E309: Why Most VCs Firms will Die by 2030

13:32Camilo Acosta:A firm is a brand. And most people don't realize that to be a successful venture manager, you have to be consistently marketing that brand to founders and to LPs, founders and LPs constantly. They think that it's just a function of having deal flow and making the investment. And it's not. The only reason your firm exists is because you have been able to bring LPs into your capital base and stewarded that capital well and continue to market your performance and your ability to continue doing that over and over and over again. Venture, if you look at the studies about successful venture firms starting all the way back to Sequoia, etc., they are successful today because of the success they had in the past.

14:09Camilo Acosta:They've continued marketing of that success. and a lot of venture managers don't like marketing and they don't like fundraising and they don't like investor relations, but that's the key to building a successful firm.

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16:46Camilo Acosta:I think the key to being a successful venture manager is having a very strong network. And people think that that just means a founder network. I think that's half of it. And the other half is having a strong LP network. Again, if you don't have the money, you're not an investor. So you have to have a strong LP network to begin with. It just happened in terms of how my life came together, my career, that I did know a lot of LPs and I had raised money as a founder. So I already knew how to do that. So I already had the network built in to go out, tap it and start my firm. And from there, word spreads.

17:14Camilo Acosta:LPs are a very insular, talkative group of people. They like to share their deal flow in terms of venture managers that they're finding. And that's how my LP base was able to grow is through that word of mouth with these investors.

17:27David Weisburd:Talk to me about these AI tools. What AI are you using internally that gives you an edge over your competitors?

17:32Camilo Acosta:I believe that you can encode and build models of what a successful founder looks like in B2B startups and then also in consumer startups, because I think they're actually different. And so that psychographic model, I think, is key. And I think it's something that's repeatable and scalable. If you look at some of the character traits that really define the best founders of the history of technology from Bill Gates, Steve Jobs, Mark Zuckerberg, et cetera, et cetera, they'll share common things. And so I think that you can actually model this and use that model just like any other AI model to say this is the right founder to bet on versus using just gut instinct, which is what a lot of precedency venture investing is a lot of gut instinct.

18:09Camilo Acosta:But gut instinct is just data. It's just accumulated data in your mind and body that I think can be actually modeled.

18:18David Weisburd:It goes without saying AI is a hyper-competitive seed market. How do you compete against other firms? And also, how do you compete? You mentioned the Kostela, Sequoia Founders Fund. How do you compete against these multi-stage platforms as well?

18:30Camilo Acosta:We are of the size where we don't have to compete with the big boys. We can collaborate with them, given our check size. And so we're in deals with a lot of the big guys, Founders Fund, Kostela, et cetera.

18:38David Weisburd:So this is due to size. Where we do compete is the other pre-seed and seed firms.

18:43Camilo Acosta:And where we win is because we are exited AI founders. We've been down the road as founders before, and in particular in AI. And so it's a very, I don't want to say it's easy, but it's a pretty straightforward argument to make to any founder. Like, we've just been there before. What can help you with the challenges you're facing today and will face tomorrow from inception all the way through exit? And so that's what really has been the key for winning for us, because most VCs are run by career investors who've never built anything before. And then the firms that do have some level of operators, they tend to be operators.

19:15Camilo Acosta:They're not founders. Very few firms have actually been built by former founders. founders fund is certainly one, and Dries and Horowitz is another, but there's actually very few when you think about it.

19:25David Weisburd:Tell me about some of the biggest misses you made as a VC and what were the learnings from those mistakes? The most consistent logical fallacy or mistake that I see from smart VCs, and this is like a very predictable at this point, is that they really like the founder and they really hate the business and they don't invest. And they're right about both, but their decision not to invest is wrong. Right.

19:46Camilo Acosta:And what happens when you do make that decision or to invest or not invest is you're saying like there has to be a pivot and I'm investing with the hopes that this team will pivot. Sometimes you feel so strongly about a team that you say I'm going to invest and they're going to figure it out and I don't believe in this thing that they're doing right now that they're going to figure it out. That's how we got our first check. When I was a founder and CEO, we got our first check and our investor told us, they're like, we have no idea what you're doing or where this is going, but we really like you as a team.

