot easier to take risk as well as do stupid things. I think the one thing that we've consistently gotten right over the last six and a half years, and by the way, we have a we. I have two investment partners and then a fund advisor. I should have introduced... I feel like a jerk for not saying it earlier. But I have an amazing investment partner named Haley, who has been with the fund for like five years. And she was early at Trunk Club and threw them through their Nordstrom acquisition. I actually met her trying to recruit her to run data analytics, one of our portfolio companies.

31:11And it turns out she's good at sales because she sold me on joining starting line. And that was that. I have another partner named Scott Holloway, who was the 10th employee at Instacart. And then he got poached over to a company called Flexport to build their Chicago office, hired 250 people there. And we have a fund advisor named Matt Maloney, who founded Grubhub as CEO, took it public, sold it to Just Eat, and works with a lot of our entrepreneurs. But so again, so some of the things that we, going back to your question, that we got right, got really lucky at the beginning, that allows to take a lot of risk.

31:43One of the things we've consistently done well is that we have never cared what other people are doing. The question I hate most, and sometimes you need to ask it for diligence purposes and a variety of other things, is who else is investing? I think it's an important question in a lot of ways, but it certainly I think it is the single biggest bias in investing is ask is groupthink. Who else is investing? So some of the things that we did in our first fund, I would not do again. I think that they are nice investments. Now that I understand the market better, I would not do them again. But I'm thrilled that we said yes when no one else would, because it at least shows that we were really consistent in our original thinking.

32:25Some of the things that we got wrong in the second fund, and for any operators out there, this will probably appeal to you, is things went really, really well at the beginning. And all of a sudden, there was a whole world that opened up to us. People who wanted us or claimed that they wanted us. And meaning other investors who say, hey, I've got a really cool company. You should check it out. Or founders who said, hey, I heard you guys are doing really, really well. We'd like you on our cap table. And it was really hard to figure out what was legitimate and what was adverse selection. And something that, again, this was during COVID and a bunch of other things.

32:58I don't think we did a really good job putting a process in place to figure it out. And because the fund was doing, it's still doing well, but at the time kind of came out of the gate super hot. There was just a whole bunch of press and momentum around it. And it was really hard to process all of the inbound and all of the noise in a systematic way. And we made a bunch of mistakes because we didn't have processes in place. Did your diligence process change from, do you think? Yeah, but the diligence process during that whole period changed. And that, by the way, was another mistake. Now, we never, and is that because things were moving just so fast so you couldn't really, yeah.

33:33So fast. We never compromised on the first principles of diligence. But I don't think we pushed certain things like founder references.

33:48meaning my favorite thing is to basically just go like as far back on people as possible and like try to find out who they went to high school with and who they actually are as people we did references we're not we're credible fiduciaries of people's money we called prior bosses like we did references no matter how things fast move how fast things moved we always did the work but i don't think we had the same creativity in doing the work that we did when things were a bit more common. And we've learned from that. And now I think it's, now we don't do the rote work. We don't make the same, even if things are protracted, we're not making the same calls.

34:22We are, we are being creative in who we try to figure out who to reach out to. Yeah, go ahead. No, I was just going to say, you just comment on it. Cause the last time we spoke was 2020. And I remember off air after we recorded the episodes at how are things. And you said, things are just fast moving so freaking fast. And like you, you just, you were just telling me about like the rate of speed that things were happening, which I'd imagine that's probably around fun to maybe era. So just wanted to comment on that. Yeah, I think. Yeah. So for our third fund, we've actually, I very intentionally tried to be a lot more in the shadows.

34:56When I was younger, I sort of liked press and I like being loud and obnoxious. Again, I'm shocked that I was invited here because I've been very loud and obnoxious in the past. But have very intentionally tried to quiet down and be a lot more under the radar. Because I think ultimately, yes, I mean, investing is a sales game and people need to know about you and respect you. But I think between the people that we've, the team that we've built at Starting Line, as well as the investments that we've made, anybody who wants to research us and do a little bit of work on who we are, will come away very impressed.

35:33And I think that one of the most important aspects of investing is actually being able to think. There was a period of time, I mean, Tiger Global ran this playbook where it was just like, we want to sell, sell, sell, sell, sell. The 100 best companies in the world are all very knowable because their revenues are reported and we just need to go get an allocation in each of them. But I mean, that probably works for the 100 biggest companies in the world, but for everybody else, thinking is really important. If you're a CEO, our founder, thinking is really important. You need time to actually be able to strategize and make good decisions.

