E390: Ron Rofé on AI, Founder Obsession, and Venture Returns

0:00Ron, nearly 90 plus percentage of venture capitalists today are exclusively investing into AI. You're not. Why not? I would say that an amazing team and business can come out of anywhere, out of any industry or out of any channel. And I have invested historically in AI companies, but it's not my focus. And the truth is I have no focus but to find amazing teams to invest in. And the problem I had over the years after being in different cycles is that when there's consensus investing and everyone is focused on the same thing and a lot of VCs are throwing money there, it clouds the market. And it's hard for me to understand if the team I'm looking at is truly solving a problem they care about or they're just excited about an industry where there's a lot of money being thrown there.

0:59And I don't know if they're truly committed to it long term. So that's the reason I try not to focus on what everyone else is doing. Having said that, I have a handful of AI companies that I've invested in that were a little bit before all the excitement and hype. and it's teams I've gotten to know over a long period of time. So I have a company called Convey, ex-Nvidia founder, immigrant that I really, really trust. And I know that he's doing it for the right reasons and won't give up. And no matter how challenging it will be or when the VC market dries up for AI, he'll still be working on the problem he's solving.

1:35We have Harmonic that Vlad Tenev from Robinhood and Tudor started. I invested in it two and a half years ago. I know Vlad from our investment in Robinhood for many, many years. and I think it's extremely exciting. So it's not that I say no to AI, it's just I want to make sure that the team I invest in is the team that I know is committed to something. And I think AI is another technology that is existing now and there'll be more technologies. And I want to find the teams that I know that are going to keep working on the problem in the customer segment and industry that they're excited about and they'll start using other technology along the way like AI right now.

2:12You referenced other market cycles. and how you've seen consensus investing go wrong. Maybe double click on that and give me a couple examples. I can say that I like to focus on the positive and what went right for us. And I can say that, for example, with Robinhood, we were early investors there, is that when we met Vlad and Baiju, no one was looking really at fintech at the time. Everyone at the time was looking at the on-demand economy, the sharing economy. SaaS was a big field at the time. And sure, there are amazing companies that came out of there. But I saw an amazing team and I didn't want to miss out the opportunity on working with a team that knew the space really well.

2:57At the time, they were working on high-frequency trading platforms for institutions, financial institutions. And I saw this amazing team. They knew the problem really well. And I didn't want to miss out on the opportunity to invest in them. So I invested in it. But if I would have just focused on the on-demand sharing economy, SaaS, maybe I would have made some good bets. And I did make some good bets in that space, but I didn't want to miss out on working with a team like that. Just to steel man the argument of investing almost exclusively into AI today. The argument for investing almost exclusively into AI is that the outcomes are just so big that every dollar, Every incremental dollar, the opportunity cost is too high to invest into other spaces.

3:41In other words, the smart VCs, they're not saying that there's no interesting consumer companies or maybe space companies or American dynamism companies. They're just saying that the opportunity cost and the cost of capital for not investing into AI is just too great of a risk. I think that the opportunity cost for missing out on working with an amazing team is much higher than on investing in what everyone else is investing in right now. And I think Robinhood is a good example of that because, again, at the time, no one was looking at fintech. And I saw this brilliant team. I backed them. And they became a category leader.

4:25So a good deal can come out of anywhere and out of any industry. How many investors over the four years when the Airbnb founders were starting didn't even pay attention to them, just some guys trying to rent people's apartments? I know an angel investor that was at the same YC batch with them and was sleeping on their couch. And he thought they were dumb. He's like, what are these guys doing making cereal and serving it to people at their apartments? But he missed the fact that there was an amazing team that was resilient and wasn't giving up and continuing to work on a problem that they were getting more and more familiar with and then eventually became an extremely successful company and a category leader.