20:12Camilo Acosta:So here's a check. And that's the kind of bold investing you need to do. And then we've done, We've invested pre-idea. I met a founder who had amazing two or three exits up to his belt. And he was like, I don't know what I'm gonna do next. And I was like, take my money. I don't know what you're gonna do either, but you're smart enough to figure it out. So sometimes you just get to get better.

20:30David Weisburd:Would you rather invest pre-idea or in the wrong business model? Both are fine.

20:34Camilo Acosta:I don't think there's an either or. Again, if it's the right team, it's the right team. You have to believe that they're willing to move quickly. Because sometimes you can have a really smart team, but they don't iterate fast enough. if they don't, they get caught up in sunk costs and say like, oh, we've already built all of this. Like, do we really want to pivot to something else? You know, you need to invest in someone who's willing to let all that go and be ruthless with their time.

20:55David Weisburd:Talked about AGI earlier. Do you lose sleep on this doomsday AI situation where there's an extinction level event, not in the venture ecosystem, but humanity in general?

21:07Camilo Acosta:I don't lose sleep over, but I do think it's real. I think we have to think about it. And And it's unfortunately true that we have to balance it with national security concerns. So there's often this tension in the U.S. at least of building for safety and building for speed. You can, you know, dumb it down and say some throw papers open AI. But the reality is, is that we don't build it. China will.

21:29David Weisburd:So why even think about it? The decision is we have to move forward.

21:33Camilo Acosta:There is that tension. Right.

21:38David Weisburd:What's a key philosophy that you've changed over the last 12 months that you now, that leads you to make different actions today?

21:43Camilo Acosta:One of the key things I've come to accept is that some of the best founders in the world are not necessarily always the best people to work for or to work with. There is an element of ruthlessness that's required in building generational companies to transform humanity. It's a sacrifice they are making personally, but it's a sacrifice they ask their employees to make as well and a sacrifice they ask investors to make as well. And so there there's often a desire to do business with people you like, right? Like it's a common maximum in the business. And the reality in venture is that sometimes you want to do business with people you don't like because they are the best, the most extraordinary, impactful people in history.

22:21David Weisburd:Reminds me of a story you told me when we were having dinner a couple of months ago. Tell me about that.

22:25Camilo Acosta:Yes. So we, it's an interesting story. So we were early in a company and the founder did behave in a certain way that was He was not very agreeable. And I'm trying to be careful how much I say here. He was not very agreeable. And when we talked about it in IC, one of my partners said, hey, do we want to work with this guy? He seems like an asshole. He's doing kind of assholy things. And I said, actually, I want to work with him even more now because he can be an asshole to me, despite all the things I've done for him. That makes me realize this guy is going to do whatever it takes to build this company.

23:05Camilo Acosta:And that was a wake up call for me and for our team in terms of what it takes to build a generational business and how we look for those people and back them and the compromises you have to make.

23:15David Weisburd:How would you explain that? Because there's obviously the opposite is also an axiom, compounding relationships, compounding reputation. But here specifically, it's almost a zero sum mentality to relationships that was a superpower. How would you explain the mechanics around that?

23:29Camilo Acosta:there's at the core a level of humility you have to have because when someone's being disagreeable or an asshole there's an element of like i'm offended it's my ego that's saying like i i'm hurt i don't want to be hurt i don't want to continue interacting with someone who's hurting me so it takes a stepping out of that and saying that doesn't matter what matters here is as a venture manager i'm here to make money for my lps and is this the right person to make money for my So it's taking yourself out of the framework that you often are in, in terms of being led by ego and about pain and whatever and hurt and saying like, what actually matters?

24:05David Weisburd:Is that a specific case where you had to just burn through all your relationships in two, three years because there's a short window? Or is there some general wisdom there for highly disruptive startup founders? At the end of the day, the best founders in the world have all the leverage.

