What It Takes to Build a Generational Company | Anduril’s Trae Stephens

27:09Totally. Yeah. I think there's a runaway aspect to all of these, you know, synchronized market effects. It's like there's too much access to capital. It's too aspirational. The AI makes things easier. You have like all of this alignment. And there's probably, you know, some opportunity for there to be accelerated growth or like new tech categories, things like that. There's probably some of that. But if you think about like enterprise SaaS as an example, like, you know, the companies, the enterprises that spend meaningful dollars on SaaS, they're not going to spend exponentially more on SaaS because there's exponentially more enterprise SaaS companies.

27:50Like they're going to tighten up. They're going to like be more disciplined or at least maintain discipline. And so like I feel like there's a bit of a market imbalance here. And so, you know, competition is sort of the the killer of opportunity in Silicon Valley. And we have more of that today than we ever have before. Yeah. Every category seems to be. Saturated, pretty saturated. Yeah. there are very few like truly novel zero to one ideas out there you know what's funny is um let me just give you my lived experience and then and then read back to me where like tell me where i'm wrong or like what like what i'm missing we came out of the gates pretty hot uh got excited about this space very odd space to get excited about i will say uh not like the thing that most people get excited about nonetheless didn't find anything decided we have to go do it ourself like there's not like there's not many games in town in what i'm doing there's very few games in town it's like an extremely boring and unsexy category like the letters cp and q unless you come from like sales you've like never heard of it before if you come from sales you're usually not like building the company right and so like you're not like the engineer has never heard of it then if you believe all of those things to be true and you were an engineer and you have heard of it you have to like you have to believe that the problem is upmarket which i do and you have to be able to access like the enterprise.

29:12And so I'm like, okay, like I believe like this is a unique market. Like, uh, I think I know something about the world that most people don't know yet. What's interesting is that I meet with folks like you, like VCs, like I go take a few of the meetings and they're like, oh no, it's, it's the TAM. Like the TAM, it's the TAM. There's no real winning, you know, because if you're in a crowded market, if you're in like coding or customer support, everyone's like, obviously huge market. And you're like, yeah, but like, there's 15 people in it, you know, and then you go to like, you know, a small market.

29:48And, you know, interestingly, I have plenty of opinions on why I think this market is completely misunderstood, but neither here nor there. You say, oh, no, no, no, it's TAM constraint. Like, there's a reason why nobody's done this. It's TAM constraint. Anyway, it's just like a funny observation. Well, I think, you know, you and I both know this because we've worked in venture. Most of the arguments that venture funds will return to a founder when they're making, when they're passing are just completely fabricated. Like there, there's no perfect, super nice way to tell someone, I just don't believe you're going to pull this off.

30:23Right. That's like a really hard conversation to have with someone. So it's like, all right, sure I can see how the TAM might be concerning or I can see how this might be really competitive or I can see how like the economics of writing this check don't really work for a fund of our side there's all sorts of these different kind of out of the box answers that you could give but at the end of the day the reason we're called Founders Fund is we're investing in founders that's it it's like with Roadrunner is it how excited am I about CPQ like I actually do understand it because I was doing this at Palantir.

30:55But like, is it something that I like wake up every morning and I'm like, man, I really hope somebody fixes the CQ press. No, it's, it's because Juvan, it's like, we're investing in the person that we believe is the person that's most likely to pull this off. And so, you know, the, you can take all of the VC passing reasons and just kind of put them aside and say, do you, as an investor, do you believe in the person and do you believe in their, their fit, the founder market fit? Do you believe that that's the right one? And if so, it's like, those are, that's where you should be concentrating your bets.

31:30And is that almost always how you operate? Almost always. Yeah. I mean, this is certainly on the venture side. Obviously when it gets to growth, there's like, there's a lot more data and things like that. But, um, at, at venture, when you're making, you know, seed series a sorts of bets, like you just need to have conviction in the founder. That's it. That's the, that is the atomic element that makes up the company. I tried to talk you guys out of it. I tried to tell you guys, like, guys, like, this is not your type of thing. Like, this is not your type of thing. What is our type of thing? Well, you know, it's interesting.