36:05And in a world where you are exclusively reactive, that is impossible. So the new starting line, quote unquote, which is a lot more under the radar, I call us kind of tight aggressive in homage to my poker days, which is really just choosing your spots really smartly and correctly. That's very intentional so that we have more time to think and make great decisions as opposed to be reactive to the thousands of things the market it is throwing at us. I think, by the way, I think that pisses off a lot of founders where we just, we take a lot fewer meetings than we used to again, because we're trying to be really protective of our time and our ability to think it means we're not as open and welcoming as we used to, but everyone is human.

36:46We all need boundaries. Uh, you know, I have, I've gotten cursed out by investors. Uh, and I was on a recently on a date night. I texted back like, so sorry, like really understand you feel this way. Understand the situation is difficult. I'm on a date with my wife. I'll call you tomorrow. And like the investor was not happy about that, but like boundaries are important, you know, boundaries are important. Totally. Totally. I'm glad you brought up tiger and as well as maybe just make a funds in general. Um, how, cause I mean, when we spoke about C just now, we talked a little bit about how maybe venture this, the pre-seed, for example, is becoming institutionalized or is actually is like a real stage now in venture.

37:29But of course, seed is getting kind of quote unquote attacked maybe from other areas too with mega funds are kind of coming into seed as well. What's your take in terms of mega funds coming down? I imagine it's just seed is kind of more competitive than ever, but what's kind of the current state of seed from that standpoint? Yeah, look, I mean, like all things in the investment world, there's kind of a bifurcation of the haves and the have-nots. So the haves have an enormous amount of inbound velocity in demand from the multi-stage funds. The have-nots have to work a lot harder. One of the things about Starting Line that I love about Starting Line is we do both.

38:07We've invested in a lot of haves and we've invested in a lot of have-nots and that's great. That said, a big part of the game is trying to be involved in the people with the highest pedigrees. It's a great way to build a brand. Those people tend to be great recruiters. They tend to be great magnets for future capital financings. And yes, that game is a lot harder. We hosted an event yesterday called Founders Shy. And so we had like a lot of... We had five recent companies that have recently raised anywhere between$5 and$20 million seat stage here in Chicago. And three of them had term sheets before they quit their jobs.

38:52Whoa. Or, you know, functionally, whatever, before they even really had an idea. And those were, those were basically all from multi-stage funds. And we can debate exactly how you define multi-stage, but call it, one was a true multi-stage, or I guess one was a true multi-stage, One was kind of a$600 million fund that claims it's early stage. And one was a$250 million fund that claims it's early stage. But they all basically had term sheets before they quit their jobs. Three out of the five. And so, yeah, that certainly complicates things for the entire seed ecosystem. I think what it forces us to do is invest in relationships a lot more.

39:33Of figure out at all times the 100 people we want to be building relationships with. That we think are founder curious. that we believe could build iconic companies if they are willing to take on the risk. Something that I believe in, given that I have four children myself, is to never paint too rosy of a picture of building a company. I've never said to someone like, hey, I really think you should do this if I didn't believe it was the right idea for them. I think you've got to be brutally honest with people. Here are the risks. Here are the consequences. all that kind of stuff. But yes, it forces us.

40:12I would say that there are probably at any time, I've probably got like a roster of 25 to 50 people that I am talking with every six to 10 weeks, how their jobs are going, what they're thinking of for the next few months, like when the trends they think are interesting in the world, Scott and Haley have theirs of 25 and 50 added up. And it's probably a hundred people at all times that we're involved with, but the multi-stage funds can do that across a thousand or 2000 or 3000 people. Um, and that's what makes them so powerful. So how do you stay competitive and what, how do you think about like the starting line product at seed?

40:49Since you obviously have the multi-stage funds kind of coming in, um, maybe might be able to pay higher prices, right. Um, and as well, higher, higher valuations and, um, and as well as move a lot more, maybe more, more quickly, cause it maybe is more of like an option bed per se. How do you think about staying competitive yourself? Yeah, we have not had a ton of success convincing founders to walk away from a$5 to$7 million no diligence check. It's just the reality. There have maybe been... Look, there are certainly cases where someone said, you know, someone said, you know, I've been offered a pretty high, a pretty big check, And I don't think it's the right thing for the company and going to raise less and blah, blah, blah.

41:38But it's by no means the norm. I don't think this is like, I don't think this is like the best LP answer. But I think it's like knowing what our product is and what we're good at. Our product is people. What we care deeply about are entrepreneurs. Anyone we invest in is not an option bet. there is, I think, no one more obsessive about any investment portfolio on earth than Haley Zalo. And there is no one more anxious about any portfolio on earth than Scott Holloway, my two investment partners. And between the two of them, we talk to the entrepreneurs that we've written checks to at worst every 72 hours.

