E377: Midas List VC: Why Most VCs Miss the Biggest Companies

0:00So, Niko, you were at General Catalyst for 15 years before you spun out to start your own firm. Last time we talked, you said something really interesting, which is 50 % of the profits are made in a vertical before it even has a name. Talk to me about that. Oh, yeah. So I'll do it by virtue of giving you an example. So when VibeCoding, as a term, was coined, Cursor was already sitting at the$10 billion valuation. Not only that, Anthropic had just started copying them through cloud code. Not only that, Lavable and Repliton adjacent markets were already minted as unicorns. The vast majority of the profits, over half of the profits that will ever be realized in any of these companies, have already been spoken by the founders, founding team members, as well as the very early investors in any of the companies mentioned.

0:53So for anyone who is thinking of themselves as a very early investor, if they want to invest in Vibe Coding today or they did so last year, they're betting on, one, the founders themselves out executing any of the incumbents that I mentioned, as well as the category of Vibe Coding to continue to be relevant five to seven years from today. I'd rather buy a bunch of lottery tickets instead. 50 % is 50%. It's not 90%. But what's crazy about that is oftentimes this is one or two years, and then the industry proliferates for another 20 years. And within that one to two years, they're getting 50 % of the profits of two decades.

1:30You're so spot on. So I've been a very early investor for over 15 years now. I actually have studied when does the vast majority of seed money get into a space? And it actually happens that two to three years after a company has already been minted as a Decacorn and or there's a big exit in that space. You can go category after category. VR with Oculus exiting. Space with SpaceX getting minted as a Decacorn. Autonomous vehicles with Waymo being a Decacorn and Cruise getting sold to GM. You go category after category. Well, guess what? That seed funding doesn't work as well. Is this why you call VCs sheep?

2:13Most VCs, it's hard to be an original thinker and somebody who wants to make a decision on the back of your own conviction is the original one. It's just really hard. There's a place for everyone. There's plenty of money to be made in the late stage. There is plenty of money to be made at the very early stage. We need everyone. Ian Sigalo, who's sitting right where you're sitting from Greycroft, he said because of that, early stage venture is not really an asset class. It's a artisan craft. It's almost impossible to scale. I agree with that. Yeah, so if you want to have 100 Xers from your original check, it's really hard to scale in general.

2:55The average VC fund doesn't perform, so it's about the very few that really go the distance. Most of them really suck. Especially now, how VC looks like today. Tell me about that. You either want to be the original investor, like we at Verdict are making this claim, that you want to be the best first money venture capital firm, or you want to be in the very late stage game, taking companies from$10 billion valuation to$1 trillion plus in the private markets and plowing in billions of dollars. Anyone else in between, I think they're going to do very well. Why is that? Because the best founders today are thinking about capitalizing the companies very differently than even a year ago.

3:37Why is that? Two founders today with one round of funding, all the AI tools, In two months, oh my God, they can make so much more progress than what a year ago. You needed 10 people, two rounds of funding, and a year worth of time. It's changing how companies capitalize themselves. Not only that, I think one of the most underappreciated aspects of AI is not just that it's bringing down costs. It's also increasing revenue. Spot on. You're making every single person 10, 15 times more efficient in getting that incremental customer. So if you think about startup, typically you have to spend tens of millions of dollars to get to profitability.

4:16Today, you don't necessarily have to do that. You could wait until you're the equivalent of a Series B, Series C, Series D company and take those large checks. You're spot on. We're seeing it in the field right now. So your dollar as a first-money investor goes so much further. So those founders are going to skip in between rounds and they're going to go from what you would call in the old world pre-seed to Series B, basically. I've known you now for eight, nine years, and you've always been this contrarian thinker going in early while you were at General Catalyst. How do you know exactly when to go before there's consensus?

4:48Because if you're truly really early, even if you're right, even if it should exist, it doesn't really help if there's not following captain. That is true. And actually, 70 % of the times, I get it wrong. So everything I say today, assume it's 70 % wrong. Like my partner, Michael Furtick, and myself, we are maniacs who work founder hours, and we're in the business of investing in freaks, also known as learning animals, that are working on creating new categories. So we're specialists when it comes to exactly what we're looking for, freaks, who are building companies in markets that have no name yet.