5:04So I think the opportunity cost of missing out on a team that has high resilience, knows a problem really well and won't give up. And the fact that they won't give up makes them more and more educated and smarter about what they're trying to crack is the highest opportunity cost because you'll miss out on working with an amazing team that can become extremely successful. And then the additional opportunity cost with that is that when you work with amazing founders, you learn amazing pattern recognition of what works with good founders to make you stronger to find more investments. And if those founders see that you're value-add and friendly and super supportive, they'll introduce you to more founders along the way.

5:43I think that it's an important thing. My approach in investing is not to invest in the thesis or the hot industry that's now. it's my job as an investor is to find pattern recognition with amazing founders. And if I don't find that, then the opportunity cost is extremely high. One of the top early stage investors, arguably of all time, Nico Bonacis, he was at General Catalyst for 15 years. He made the Midas list. He's found the exact same thing, which is he did a study with his partner, Michael Verdict. They now spun out and run this fund called Verdict Capital. And they figured out that 50%, 5-0 % of all value in every space was created before that space had a name.

6:30100%. I agree. And kind of take a step back and you look at that 50%. Okay, well, I'll focus on the other 50%. The problem is that that 50 % comes in the first 18 months. The other 50 % comes over the next two decades. So you have this rapid growth in returns and even more rapid growth in multiple followed by what you could call the erosion of alpha. So maybe some nice returns for a couple of years, then some less nice. And then at some point, you're just at beta. I think it's a long game, 100%. and it's knowing how to get in early with amazing founders and then see that they are committed long-term.

7:14And again, it's starting with how we started the conversation is that you want to find the teams that won't give up. And if they won't give up, then they'll catch those tailwinds that they need to catch. So, for example, we're investors in a company called Webflow and it's done extremely well for us. Along the way, I sold positions of it and it more than returned my first fund. And I remember meeting the founder and he started the company seven years before. He failed three times and on the fourth time, that was when I invested. And he saw something over the years that others didn't see and he just kept going with it.

7:55The no-code movement and people wanting to build and not rely on engineers. and so he's kept going and kept going and then finally when we invested he started seeing tail winds along the way that made him successful so i couldn't agree more with i think that's one of the most underrated founder archetypes a founder that's obsessed with the same space right i invested in better when joey levy and he's been in the gaming space for his whole career which at this point is a decade or so scott painter who famously has raised over 10 billion dollars in venture capital has been the car space and just the earned secrets and information and the network and the profound insights from the customer that you get by going after the same space over and over, even if the previous companies completely fail, is such an underrated thing.

8:44I couldn't agree more. That's exactly what I'm saying. We're not looking to invest in ideas and we're not looking to invest in technology. We're looking to invest in founders that are obsessed and extremely passionate about what they're doing and they won't give up. And will they be right all the time? No, that's not the reality of things. But they will keep trying and learning and trying and learning and keep progressing and not have the best idea off the bat. We don't look for an amazing solution. We don't look for an amazing idea. We look at founders that care enough about a problem that will keep reinventing good ideas to crack the problem they care about.

9:21And I have it. Our most successful founders have been working on companies for years and years and years and are still obsessed with it. I had Vlad Tenev from Robin Hood over at my house for a Shabbat dinner six months ago. And I just noticed him speaking with some of the other guests. And I realized like, why he's such an amazing founder. And because the answer is he's already working on Robin Hood for 12 years, and he was still showing to guests a new product feature that he's working on for Robinhood that he's excited about, like he started the company yesterday. And that to me is the founders you want to invest in, the ones that are going to be passionate about it for over a decade.

10:06You said something earlier, which was very subtle, but powerful, which is one of the benefits that you get from investing into spaces that are non-consensus is they have a very specific type of founder. Double click on that. What's the difference between a founder in a non-consensus space and a consensus one? I would say courage because when someone is doing something that not everyone else is doing, it shows that they see something that others aren't seeing, but they're not afraid to do things that's not popular. And I think that that's a huge trait to have as founders that are disruptive or starting a new trend.