32:01So I was like, you know, I was like, this is boring enterprise software. It's B2B, like, you know, all these things, right? Who was it? I think it was, um, uh, Matthias. He was like, cause I said this to him too. He was like, dude, our thing is returns. I was like, all right. Yes. The business of a venture fund is returning capital to your investors, to your LPs. All right. All right. All right. No, Matias is very right about that. But I think that like, you know, if you look at the founders across our portfolio that have generated the vast majority of returns, you have Elon with SpaceX, you have Carp and Peter with Palantir, you have Zuckerberg with Facebook, Brian Chesky with Airbnb, the Collison brothers at Stripe.

32:44you know, Palmer, Matt, Brian, and myself at Anderle. It's like, you're just looking for like world-class operators, like people who have the charisma and the vision to like go and take wildly disparate things. It's like SpaceX builds rockets, Stripe builds payments infrastructure, Airbnb, like helps people sublet short-term leases. Like these are not common at all. There's no thesis here. It's not like Founders Fund has like a list of industries that we're working our way through. No, it's just like, is this the right person to solve this particular problem? And if so, like the returns part of it will, will work it out, work itself out.

33:23I didn't know this, but I found out later that, so you asked me, you didn't ask that many questions, by the way, I appreciate one of the things that you did that I felt like I should tell you that I did appreciate was, um, you had like a notepad and, um, like when I was pitching you, you were taking notes. Very small thing. I noticed it and I really appreciated it. And I appreciate it because, um, like I, I put that in the bank of like, this guy's like, he cares. Like this is what he's doing right now. And he's really focused on it and he's being detailed about his focus. Well, this is something that like, it's more of a self critique than something that I do for founders but like i i really care about my own weaknesses in the places where i feel like i am falling short in like respect and responsibility for myself and i notice that if i have an ipad out or i have a laptop out i'm gonna i'm multitasking like somebody sends me a text message i look and i respond and like each of these things individually are like seconds it's like vapor it shouldn't matter.

34:29But in aggregate, I'm pretty distracted. Like I'm not giving my full attention. And you know, one of the things I realized in my first year at Founders Fund is that I wake up, I come into the office, maybe I have three, four pitch meetings in a day. There's a pretty high likelihood that I haven't looked into these companies at all. I have like some vague understanding. I have a reference maybe from someone, but like when I, before I go into a meeting, I'm going to open it up and say like, okay, how did I get introduced to this company? What's the high level overview? You know, I think for a couple of seconds about what questions I want to ask, what things I believe I need to get clarity in.

35:06And then I go into the meeting. The founder on the other side of the table has a totally different experience. There's a pretty high likelihood that they've been stressing building a deck. They've been thinking about how they could change their pitch. Maybe they're like laying awake at night, staring at the ceiling, being like, I'm going to go, I'm pitching founders fund tomorrow. That's a big deal. This is like, could be the difference between me building this company or not building this company. There's a huge imbalance. I've got like 30 seconds of prep and they've got like 30 days of like thinking about this.

35:38So the least that I can do in my mind is give them my full attention, whether or not I'm going to pass. I think founders deserve the full attention of the investor on the other side of the table. Well, and I think you've been on the other side of the table, so you appreciate that. Totally. Yeah. Yeah. I mean, I wouldn't say that I'm like upset when people have laptops out during pitch meetings. It's fine. Like I said, it's more about like being true to who I want to be rather than judging other people. But it is it's been remarkable to me. I love how I just use that word. I use a remarkable tab to take notes.