5:28That's all we do. And 70 % of the time, our timing will be off because the freaks that we're investing in will go after a market that might actually pan out five, 10 years later. But 10 % of the times, we're going to be very right. That's how we think about it. You use the term freaks multiple times. Multiple times. How do you define that? What does a freak look like? So a freak is, in the startup context, it's very much like professional sports. Few people break all the records, make all the money. So a freak in the startup context, somebody who is a learning animal, and in one day they can learn, they can mature, they can make so much progress that takes the average fear-smart founder a whole week.

6:12They treat every meeting, every decision as a learning opportunity. They're sponge. Oh, yeah. So if you meet such a person today, and then you meet them again in two days, and everything they tell you sounds the same, that is not a freak. Because at a minimum, they're not listening. It's the rate of growth. That's it. Rate of growth. So for me, even if the initial idea is wrong, but these guys are freaks, dude, like in a few weeks at the latest, they will move on to the right idea. Looking back at your 15 years at General Catalyst, the 70 % times that you were wrong, was it just probabilities in that you didn't necessarily make a mistake?

6:49You just got unlucky with the timing? Or were there specific lessons on timing? It's not just one thing, but I would say quite a few times we were just so early. Other times we picked the founders who didn't end up, you know, becoming the winners in the space. They were good in the zero to one game. They were good as entrepreneurial CEOs, but they didn't become the enduring CEO in the space. Some other times in the context of a larger venture capital firm, you also do investments in other duos. So you get conflicted out of some of the more amazing ones that go the distance. And also, you know, I'm now 15 years in, but when I got 30, I was not 15 years in.

7:35So I made a number of judgment errors along the way. What's a common mistake that smart VCs make early in their career? They don't take enough risk. They try to play it safe and do the doable deal that gets them promoted, do the doable deal that will get a quick markup from some other notable people because it's in a hot space right now, but might not be the one that they're really swinging for the fences. Have you seen average teams get pulled up by momentum in hot sectors? And if so, what does that look like? I've seen it again and again. And sometimes I paid the price for that. So it happens in particular when the times are good.

8:17Actually today, no joke. I met a 19-year-old who is a founder that I've known since he was 16. He raised venture funding. Now he is an angel investor and a venture partner at another firm. In the last four months, he's made six angel investments. All six of them already have received a markup. I asked him, do you think that's normal? He said, no. I was like, I'm glad you said that. So if you remember, I'll just use an example from the past. Once upon a time, SoftBank showed up. and they started overcapitalizing companies. So a lot of the earlier stage VCs started organizing themselves around what a soft bank wants to invest, let's make some early investments and serve it to them.

8:58And sometimes overcapitalizing a company before they're really ready could really destroy them. But if you're the early investor in that company, you can benefit temporarily career-wise. You mentioned this 19-year-old now venture partner and angel investor who was 16 when you met him as an entrepreneur. It seems like today VCs are fetishizing age. Why is that? This happened big time right now. I think the primary reason is because some of the most successful later stage companies in the private tech markets today were founded by very young founders. We're 18, 19, 20, 21 years old, three, four, five years ago.

9:39So when Michael Furtick and I were investing exclusively in Gen Z founders in 2021, 22, 23, there were probably 10 other VCs in the U.S. who were investing in them. But now some of those founders are the founders of Kurser, Merkur, many others. YC also in the meantime, back in 2021, average age was like 30 plus years old. Now, after Gary Tan came back, he brought it back down to like very, very young founders. and VCs want to invest in what other VCs are investing because you feel more secure. You feel that that founder is going to raise more easily the next round. That's what's happening today.