42:26And at best, I mean, normally far more frequently. the other. Obviously, people don't want us. They're moving too quickly, all those things. But we are constantly, constantly caring. I think our product is... I don't think our product is capital. We're way too small for that. I think our product is brand, meaning I think many of the best investors in San Francisco and New York and whatever know who we are and think we have pretty good decision-making faculties. So I think our product is brand. I think our product is empathy, that we are always going to treat people well. We are never going to screw people over.

42:57However, we have made some non-economic decisions because we made commitments to founders and we decided to stick by them. I think that that can be, I think maybe some LPs don't want to hear that, but I think the LPs we have in our fund trust us to make good long-term decisions and expect to be with us over several, many funds where any decision we make in the short term to the benefit of a founder, potentially expense of returns will be more than paid off for over time. You know, whatever those are. It's impossible to quantify that calculation in real time. But again, our product is people, empathy, obsessiveness.

43:36It's not capital because I don't think capital is a commodity and we're not big enough to fight on capital anyway. How do you approach sourcing and maybe trying to find companies that are, I know it's a cliche, but diamonds in the rough per se, that may be underappreciated or even unknown from any other VCs? Yeah. So first off, like this is the Consumer VC podcast. Congratulations on building a great platform in the last four years. So the truth is, is that the investment world has been dominated by SaaS for the better part of a decade. And so in general, I think that our job sourcing, let's just be clear, we by no means see 100 % of the opportunities that are out there.

44:23But I think that in general, sourcing and consumer has been easier because the vast majority of the products that really are SaaS and that really weird people want to build that don't really make a lot of sense. There aren't a whole lot of people who even talk to you about those products because A, they're not SaaS and B, they don't really make a whole lot of sense. So the category is underappreciated and that's part of it. It has been. What's changing now is because there's this thing called Gen AI and everyone's like Gen AI is a new platform shift. And every time there's a platform shift, many trillion dollar consumer businesses are built.

45:01So there's obviously going to be a bunch of new trillion dollar consumer businesses built like the next Facebook and the next Google and all these things. So we got to get in front of it. So there's been a huge shift in the last nine months towards consumer is back. I assume you've seen that. I assume you've had more inbound of guests wanting to sell their wares on the podcast and make sure that they're known and things like that. So I'm not saying sourcing is ever hard. But again, sourcing for us is about people, people, people, people in terms of finding diamonds in the rough. I think that's really hard and unpredictable to do if you're not a growth equity firm that has hundreds of people hitting the phones.

45:33Here's how a growth equity firm works. Growth equity firm is really, really good at raising capital. They have investors who basically just want to earn 12 % a year or maybe slightly less. And they have a team of 100 people of basically 100 recent college grads who are cold callers. And those cold callers, and I know this because many of my best friends work at these firms, they're basically taught the following formula. The formula is your job is to invest in great businesses where the owner of that business historically hasn't raised a lot of capital and maybe doesn't know how great their business is.

46:07But the most important thing is that CEOs are fundamentally lonely. And so what you should do is try to optimize for lonely founders who are getting bored of running their business and want to sell sometime soon, or just want somebody to talk to them, etc, etc, etc. So it is really... It is just an aggressive outbound cold calling machine. And it works. And Site Partner has made an enormous amount of money. Summit Partners has made an enormous amount of money. General Atlantic has made an enormous amount of money. Sourcing for quote-unquote diamonds in the rough works at that scale. I think we do a lot of outbound, but it is impossible to have that much of a systematized outbound.

46:43That said, we use a bunch of tools and AI to look for certain triggers of people if someone's leaving a company. Or we have a whole bunch of companies pre-filtered that we think are indicative of the types of people that we might want to back. If somebody leaves one of those companies, we get triggered on that as well. A whole bunch of things that I think make a small difference, but we are by no means a ruthless, like, you know, growth equity machine. I think, again, we're very people focused. We know the people we care about. We know the people that we think are super high potential and we want to make sure that whatever they do, we are 100 % of the time part of that story.

47:16I'm so glad that you brought up that. That's really helpful. I'm also really glad that you brought up AI because I know we're going to get to it and this is maybe a good time to transition over to AI. I recently had Peter Walker, who's head of insights at Carta, who posts, I mean, definitely, if you all don't follow him on LinkedIn, he's great data. Great, great person to add. We talked last week about if we're in a reset and because Peter said we should be in a reset, but we're not. And the reason we're not is because AI ruined it. But do you agree with Peter that we should be in a research right now, but we're actually not because of AI?