24:18Camilo Acosta:They can choose their investors. And so they will have leverage in that dynamic always. is once you come in, they still will have leverage over you, even if no matter how big your position is in the company, because they can always raise more from someone else. Right. So I don't think from a founder perspective, like you just have to become conscious of that. That's the dynamic now and that's okay. I'm not here to be in the spotlight. I'm here to support founders. I like how Vinod Kozla says he's not a VC, he's a Venture Assistant. He helps founders, he assists them in a service provider. That is the role.

24:49Camilo Acosta:And so you have to own that and let this ego of the VC, like push that aside. And it doesn't mean that your relationships are fraught. It just means that you have to be careful with those people and people who worked. I'm fortunate enough to know people who worked with Steve Jobs or were on board with Steve Jobs and they all knew like, you gotta be careful with him. Doesn't mean that you can't have a relationship with him. It doesn't mean that he's not extraordinary. It just means you just have to be careful. Yeah.

25:12David Weisburd:Would that be the case if you were a customer of that entrepreneur? Clearly that would be counterproductive to scaling, but it's really that you're a commodity to that entrepreneur. so he didn't find the need to use niceties and waste time with you as a commodity versus if he was trying to secure a large product or a large, large contract, that would be a necessary condition for him to succeed. Yeah.

25:33Camilo Acosta:And, and again, these founders, it's not that they're perma assholes. Like they, they, they are, they're quite charismatic, very friendly people when the moment is right. And so they know how to turn on the charm when it comes to sales, when it comes to customers, clients, et cetera. And that's, that's their magic is that they can be both. Now, when I look at my portfolio and we look at our top companies, top founders, unicorn founders we've backed, they'll have that ability to from one second go ruthless to the next second be like the nicest guy in the world. And so they know that they, in order to build a massive company, they're going to have to be the nicest guy in the world

26:03David Weisburd:where they're outpitching.

26:06Camilo Acosta:But when push comes to shove and there is a moment that requires decisiveness, they're not afraid to pull out the ruthless side of them.

26:12David Weisburd:Yeah. If you think about your energy and being nice as being highly energy consuming, they have an efficient use of their energy when it comes to different parts of the value chain. Of course, that sounds psychopathic, but when you take away the moral frame on it and you look at what's going to lead to, if you're trying to create an entrepreneur from scratch, that's going to execute at the high speed with the fewest amount of resources, that's almost like the perfect equation.

26:35Camilo Acosta:Yep, exactly. And I think we like to judge, even using the word psychopathic, it's like, oh man, do we want psychopathic founders? But what if that's just simply what it takes to build transformational global companies? It's the level of psychopathy.

26:52David Weisburd:You could be 100 % psychopathic and provide massive value to society. I'm not going to name any founders. Psychopathy is a clinical definition of not caring, having low empathy and all these things. You could literally be clinically psychopathic. And if you have the right incentives, they could end up actually carrying society forward. And you could say that's wrong, that's bad, but on a net basis, they're actually very positive for society.

27:12Camilo Acosta:We need them. Exactly. Yep.

27:16David Weisburd:Last time we chatted, you said that whoever controls the computing platform controls the future. What form factor do you expect the future of compute to take form?

27:26Camilo Acosta:Let's talk about what today's interface model looks like in these computing platforms. So we primarily use two interfaces. There's the computer, which we're chatting on a computer right now. Most knowledge workers sit at a desk looking at a monitor or a laptop. And this is interface model number one, let's call it. The second interface model is the phone. And I actually argue this is probably the most important one because most people on the planet have a smartphone, but most people on the planet do not have a desktop. And the GUI, the graphical user interface, that we use on laptops and monitors and phones, it's been around for 40 years and it's entirely text-based.