10:18So you're 22 years old today. You're in San Francisco. You're building your tech startup. Oh, my God. You check your mailbox, there's a seed term sheet. You're 18, 19 years old, you check your mailbox, there might be a Series A term sheet. Second saying. Just to play devil's advocate, it, I think the thesis there is that these are AI native founders. They don't have the scar tissue of having to manage some of the legacy softwares, legacy processes. They're obviously young enough to work the 996. Are none of these good reasons to invest into young founders? It's an exceptions-based business. Sure.

10:53If you come across a freak and you're sure that they're a freak, you should invest, no matter what they do. Even if the price is super high, invest. But a lot of the young founders are not doing the stuff that you talked about. They might be trying to build a nuclear submarine. That's less likely that they're going to be successful than somebody who is more experienced than them.

11:18In general, you take this contrarian view on the market, and you invest into the underappreciated sectors of the startup ecosystem, and you sell or avoid the overbought and the overhyped parts of the startup ecosystem. What today is most overhyped? Anything that has to do with American dynamism, overhyped. Today, anything that has to do with AI broadly, overhyped. So like you're two, three founders, leaving Cursor, Merkur, OpenAI, Anthropic, boom. You can raise 15 to$25 million if you do something in AI without having anything to show for. You're somebody who's leaving SpaceX. You want to do something in American dynamism?

12:00Great. You are going to raise a very large seed round. Could be a straight Series A. What about on the other side? What's undervalued? What are you bullish on? Consumer, undervalued. FinTech, undervalued. Crypto, undervalued. Can keep going on. Let's start with consumer. Why are you bullish on consumer? I'm bullish on consumer because you have a next generation of founders, young Gen Zers. who want to build stuff for themselves. They're tired of the existing set of brands or like online regimes. They're really tired. They don't speak, you know, to them and their generation. And also nobody really today has managed to build something for Gen Alpha.

12:41Like if you want to hire today, the most amazing designer who has built legendary products for Gen Alpha, there's no company that you can go and hire from. In addition to that, thanks to AI, new hardware that's going to come out, We're going to be interacting with technology in ways that we can't even imagine. Young brains have an advantage when it comes to having enhanced imagination about designing new experiences for new markets. So I'm pretty bullish. And what about other VCs? Aren't they also investing in the space? Why do you think that's undervalued? It's what Charlie Munger used to say.

13:17You know, show me the incentives. I'll tell you the outcome. So the venture capital industry now has a lot more firms and a lot more people than ever before. So it's almost like a factory where it's like, I'm investing in you and your company. What are you going to do for me in the next six to nine months? You need to deliver me a markup and show me a 2, 3x markup. It's just harder to do that if you're the original versus you showing up at a demo day, picking what is the theme that is in vogue. and then three months later, you have a markup. So I think it's only a matter of time when you have enough of the awesome freaks who are building in consumer that one year from today, you will start seeing the markups and everyone else will start flocking in.

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15:54Do they have to have some special skill or some special characteristics that allow them to push through? That's the whole game. So my partner, Michael, and I have a shared vocabulary about our pre-leading indicators of future promise and success to really make sure that the founders we're investing in are freaks. So we don't take any risk on the founders we're investing in, but we're very comfortable, as you said before, to take a lot of risk on the markets we're investing in. So what is the common trait of the founders we're investing in? basically in one day they can learn mature make the progress that is takes the average founder a whole week and why is that very important because you're if when you're building for a new new market a market that doesn't have a name yet and you have that kind of ability to learn and make progress it's almost guaranteed that in two years from today you will be the world expert in that new market i have this thought experiment of the nepo baby second generation wealthy kid goes to Silicon Valley with the worst idea in the world, meets with every VC, and the VC wants a check from him in the future or from his family.

17:00So they give him actually good advice. By the end of a couple months, he has a good business. Do you think that's true? I'm very pleased you asked me that question. And especially now, being in the best city in the country and the world, New York City, I do think that at the moment, in May 2026, Six, Nepo Babies are a founder demo that is underappreciated. I'm intrigued. Why? For many of the reasons you articulated. You need to pick the right Nepo Baby, the one who has huge chips on their shoulders, because they're not the ones that are in line to take over the family business. The one that is really curious to do things differently.