10:47What's upstream of that? Is that just intrinsic love for the space? Is that a passion to solve the issue? Is it some intellectual fascination? Why do they behave differently? It's their actually care about the problem. So I'll give you an example. One of my first investments is a company called StudyEdge. And it's kind of how I realized I was supposed to be in investing and in venture capital because it's a very relationship business. But he was friends of my older sister when we were growing up. I met him when I was 10 years old. And he was getting kicked out of schools because he was so smart and he would just get so bored in class and he would just distract the teacher.

11:28And then eventually he wanted to go to, he got like 1 ,600 SATs. He got like a 4.0 GPA. And then eventually like none of the Ivy League schools accepted him because he had such bad behavior. So I ended up going to University of Florida. And again, he was so bored there. So he was just like, OK, these classes are so easy. I'm just going to teach other students. And he started tutoring students and making money. And then he was tutoring groups. And then he was tutoring auditoriums. And when I started, I always stayed in touch with him because I'm like, wow, this guy is so impressive. And he's so smart.

12:06And he's like has his own business. And then when I started my VC fund, when I started Rainfall, he was the first call I made. I called him. I said, hey, I started a VC fund. And I know you have this tutoring business. If you ever do something more scalable with it, please let me know. It's like funny enough, I am actually figuring out a way to make it more social and start an edtech business. and I was like, wow, can I invest? And that was my first investment. Ended up doing really well. It was like a 14X investment. And why do I bring that up? Because today we're also investing in his second company, Curio XR.

12:40He had a successful exit and now he's doing VR headsets across the education sector, in high schools and college. Certainly non-consensus. Definitely non-consensus. He's doing VR headsets to teach kids in high school, medical across the country, education in an actual digital way, right? And he's a founder that's already 20 plus years in education. And I know he's obsessed with it. And he knows it inside and out. And he knows what the customers want. He knows what the districts want. He knows what the schools want. Is it sexy? No. Is it AI? No. But it's a founder that's amazing and passionate and knows the space inside and out.

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15:17And the reason for that is they knew the founders before they were pitching. So if you think about passion or all these things that are normative in the space, founders, whether they're truly passionate about a space or not passionate at all and just purely mercenaries, they've learned the language to communicate passion. Up to the point that if you're intellectually honest, it's very difficult to differentiate. Right. So when you find a founder, you actually were willing to invest in this founder pre-business. If you think about what does it mean to truly back a founder, they don't even have a company.

15:49They may not even have a concept, at least that you're aware of. And you're going to back that founder because of their passion. That's why AI investing today scares me because I don't have the time to get to know those founders and understand who they really are and why they're doing this and what their care and passion is and how long they'll do it. I have in my office on our wall, I have our five values that we look for in founders. And it's humility, persistence, resilience, ambition, and vision. And I want to see that the founders that I invest in have those character traits. And if I have the luxury of getting to know them over time, and then they fall on something that they're passionate about, and they know the problem, then 10 times out of 10, I'll invest in them.

16:42I would be silly not to. And I've seen that those are the best investments that I've made. So the founder of Alma, for example, Harry Ritter. Alma is a mental health platform. I met him when I was thinking about investing in a certain company. And I was just someone overheard and said, you should speak to Harry Ritter. He works at Oscar Health. you should get to know him. So I went to speak to him. I told him about the business and just long story short, he said it's, he gave me his pros and cons on it. But then I said, listen, you're really impressive. If you ever start a company, please let me know.

17:16And then I made sure I was so impressed by him every couple months to catch up, have lunch, coffee, something with him. And then I got to know him over two years. And then I saw what a thoughtful, humble individual Julie was. And then he said to me, I'm quitting Oscar and starting all my health. And I said to him, okay, I'm in. I gave him his first term sheet. And then we ended up investing. Thank God it was a very successful investment. He just merged with Spring Health, which is another leader in the space. And together, I think they're going to be the new category. I've seen these five traits on your wall.

17:47Yeah. And one of those traits is hard to define. And we may have a disagreement on humility. What does it mean to look for a humble founder? Because you could argue the exact opposite. You want somebody with a chip on their shoulder, somebody slightly egotistical. What's the right tradeoff between ego and bullishness and self-belief versus humility? Yeah. I think that all of us have ego. And I think ego is a very good thing if it's used in the right way. Having said that, I think that humility is very, very important for founders because they pick up on insights instead of being stuck on their way or what they originally thought would be the right way.