36:11But it has been remarkable to me how different my experience of a pitch meeting is when I'm just fully there. I got no distractions, not looking at text messages. I'm not checking Slack. I'm not seeing emails flooding in. It's just me, the founder, and a notepad. And I feel better about how I'm showing up in those meetings as a result. I didn't know this, but I found out later that like one of the questions that you asked me was about round size. And I have a strong opinion on round size that I apparently you share. OK. Which is, you know, like we're in the land of the like mega rounds right now.

36:55And I don't like the mega rounds, especially at the early stage. Like I think it's bad for business. I don't think it's de-risking the next opportunity. I think it's just like raising as much as you can because you can. And I don't think you really appreciate like the gun to your head of what you have to go do and how unnatural that is. It's like hitting puberty way too early. You're like 10 years old when you do it. It just like shouldn't happen. It's just too early. And, you know, I think when you asked about like what kind of round do you want to raise? I probably said something along these lines.

37:25Like, you know, I want to keep a normal round. Like normal. I'm not saying like small, just normal. Right. You know? Totally. I guess it resonated. I think it's so true. like when you raise let's say you go out and you raise like a 60 million dollar seed round or you know 100 million dollar series a you're now putting yourself in a position where like you can't raise less than that the next time you go out and i think you can sort of justify that like a really big round like a mega round if the price is so high that you've just set that you need as much runway as possible to like catch up to that valuation.

38:03But there's all sorts of reasons not to do that. Like your employees are going to benefit from seeing continued momentum. You're going to have the benefit of like remarking the price over time so that your employees can see like appreciation in the stock as compensation, so they can view it as compensation. You keep the price low so that you're able to grant shares or options to your team at a lower strike price. Like there's all sorts of reasons why like phasing it in a in a more patient way is good for not only, you know, the investor at some at some point, but it's also good for the company.

38:39So it's not like a pure selfish thing for investors to say you should raise less at a lower price. It's we believe that this actually increases the probability of success at the company as well. I, um, my, my take on it is like, uh, I think startups are like the oxygen of them is momentum and velocity. Totally. Like I just like, if, if, if I could only have one thing, I would keep having momentum because everything else gets easier after you have that oxygen and fundraising is one version of momentum, but it's a powerful version of it to just like keep stacking wins, stack product wins say what you're going to do on the roadmap ship it stack customer wins keep winning customers knocking them down as early as you can stack fundraising wins you can use those fundraising wins to stack media wins you can then use those to stack candidate wins and like over time the like house starts to get built but like uh it's very difficult to do that if it's like lumpy right like it's just harder to do that and if the trade-off is less money with a partner that you're excited about at a valuation that's like good for everybody by the way including employees that then in like six months you can like show meaningful progress and then go do it all over again like that's how companies are built yeah that's like the momentum and velocity that you need to like go build a company and by the way like you do that forever like that's the name of the game like you have to do that forever and that's like the harder way in some ways like i actually think not to like now I'm on my soapbox about this but like like raising a I don't know hundred million dollars seed round like that's much easier and then there's like no one's on your back you can throw stupid offers at people you don't actually have to negotiate anymore because you have no constraint of cash all of your candidates know you have no constraint of cash so you have no leverage to actually be able to negotiate your your customers it's all this it just compounds in a really negative way anyway I'll get off my soapbox but no I think you're totally right.

40:42You know, the being the oxygen, I couldn't agree more with that. Like, you know, your, your team sees that they can feel it. It's like something visceral about like, and there's a markup and we hit our numbers and there's a markup and there's a tender opportunity at the last price. And, you know, you're just constantly like plowing through and, you know, at Anderil, we were super intentional about this. Like we actually want to make sure like on a, you know, every 12, every 18 months that we're presenting a tender opportunity at a higher price to our, to our team. And I think that that's something that allows them to see that equity compensation as compensation.