47:55And obviously the incredible valuations that are happening with AI. And do you think there's kind of a bifurcation when it comes to AI valuations versus non-AI tech company valuations? Yeah, I mean, so again, you're talking to like an early stage guy. I'll do the best I can. I don't have the data that Peter has. I think from our perspective, we are definitely not in a reset. So the nine months between June of 2022 and chat GPT coming out, which was like March of 2023, something like that. Those were like the slowest months I've ever seen in the venture capital industry. Like so many firms are like, yeah, we're on pause.

48:34We got to shore up our own portfolios. Like it was the slowest period of time I've ever seen. By the way, that's when we chose to raise our third fund. So great timing. So that is a fact that happened. What is also true is that the AI boom has created a huge flow, inflows of capital into the quote-unquote venture capital market in the last 12, 18 months, as people see how quickly Anthropoc, OpenAI, Cognition, Merkur, Cursor, Winsurf are growing, and they all want a piece of the action. I think the sort of... So yes, on an aggregate data basis, there is no reset anymore. The flows are back. If you follow the money, the money is rolling into venture capital.

49:20What Peter, I assume, also told you, or maybe if he didn't, we can discuss it, is that almost all of that money is being concentrated in the hands of 15 people, 15 firms. And those firms almost exclusively focus on later stage investments. And I've spoken to a bunch of those firms. And they think their job is sort of easy. They've never said the word easy to me. But they think their job right now is a lot different than it used to be. They think, you know, it used to be, we got to go out and meet with hundreds of founders and try to market, you know, do market maps and whatever it is. And the job right now is like, there are like 15 companies that are sort of running away with it in the world right now, whether those are OpenAI, Anthropic, you know, the list we just gave.

50:00We need allocations in all of those because either they're all going to win or one or two of them are going to win. But if one or two of them win and they look like Google, then we do really well overall. Not all firms feel that way, but a lot of them do. And so is there a reset? I don't even know what the word reset means. By the way, all markets rebound. The stock market rebounds. I mean, historically. Real estate markets rebound historically. All markets ultimately rebound. So, I mean, I don't think there needed to be a permanent reset in venture capital. A lot of our companies, in fact, I would argue that a lot of our companies did a lot of hard work between June of 2022 and the ensuing 12 months.

50:43And actually didn't, they'd done the hard work. They'd short a lot of things up. Their cost bases were a lot better. The thing was growing again. And many of the founders then were a little bit too timid to start to spend money again because they didn't know that there was money out there again. And so that's something that we actually, we wrote about it in a bunch of our letters to LPs. And we called a whole bunch of founders. And we said to them, by the way, your business is doing really well. You probably don't understand how well it's doing. And you should probably be a lot more aggressive.

51:07And I know it's scary to be aggressive because for the last 12 months, you were told that there was no money ever again. And every dollar in your bank account was the last dollar you're ever going to have. That is no longer true. That said, again, if 75 % of all the money coming to venture capital is going to 20 people and they're all at a later stage, Some of that is flowing down to the early stage, but the vast majority is not. And so I think early stage is still really tough because those growth equity firms, a lot of that money will flow down to people spinning out of, that used to be meta, but now it's OpenAI and Anthropic and a whole bunch of other kind of, or scale or a whole bunch of other pedigreed AI firms.

51:47But that's where they're market mapping. And so that leaves kind of, And again, there's still a lot of money in early stage venture capital, but certainly not as much as there was in 2018, 19, 20. How do you evaluate AI companies? Because some of them, of course, are just growing. I think it's like a race that just are unprecedented. And how do you kind of figure out what? Well, first of all, if you should invest these companies, which I'm sure command pretty high valuations, they're going to pass. But secondly, if that revenue is real or is long lasting versus versus revenue that might might go, they might be a sensation one day and then, of course, maybe die the next.

52:30Yeah. I mean, look, it's the right question. So I was pretty skeptical on a lot of the froth in the AI market until probably like six to nine months ago. okay um and i told this to rlps i mean the investors in our fund and i admitted that i was wrong um i even wrote a post called the internet is fun again uh which was all about all the cool stuff coming out from generative ai but the general core of that post uh that article was like there's a ton of experimentation because the stuff is so novel and interesting but it's not actually particularly useful like having a really cool ai avatar generator of your face or like whatever is like, that's cool.

53:12And that's fun. And you'll pay 99 cents, but like, you're probably not going to do it on a monthly or even yearly basis. Right. Um, and so in the early days, I thought that there was far more experimentation than there was, uh, true 10 X product change. My wake up call was over the last six months and my wake up call was actually looking at the data for chat GPT. So if you look at the data for chat GPT, it is by far the fastest growing consumer application or really application period in history. But that's not what made it special. If you actually looked at the data of the retention data for all the people who were using it, it looked like basically every other application on earth, which is a whole lot of people use at the beginning.