27:53Camilo Acosta:Even though it's visual, I still have to read the written word on my calendar, on my emails, websites. Reading is actually not that fast. Like it's not necessarily the most efficient way to process information. And part of the reason for this is that we developed the spoken word long before the written word. We're wired for speaking, which is why we're having this conversation by talking instead of writing back and forth to one another. So that's a fundamental principle behind these interaction models. And again, the phone follows that logic, but I think the phone is going to be the first one that breaks because it's an even more inefficient interface.

28:18Camilo Acosta:People often check their email on their phone and then wait to respond on their computer because typing on a phone is so cumbersome. And we're already seeing early signs of that, that audio is faster and preferable. You see people using the dictation function to write emails and SMS on their phone. That's audio. That's a spoken word. So the input is becoming more and more audio based. So I think that's what we're going to see right first. And that's going to be the platform shift that matters the most. And we've already started to see it with Humane, which came and went. But now OpenAI is going to release its own audio first device.

28:44Camilo Acosta:And while it may have a visual component, again, it's going to be primarily an audio interface.

28:49David Weisburd:What is one piece of advice you could go back to 2006 when you had just graduated Princeton? One timeless piece of advice that would have either helped you accelerate your career or helped you avoid causing mistakes?

28:59Camilo Acosta:One thing that I wish I had done was actually work at a big tech company earlier in my career, before I was a founder. When you're a founder and you've never worked anywhere before in tech, you're really flying blind. But when you work at high talent density places like Google or Meta, you understand what the bar is across a variety of functions. So it wasn't until I got to Meta that I really understood what world-class design looks like, world-class product, world-class engineering. I thought I knew as a founder, but it really wasn't until I got there that I understood the processes and systems that the best engineers in the world, the best designers in the world, the best product people in the world use to get the job done.

29:33Camilo Acosta:And so if I was going back and talking to the younger version of myself, I would have said, go learn there, go learn from them, and then go out and build a company so you're not making a lot of mistakes.

29:44David Weisburd:And I've only worked for three months in my life for somebody else. I worked at Jeffries for a summer, so I'm similar to you, very entrepreneurial. And when I think about these meta engineers and these Google engineers, are they the same level of talent at the high end as the top founders, and they just have a different risk appetite? or are founders just a different class of engineers, designers, et cetera?

30:05Camilo Acosta:I think it's just a risk appetite question. And going back to the psychopathy conversation, there's a different profile there. But in terms of -

30:14David Weisburd:They care too much about being liked?

30:16Camilo Acosta:They care too much about being liked. There's, yeah, they're not the extreme of that psychographic profile that our founder -

30:23David Weisburd:Not enough trauma. Not enough trauma necessarily.

30:27Camilo Acosta:So I think those, which I think are the, frankly, the key factors because there are tons and tons of intelligent, brilliant people in the world. But how many of them have the right, let's call it the right trauma, the right wiring, the right psychopathy, the right, et cetera, et cetera, et cetera, to be a generational founder that transforms the world?

30:40David Weisburd:To play devil's advocate on you wish you would have went to Meta or Google earlier, you never know how that plays out. You could have been a lifer there. And I also, I started my career as an entrepreneur, and it's embarrassing how ignorant I was at the time. But yet I developed the skill set of being an entrepreneur in an unknown environment that if I had to pick, I'd go with that skill set versus the hard skill set.

31:04Camilo Acosta:The skill set of a founder doesn't translate very well to corporate America is what I found. When I got to Meta, one of the first things I told my manager was, here's a list of a dozen people I think we should fire. And she just laughed at me. Was that day two? This was in like the first week. Day one. I quickly could tell who was pulling their weight and whatnot. And she just laughed at me and she said, hey, this is not how things work in corporate land. And we're going to have to work with these people, even if they're not great to work with in terms of their efficacy. And so I have a strong bias for fashion as a founder.

31:36Camilo Acosta:And that doesn't always translate very well to corporate land where there's systems and processes that slow you down. And you can't just fire and hire the team that you want. So I think it really depends on what you're optimizing for.

31:47David Weisburd:Kamilo, this has been an absolute masterclass. Thanks so much for jumping on the podcast. Thanks for having me. That's it for today's episode of How to Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.