41:20It's like, it is as good as cash. We're giving you opportunities to turn it into cash. And I think that changes the way they think about, you know, retention and recruiting their, their peers and things like that. It just heightens the, the palpable sense of, of growth and success. Um, and you really, you really don't want to stall out under the, you know, the overhang of a really big valuation or a really big round. It's just not that healthy. Totally. I think that the other way that I kind of say this internally to the Roadrunner team is like, um, we have had this sense of inevitability almost from the beginning and like that's grounded in reality of what has to come.

41:59But there's like this deep sense of unspoken belief that there is an inevitable future that we're going to go achieve. And I think in order to actually believe that you need like, just like keep stacking them. Like it just needs to feel like this every step of the way. And again, like we came out of the gates pretty hot. And so it's been helpful to be able to like continue to push. And, you know, maybe there are companies that have taken four years. There's a few like Figma or Notion. There's just not that many where that feeling of inevitability was not imbued from kind of the ground up. I don't know what your reason.

42:36I don't know. Yeah, no, I think that's absolutely true. Is that how it felt in the end row? Oh, yeah, yeah, for sure. Like the velocity was the name of the game. And, you know, for us, it was, we were oversubscribed to every round. And, you know, could we have like adjusted the price to like have the supply and demand curves, you know, connect at some point? Sure, we could have done that. But like, that would have decreased velocity, right? It would be optimizing for minimizing dilution or something else. But, you know, I don't, I don't think that that's the right call in most cases. So yeah, totally agree.

43:11I've heard you use the X-Men analogy to describe like you and your co-founders at Anderil. Yeah. Can you describe it? Yeah, this is something actually that I learned from Sham Sankar, who I believe his current title at Palantir is CTO, but I don't know. His title changes all the time. But he, you know, used to tell the entire company at Palantir, like, we are not supermen. We are the X-Men. Like, you know, somebody has laser beam eyes. Somebody can conjure the weather like storm. And somebody has adamantium claws. And the goal is not for us to be like one unified mega superhero. The goal is everyone use their unique superpowers together and you fill all the gaps.

43:54Like, you know, the worst disasters in X-Men lore are the ones where like one of the superheroes was checked out. You know, it was like Wolverine was, you know, depressed and, you know, not participating in team activities or something. And the team really gets in trouble. And like, how does they solve the problem? Wolverine comes back and fills that very specific gap that they needed to solve the problem. This is like a hero's journey. And I think that's like the way that the best companies are built is they're not built of a bunch of like really well-rounded jack-of-all-trades people. It's super spiky people that are like broken and disabled in some ways, but are truly superheroes and others.

44:34And, you know, the way that we've approached this at Andrel is that we have a super deep executive team. Like, you know, the headlines are going to talk about, you know, Palmer and Matt Graham, my co-founder, COO, Brian Schempf, the co-founder, CEO. But like a level down from that, when you look at like our CFO, Babak Seyvashi, also Iranian immigrant, represent. Chris Brose, who's our chief strategy officer, Matt Steckman, our chief revenue officer. And then you go down like a layer below that to the business line directors. like every single one of these people could very easily have started like a multi-billion dollar startup themselves.

45:12But instead, they've all chosen to come together to try to build a truly generational defense company. And we're not going to do that if one person is just like, I'm going to be the guy or I'm going to be the girl and I'm going to do all of the things and try to own more than my fair share. It's like, no, it just doesn't work that way. I think the X-Men way is a way more effective strategy. I'm just thinking of like how different you and Palmer are. Like, how is that? I mean, yeah, I mean, Palmer is like a, he's a prodigy. He's a renaissance man. Um, you know, he's insanely talented, uh, at idea generation at, you know, building the first iteration of a product um he's incredibly good at communicating vision at recruiting like there's like all sorts of things that like palmer is not incrementally better than anyone else on the team he's like orders of magnitude better at at a certain set of skills and then there are other things where he's just like it's not for me like you know he's not the guy that's going to show up at like quarterly finance reviews and like pour through the financials and make tough decisions on gross margin optimization.