53:53And then 60 % of the people stay. And then the next month, 40 % of the people stay. And then the next month, 30 % of people. And I'm sure you've had a lot of consumer founders on your podcast who talk about the retention cohorts. And it's like 20 % to 30 % is an amazing retention cohort and you hope it stabilizes there, but you know, they'll ultimately churn like you're doing the best you can. That is exactly what ChatGPT looked like for the first year, like through mid to late 2024. And then something happened in the early part of last, latter part of last year, the early part of this year is I just wrote about this in our quarterly letter is something called the smile curve where those cohorts started trending back up, which means that people that had abandoned the product 12 months ago logged back in and started using it every day, every week.

54:40And that is really rare. And the reason why it happened is that the product had evolved to the point where it was actually really freaking useful to a lot of people and a lot of use cases. So that was one of my wake up calls of, hey, this is more than a novelty. And this is more than something that people are experimenting with. People are getting an enormous amount of long-term lasting value out of these products. And the more I've researched, the more I've come to accept and capitulate that there is an enormous amount of value being created. I think my skepticism was warranted. Every kind of hype cycle in history has statistically, like the hype has really dramatically outpaced the underlying progress.

55:20Like whether it's from railroads to crypto, like the hype always outpaced the progress. But I think in AI, I arguably, I think the hype is now underpacing the progress. So to your question, I think the answer is, and I can't speak for other investors. And again, we're a small, dinky little fund. I don't know why I'm here. But we will get everything from a first principles basis, which is your question on revenue. Like Bill Gurley has a great post from 12 years ago called All Revenue is Not Created Equal or Not All Revenue is Created Equal. And it's all about actually looking at the first principles of the revenue and who the buyers are and what the consistency is.

55:57And so we try to apply that to AI. I think that we use the same first principles looking at all the businesses now. And there are admittedly a lot more unknowns, but the pace of growth like more than more than makes up for us. I'll give you three. How about tangible examples? Is that a good use of our time? Yeah. We made four investments last quarter, which is the most we've made in any quarter, maybe ever. And they were all basically AI first or AI enabled. One is a new kind of AI social media company. It is 18 months old. It has something like a million monthly active users and it is profitable.

56:37It's profitable. Wow. It's growing really fast and it's profitable. It's a small team. I think it's like four or six people, maybe eight people. But it's just profitable and it's growing really fast and they can keep up with it because so much of their product is built on AI and a lot of the moderation is AI driven. It's profitable. We just invested in kind of a voice AI SaaS company. It's a B2B2C, whatever. We do that as well. And again, we think it'll be profitable at the end of this quarter. we uh invested in a marketplace uh that is kind of it's a marketplace for uh large ai companies to source consumer data it is 11 months old it will likely do tens of millions if not more of revenue this year and it is profitable and then we invested in one of the most controversial investments we ever made we invested in a media company.

57:36Hi. This is the only one that's public called Every. And Every is one of the leading AI, they call themselves a multimodal media company. A really special team. They are also profitable. So why did they want our money? Well, they wanted our money because they have over 100 ,000 readers of their newsletter. They have a whole bunch of EIRs that basically want to be affiliated with their brand. And they wanted to start incubating companies. And they needed some capital to actually pay the EIRs to sit around and make great ideas. And while they're profitable, they weren't profitable enough to do that for dozens of people.

58:10And so they took some of our money. And that was actually a really, we did a really interesting structure where we told them like, hey, we'll give you up to X, but they only took a piece of the X dollars. They only took a piece of it to begin with because they said, we're an AI company. We actually were profitable. We don't know how much of your money we're going to need. And we're looking for someone who will basically guarantee us a certain amount of money, but we don't have to take it all at once because we don't know how much dilution we ultimately want to take. And never done that before.

58:37Most people will, most firms cannot do that, but we're small and nimble and we can do things like that. But again, the commonality is four AI companies growing to amazing scale in a short period of time and all profitable. We don't look for profitable businesses. That's not our business model. These are companies that are profitable, not even by their own choosing, just because there's so much interest in what they're building. Has that changed your mindset in terms of profitability? Just because venture, typically, it's grow, grow, grow, grow, growth. Not really so much about profitability, but now you have a lot of AI companies that are profitable.

59:09How do you think about it in terms of reinvesting those funds? It has. It has a little bit. I don't think we don't seek out profitability. We seek out velocity of demand. Meaning, as consumer investors, the only thing that matters is, is this business growing really fast or can it grow really, really fast if a certain intersection of a few things goes right? What I have changed my mind on is the importance of capital efficiency. I used to... One of my soft spots in investing is falling in love with really hard problems that will require hundreds and hundreds and hundreds of millions of dollars.