17:43They're independent thinkers. but oh my God, you know, they have managed to be fluent and comfortable in rooms that another very young founder might take decades, if ever, to even get access to. If things are going to go faster and you can have the beginnings of a business that has momentum, being an Apple baby, you can even further accelerate all that stuff. And in certain categories where you need to be able to converse with the government or large enterprise contracts with non-tech companies, those individuals can have a significant unfair advantage over others. I think in general, people underestimate information alpha and overestimate IQ.

18:32You could obviously argue the opposite. There's well-known cases where people with just exceptionally high IQs like Vitalik from Ethereum have went on to be very successful. But But information alpha, the way that I think about it is if somebody feeds you the information, you don't need to use the mental compute of a high IQ person to get to the same exact outcome that that high IQ person from first principles would probably still take years and years to get to. Well said. And especially now that intelligence is becoming a commodity and the cost of tokens is coming down. You just have to have agency.

19:04You need to have great taste and access. Some nipple babies have all three. So right now, if you find the right one, invest. Speaking of Neva babies, as you mentioned, you're one of the only VCs in the world investing to Gen Z in 2020, 2021. Today, you're really doubling down on Generation Alpha, the next generation. What differentiates Generation Alpha from Generation C and maybe Millennials? Look, we're all finding out as we go, right? And as you know, most of the Gen Alpha today, they're not even of like working age. So who are the Gen Z folks? The Gen Z folks are the ones who were born from 1997 until 2000, roughly, you know, 13.

19:50So afterwards, we have the Gen Alpha. So the Gen Alpha folks, we have not invested in anyone yet. Okay. But we're investing in the young Gen Zers. The youngest one is, the oldest one is nine years old. Anyone who's born after, you know, 2014. Yeah. Let's say, you know, 10, 12 years old. But we're investing in young genziers who are building for Gen Alpha. Every generation has their own beliefs. And we're all products of the times and the markets we operate in. And these conditions shape us. So what Michael and I are open-minded is to update at all times our priors and find the singular individuals, the freaks, will be able to navigate and build something for their own generation with authenticity and credibility.

20:34We love to invest, of course, in very young people, but that's not the only demo we're investing in. I would actually say to you now, you're somebody who is a very commercial, but unfortunately for you, a non-AI researcher who is in your early 40s. Tough luck. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground.

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22:15Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square, and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them, and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups, and everything stays synced in real time.

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23:23Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square, and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square.

23:54They just feel more put together. The experience is smoother for them, and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You can track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so your best customers keep coming back.

24:26And right now you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. At Square, you get all the tools to run your business with none of the contracts nor complexity. Run your business smarter with Square. Get started today. Nobody wants to meet you. Even if you're a 10-year professor at Stanford, you won't get a meeting with a VC. Because it doesn't match the pattern of the last couple of years. Yeah. It's like standing, you know, or you're a gaming founder. Like I went to GDC, the Game Developer Conference in SF. A month and a half ago, 50 % fewer attendees than two years ago.

24:59Not only that, the founders who had raised pre-seed and seed rounds, they were willing to reopen the pre-seed round. And these are companies that have product market fit. Why is that? Because no one in the VC industry wants to do gaming, which is a headscratcher to me because gaming is larger than film, music, sports combined. And now with AI, the cost of content production for gaming is coming down. So like, what the hell? It's hard for me to believe that all these reasons are purely mimetic and just VCs following VCs. There should be some structural disadvantages to consumer, to gaming, to crypto today.

25:41That's keeping the next generation of founders from building these large companies. But you would say, no, it's purely mimetic. There hasn't been any big wins. so people aren't building. You got exactly right. How could that be? It always is. It always is because all of us as humans are looking for the quick, easy wins. And you probably have seen that online. There's that chart that shows 2016. What was the hottest category? Autonomous vehicles, which was, you know, the most successful, viable company from that era, a company that had nothing to do with autonomous vehicles. So like for every year, the most viable company that was founded that year was not the one that was in the hottest theme.