18:36And they listen to the users and hear what they want. They listen to the industry and understand how it's moving and adapt and pivot in that nature. And I've seen the best founders have those humble traits and end up being much more successful. So Alma is a perfect example of it. When Harry originally pitched me on it, he said this was at the time when WeWork was extremely successful. He basically said, I want to create a WeWork for therapists. And the reason is I see that therapists practice to be practitioners, but they don't practice to find office space, market themselves, and run a business.

19:15They don't want to do the back office. Yeah, they don't want to do so. He said, I'll create a white glove solution. I'll market them and I'll get them customers and I'll create a beautiful home. So he raised$3 million. He built this midtown location that was absolutely beautiful and it was going really well. And then after about a year and a half, it was snowing. And one of his therapists said to him, hey, Harry, that video platform you created so we can speak to other therapists. Can I use it to see one of my patients? By the way, when we made this investment, therapy was still kind of taboo.

19:46It wasn't a mainstream thing. So it was not the consensus investment at the time. So anyway, this therapist said to Harry, that video platform that we use to speak to other therapists, can I use it to speak to my patient today? It's snowing. I want to work from home. He's like, yeah, but I thought part of therapy was the patient leaves the door and goes to see his therapist. The human touch. Yeah, the human touch. and he's like that's and the therapist said to him that's quickly changing and people don't really want that anymore so he's like hmm okay and then he asked a few other therapists and he felt the same what did he do he closed the four-wall business and that was a crazy thing to do but he realized where it was going he was listening to his customers right then what happened shortly after that is he got this call from an insurance provider and he said we heard about you and we heard you have a network of therapists and we have a problem offering our customers reimbursements for therapy because we don't have a trusted network of therapists that we could use.

20:47Can we do a partnership where we'll drive your customers and we'll do a rev share deal? And he said, so you'll bring my therapist customers? And they're like, yes. He's like, okay, let's do it. He spoke to his COO. He said, just had this call. Let's speak to all the big insurance providers and see if they're experiencing the same problem. Sure enough, most of them were. And then he realized that's how I'm going to bring business to my therapist. Then what happened? COVID. The whole world shut down. Everyone needed therapy. And all of a sudden, he can offer nationwide therapy across America. And if he would have been married to the beautiful four wall business that he originally thought of and used his ego to be like, I'm the most smartest guy in the room, then he would have missed out and probably that business would have shut down.

21:36But instead, it became a nationwide business with over almost 30 ,000 therapists and doing extremely well. That's humility to me, listening. I've been thinking about this paradox for many years because the opposite is also true. You want somebody that's so dogged that will ignore the wrong type of feedback when everybody is telling them, why are you doing a mattress in your home and everybody's rejecting you? You want somebody that's going to continue pushing through that. And the best analogy that I have for this is a rose. You want to be like a rose. What does that mean? It lets sunlight in.

22:08It lets water in. But if somebody tries to go and pluck it, it has thorns. Right, right. You want to know. And the distinction there is you want to differentiate between good feedback and bad feedback. A lot of times people are not able to differentiate between what is good and what is bad feedback. And also people don't differentiate between being weak-minded and being strong-minded. So you want strong-minded, you want to be able to persevere when things are tough. Some would call that ego and other people will just say that's just doggedness and that's persistent. But 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.

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26:17So not giving up and caring about something long enough. And the best founders will try things and some things will work, some things won't, but they'll live to see another day and keep going. Vlad from Robin Hood, he went through roller coasters. He was speaking in front of the Senate after the GameStop scandal. He was like one of the most hated figures all of a sudden in the financial industry. Everyone was trying to take him down. But he got through that, came out the other end. And now that company continues to skyrocket. But Vlad, what was interesting about him is I always noticed that anyone in the room with him, he would always ask questions.