59:47And even when those work, if they don't work well enough, even if we're right, we don't make very much money. My job at the end of the day, as much as we've talked about founders and builders and how much I love them, my job at the end of the day is to make money. And companies that are not capital efficient take a ton of dilution. And there are a whole... I chat with my friends all the time. There are a whole bunch of large billion-dollar exits that you read about in the press where the seed investors made 1.5 to 2x, 3x, 4x. Just the dilution will kill you. So I do think that there is a huge benefit to seed investors, given that we have no rights.

1:00:24We can never recap a business. We will never force a set. Like we have, once we put our money in, like we're complete, like we're basically like we're friends of the founders and that's about it. We have no rights or control, period. And so capital efficiency becomes really, really important to preserve our ownership in the business. So again, growth matters more and companies that grow really fast will often take in a lot more money and more dilution. But one of our best performing companies ever, they took, let's see, they took probably 25 % dilution for their seed round. They realized that things were going really, really well, but they wanted a little extra money.

1:01:05So they took 10 % dilution for that. Then things were going really, really well. So they raised a large quantum of capital and took 10 % dilution. And then the final one is things were going really, really well. So they raised an even bigger quantum capital and took 5 % dilution. And so our original ownership was 7.1%. Our current ownership is 5.25%. And that is a home run in venture to only get diluted down by 35 % over three or four rounds of funding. And that can only happen in a capital efficient business where they can kind of call the shots on that. That's really helpful. You're going to hate this next question.

1:01:41I'm sure I'm going to get a couple of eye rolls from you. But traditionally, I would say the worst, or what some investors say is the worst question to ask in venture is, well, when we're talking about the founder is, well, why wouldn't Facebook just launch this? Or why wouldn't Google just launch this? Or why wouldn't Amazon just launch it? Why wouldn't the incumbents? And what Peter Walker was pointing out last week, I thought was interesting, is it seems like the incumbents in AI are quite different in that they're actually coming and like eating other people's lunch, which is quite different in terms of, you know, maybe like the SAS businesses or, or the mobile businesses from, you know, call it, um, late, late two thousands all the way to now.

1:02:24And so how do you think about that in diligence when you're, when you're talking to it, when you're meeting the company of, of, Ooh, we'll, we'll open AI kind of build this versus like, maybe it's going really, really well right now, but there might be opportunity when it comes to for open ability because they still act like a startup yeah we've we've um i mean we just learned that lesson the hard way over the last 12 months by making a bunch of ai investments some of them are really working well some of them are clearly not working in the commonality of the ones that are working really really well are in really strong ai native engineering team doesn't mean you need to work at open ai but you better have a whole lot of friends on or you yourself on just the frontier of the models and obsessive over the market.

1:03:12I don't think we've made any really fantastic AI investment yet where the engineers and the product leaders behind the business did not have an insane AI pedigree for a couple of reasons. One, I think to your point, there's just an enormous amount of velocity of competition, both from incumbents and new entrants and B, for the people who do need capital, all the capital was accruing to pedigree for a variety of reasons. But yeah, those are the mistakes we've made of giving money to people who were not on the frontier of AI models in pedigree. Got it. That's helpful. I know we don't have too much time.

1:03:56I wanted to touch on liquidity, but before I do, are there any questions from the audience? We want to try to make this as helpful as possible if anyone does have any questions. I'm happy to keep going, but it's called consumer VC. Yeah. All right. Cool. All right. I'll keep going. Um, so, um, I wanted to talk a little bit about, there's been a bit of a look, um, a bit of a liquidity crunch per se, when it comes to venture, how are LPs, when you talk to LPs, How are LPs thinking about venture today, especially with stretch timelines, light distributions, probably light distributions as well from like the call it the when when the market was peak?

1:04:44Just a comment now. How do you think about like how you approach exiting businesses per se? Has that changed at all? What I hear from our LPs is that they don't have a whole lot of money and nobody gives them money. And so that's not a great thing to hear. I think the challenge for us is that the companies that we're most likely to be able to generate distributions from, i.e. through sales or whatever, are probably our best companies right now. And so that's always just a challenge. I'm not particularly... We're close friends with pretty much every founder we've backed. They've all told us, like, if you want to sell shares, you should feel free.