46:27He doesn't care. He just doesn't care. That's not him. And that's fine for you guys. That's great. The X-Men have been set up in a way that he does not have to do that. Totally. He doesn't have to worry about it. And, you know, I think that, you know, if he were trying to insert himself into those conversations, it would not make the company better. And I'm not saying that as like a critic of Palmer. I'm saying that as like, Palmer would say the same thing if he were sitting right now, here right now. He would say, yeah, if I were trying to do Matt Seckman's job, which is like the chief revenue officer who's literally like managing the crm and stuff like that it's like the company would not be better if palmer was trying to do that does he have directs uh does palmer have directs um that's a good question i don't think he does i don't think he has any directs i don't know what x-men character he is but like the really cool awesome one that gets to do whatever he wants exactly he's like he's like uh professor xavier he's just like you know i'm i'm controlling everyone's mind yeah no he's he's a free he's a free electron uh there's like there it's all over the internet now but like there's rumors about andro fundraising whatever 60 billion it's insane gotta be like can i just ask like surreal like maybe the real question that i want to ask is like at the early days has your ambition grown as you've seen more or did you have this sense of like, oh, of course, like, like, yeah, like, did you have to flip over another card and then be like, all right, I think we'll be like a$5 billion company and then flip over another card, like, I think we'll be like an$8 billion company.

47:59Like, how did that, I don't know, like, how did your ambition manifest as the company grew? No, it's totally surreal. I distinctly remember in the first year of the company, I was hanging out at Joe Lonsdale smoking cigars. Joe is one of the co-founders of Palantir. And he was like, oh man, like when you do this and you do this and you do this, like, you know, this company is going to be worth tens of billions of dollars. And I was like, okay, let's settle down for a second. We're trying to do something that's incredibly hard. It's going to take us a long time to figure this out. And I was reminded in that moment of my offer letter at Palantir, where we all got this offer that had a high mid low for cash and equity.

48:42And so it was basically flipped. If you take high cash, you get low equity. If you take low cash, you get high equity. And then there's like a middle, middle option. Does that make sense? Yeah. And below that like offer where you had three choices, it was, here's what the equity value would be at different prices. And it was like 1 billion, 5 billion, 10 billion. Then I think it was one that was 50 billion. And I remember like everyone at the company thought this was freaking hilarious. Hilarious. We would be like$50 billion dollars what a joke like it's like obviously the ridiculous option on the offer that's like just imagine your equity could be worth this many millions of dollars if we end up being worth 50 billion dollars and now it's worth what like 350 billion 400 billion dollars i don't know what the price is today but like of course like no one except the most you know unbelievably irrationally exuberant founders believes that there's like a inevitability to them being worth tens of billions of pounds it never felt inevitable it felt hard the whole time yeah yeah yeah does it still feel hard yeah for sure I mean it's hard in different ways it like in the early days it was like you know we're celebrating winning every deal it's like we got that thing across the finish line that feels awesome and now it's like you know sure we celebrate winning deals but we also recognize oh man we have to produce like manufacture thousands of things and they're like supply chain challenges with those thousands of things there are you know uh production challenges facilities challenges like there's a million different things that go into that so it's like you win the deal but it's not over yet now you have like a whole nother set of things to worry about yeah um and you know you have all these crazy kind of like edge case stuff that comes up more often than you would think it's like when you have you know thousands and thousands and thousands of employees like just think about like the 0.1 percent chance that somebody has like a cosmically bad day that's like one in a thousand people right so if you have like seven thousand people one in a thousand is going to have a cosmically bad day that's seven people that like might get arrested they might like show up drunk they might like that's a lot of people if you think about it and luckily that's not my problem that's my co-founder matt grimm's problem but um man the stories are crazy like things i never would have expected when we first started this thing i uh the the deal that i texted you about it was a big like granted for a company of our youth if you will it was a big deal it was a multi-million dollar deal but when it came across i texted you it's me my two co-founders and like engineers and they don't like understand like they're just like yeah like of course we did yeah yeah like yeah and i was like guys close your laptops we go to the bar like stop stop like we go to the bar like enjoy this moment like we never get this again enjoy it it's just special you know like uh like uh definitely you appreciate when you know you're in the good old days it's fun to be able to appreciate it 100 yeah i mean there are probably like three or four times a year there will be some you know conversation about the first week or the first month or the first year and people just start like texting each other pictures from that time and it's like things are really hard but in some ways they were also also much simpler and uh there is there's really nothing like that there's nothing like that first couple years of a startup yeah it's just super formative and like most of the company lore is going to come from that time period even though it's like one one thousandth the eventual momentum that you reach but at some point you get to this point where like it's hard to generate lore because there's just too much happening on any given day well look I appreciate you being a part of the company's journey at what is what I think a really special time you don't do this very often you don't take very many board seats so I dragged you onto this one.