1:05:24We have permission, but it's been really hard to do so because the only ones where there's an active market for our shares are our best performing companies. And we're romantic optimists and we always see more upside than at present. So I don't know. The one change that we've made is as a team, we meet every six weeks and we ask ourselves, would all things being equal, would we want to buy more of this company, sit on our holdings or sell this company, sell some down right now? and what surprised me is for a lot of our best companies we often answer we'd want to buy more and so I mean it is what it is I mean again just to be clear like we're not a growth stage firm we don't have people bidding on all of our positions all day long but we have a couple and we have not sold much yet so you've never felt tempted to actually sell for your best companies we've I felt totally tempted okay but we haven't done it that's that's helpful thank you can we also talk about maybe the future in terms of new capital potentially entering the private markets with 401ks if if we're all allowed to actually use a 401k to actually invest in private markets how does that obviously a lot more capital might go into venture do you will do you think a lot more capital will actually go into venture funds directly i don't know i mean you guys are attendees and you all have probably saving of accounts.

1:06:59Uh, I don't know. I just suspect some amount would, I think, I think there are a whole lot of young, ambitious people in the world who play with a lot of products, whether those are CPG products or technology products and all things being Ethan, given the opportunity to own a piece of those products would be very excited too. Um, And so my suspicion is that as it becomes easier to access private markets, there will probably be a healthy flow of funds. It's just impossible to know what it looks like. Is it a few digital marketplaces that basically consume all the flow of funds into private market companies from 401ks?

1:07:44I have no idea what it looks like. But all things being equal, I would bet that there are a huge amount of regular people who would love access to SpaceX and to Stripe and to a lot of the great companies that they have heard of, as well as a lot of the smaller companies that they use on a daily basis. We've actually, I understand it's controversial, but we've recommended crowdfunding to a lot of our investments. Again, if you are a consumer business, you have a lot of real human customers that, in theory, love your product if they keep repurchasing it. And I tend to believe that if it's legal and people are adults and can make their own financial decisions, you know, recognizing there's risk in any early stage investment.

1:08:30And I don't know, maybe, you know, keep a cap on how much any single person can put in. But I think crowdfunding is like an amazing opportunity to become closer with your customers and give them a vested interest in telling more people and a whole bunch of things. I don't know if that's a consensus opinion or not. I don't think so. But, you know, we've had probably three or four companies do out of 50 or whatever, 40, do crowdfunding campaigns at different capacities. And like, I think that's awesome. Give your customers a piece of the action. Does that, if a company crowdfunds from the, from the venture perspective and that company that maybe wants to go out and raise a fund, right.

1:09:06Is that a negative single signal to you? I mean, these campaigns tend to be pretty small, like a hundred thousand, 200, 300, thousand dollars. Like it's not making a huge difference either way. So personally, I don't care. Um, but I think the narrative has got to be right. If it was like, we needed a$200 ,000 bridge and the only idiots who would do that are people who don't understand how bad we're doing. like yeah that's a problem but if you're raising two three million dollars and you want to give your you want to give your customers your users an opportunity to participate in that i think that's super cool i think more companies should do that personally yeah no for sure what's the biggest misconception founders have you think about raising from institutional institutional capital today that it is a sign of success yeah that's fair i yeah i just think like we play a game where the press releases and everything.

1:09:58We play a game where the timelines are super drawn out. It's super, super difficult to found something. It is super lonely to be a CEO. And there is very little external validation while you're doing a hard thing. And when an investor comes in and says, we love your business and we think you're credible and we're going to give you all this money, for a lot of people, it'd be hard to say no to that. In many cases I think they should say no. That's great. That's great. Um, if you were an investor today, what company would you build? I would not be a, build a company. I would go back to rabbinical school and be a rabbi.

1:10:37There we go. Or I'd start a farm or you start a farm. What would you grow? Uh, I would milk animals.

1:10:49I've just always had a romantic idea of, uh, of, of a living on a farm. It's probably, I'll actually, I have a few friends who like have farms, uh, and it is a lot of work and not particularly romantic, but I, uh, I don't know. I love the idea of just being around like wildlife and cattle and, uh, knowing the person there was, uh, actually she joined a cameo for a while. Uh, like there was this like TikTok star who like, was just like super close friends with her ostrich and the animals at her farm. And like, had they, like, she talked about their personalities. I don't know. I've just always that would be really, really fun.

1:11:23I don't think there is any company I would... I love what I do. I hope to do starting line for a long time. And afterwards, I'm going to go to rabbinical school and then live on a farm. There's actually a great Netflix documentary about this couple in LA. They live in downtown Santa Monica, LA. And then they move out. They just buy a farm or buy land in Ventura County and sort of farm. And they document all the different challenges and stuff like that. It's really cool. I assume it's far more miserable than it seems to me because the grass is literally greener on that other side. But that is my ideal utopian vision.

1:11:55By 2030, what would it mean for a starting line to have truly lived up to its potential?

1:12:04We are wildly indispensable to a very, very small group of people and wildly irrelevant to a large group of people. By which I mean, like the founders that we work with, I want them to love us so much that they tell every single friend, Whether you need money or not, you need to meet this group of people and work with them. And that for everybody else, they don't even know or care who we are. Because I think that one of the mistakes we've made in the past is trying to put a marketing reach that is way too broad. And all that matters is that you know your customer really, really well. In this case, I think a very small group of founders that are sort of insane and on the frontier of new technologies and want to do really, really weird stuff and that they trust us to take a risk with them and to be alongside them even when things are not going super, super well.

1:12:53So again, I think be wildly indispensable to that group and be just irrelevant to the rest would be a huge success. Do you, as a fund too, I know that it's... How do you not end there? What a great soundbite. What? I'm joking. So I know starting line consumer-focused fund, it seems like you also invest in as well as in some non-consumer companies. how do you think about whether you invest in a consumer versus more broadly? So just to be clear, probably 75 % of what we do is direct B2C. And the rest is B2B2C in some capacity or another. Or it touches a real human or a real worker in a very, very real way.

1:13:37So again, we don't do enterprise software. But there are a lot of times we'll invest in stuff that makes workers' lives more better. Or in some cases, companies have pivoted and they look a little bit more B2B than they were when we invested. We have a company that's doing really, really well down in Austin called Boom, which is now software for property managers. But it started as a consumer rent reporting application. And I was like, okay. That was really, really good. And the technology they built ended up being really relevant to property managers. They went into that as well. But I think the core of what we do, and I actually think Josh Kushner from...

1:14:09Is it Josh or Jared? I think whatever the investor one is, Josh Kushner from Thrive, Josh said really, really well is that the core of Thrive was built on consumer. And even though they now do everything, they take the same investing approach to every single business. He said this on Invest Like the Best with Patrick O'Shaughnessy, which is, is their core consumer DNA at the core of this product or not? Because whether it's enterprise software or not, the best products will be built with a true consumer DNA underlying them. And he basically gives credit to the early days of Thrive for creating that philosophy in their heads of that is how they're going to look at every investment.

1:14:48The early days of Thrive was Instagram and whatever. It was only consumer, Warby Parker, only consumer. And they now take that lens to every investment they make, which is awesome. No, I love that episode. Also, everyone should subscribe to Invest Like The Best. It's unbelievable. And ConsumerBC. But Invest Like The Best is like, Patrick is like the goat, in my opinion. He's unbelievable. My final question is that we... I always kind of conclude with this question is what's one book that's inspired you personally. It's my one curveball, one book that's inspired you personally and one book that's inspired you professionally.

1:15:24Uh, my favorite book is the little prince and that is the book that has inspired me personally in terms of dreaming bigger, uh, inspired me professionally, probably a book by an author named Tal Ben Shachar called happier. And he was very early to the positive psychology movement. In fact, many of you may have seen Scotty Scheffler, who's the best golfer in the world. He just gave this amazing five minute clip about all the success he's had in golf. Just doesn't fulfill him. But what does is this great. Tal Ben Shachar, I believe was like the leading wrestler or boxer or something in Israel. And he worked his entire life to win some event.

1:16:11He won it and he felt amazing. And then he got home and he felt incredibly depressed. And he decided to dedicate the rest of his life to understanding why he felt so depressed when he got home. And what he realized is that the happiness that he felt was not happiness. It was relief that he actually had no underlying happiness, that he had built up so much stress in his life and anxiety that whatever he felt, what he felt at that moment when he won the big event or match was just relief from the stress, but it wasn't happiness. And when he got home, he realized he had nothing fundamentally important in his life besides this, and it didn't make him happy.

1:16:50And that's why he was so depressed. I think that's a book that I read in business school and I have taken with me ever since then of, uh, am I professionally pursuing things that are fulfilling as well as personally pursuing things that are fulfilling or are they just going after relief happiness wow i don't think we've had i definitely want to read that book i don't think we've had anyone that actually brought up that book uh before thank you so much everyone thank you so much this has been thank you mike thank you and there you have it p33 thank you so much for having us at your summit tech chicago capital Summit.

1:17:28I had a wonderful time and really enjoyed talking with Ezra. Ezra, thanks for taking the time. Really enjoyed our conversation and I really appreciate you doing this. And Glimpse, thanks so much for sponsoring the episode. Remember, Glimpse is an AI-powered end-to-end deductions management service that's focused on recovering revenue from KEHI, UNFI, Amazon, and Target for consumer brands. Check out Glimpse, links in the show notes. Thanks for listening. I hope this was helpful. Until next time, folks.