52:53I'm not a huge fan of boards, but I'm really excited to be on, on, online for this one. I dragged, I dragged you into this one. Uh, I appreciate it. I'm just like, I'm excited to do this. Um, I'm excited for you to be a part of it. Like, it's just fun. Uh, you, um, you're a legend in our industry. And so like, it's just fun. It's just cool to be able to do it with you. And, um, I do believe you're, you're one of the good guys around here. And so it's fun to be able to do it with the good guys. I appreciate it. Yeah. I'm really excited as well. Yeah, man. Cool. We have one of the other directors at Palantir is this guy named Aki, Akash Jain.

53:27And his signature when he closed out a conversation, when he said bye to you, is he said, meet me. No way. And I feel like we need to do that with Roadrunner. You got to do the meet me to close out every conversation. You know when you log into Roadrunner, like you go from Salesforce and then it takes you kind of like to the Roadrunner screen. The first thing you hear is meet me. amazing the first year and one of our one of our early customers she was demoing it to like all of sales and this was like my like king's decree feature like i was like guys i i never do this i never just say that we have to have something this is the one thing that i'm going to ask for and i'm going to phrase it in a way that i'm asking but i really really want it you know please just add the meet me when you when when somebody enters roadrunner it's so good and And she didn't know when she was demoing it for sales that it was going to pop up.

54:22And she had her volume on full blast. And the Meep Meep comes and she like chucked her laptop because she was so scared. She was like, who did that? And I'm like, I can't even have one nice thing. One nice thing, I ruined it. Well, you know, there's like, you know, people think about aesthetics a lot. Well, at least the design side of these big tech companies. And we have this brilliant designer who runs our team at Anne Rural. Her name is Gembucci. And she was having this conversation with me a few months ago that kind of blew my mind about like like an audio logo in some ways. And she used a different word for it.

54:59I don't remember what it was. But like if you think about like, you know, you turn on the TV and you hear Netflix. It's like I don't need to see the TV. I don't need to see the logo. I just know the sound that Netflix makes. I think there's like a really cool trick around having these audio cues. Well, think about Slack. Think about the message that you hear when you get Slack. I think it's like there's just an aesthetic when you feel a product. You feel the aesthetic. And that aesthetic is generally prescribed as visual. But I think there's more to an aesthetic. Yeah, yeah. I think there's more to an aesthetic.

55:33I actually think Andrew does a great job with this aesthetic. Well, that's Jen and her team, for sure. Yeah. She's the brainchild. Anyway, thanks, man. Great. Yeah, thanks for having me. This is fun. I close all these out the same way. When you hear the word grit, what do you think of? Agency. It's like the ability to put your head down and just go and get the thing done. That's right. Thank you. That's it for now. If you liked the episode, please leave us a review or go back into the archives where we've done more than 200 episodes with some fantastic folks. This podcast is a Clienter Perkins production and I'm Juven.

56:07Thanks for listening.

56:12you