E407: Why Venture Capital is Becoming a Winner-Take All Market

24:37We want to be the LP that when you were first getting set up, we helped you literally get your operation set up. We worked with you and maybe even co-drafted your LPA. We helped you with your deck when you were first ideating on what you were doing. We helped you with everything from LP composition, portfolio construction strategy, not directing you what to do, but helping you think through it. Thought partner. Yeah. We want to be the first call you make when you think about raising a fund and then be a thought partner in that ideation process. After that, once we become an investor with you, we add a lot of value to the GPs.

25:12Now, introductions, everyone makes intros. We will help on the ground level with the portfolio companies where we can. We'll help you interview candidates. We will help you with other LP interests and other GP intros, either for your companies or for yourself. The thing I pride ourselves on is I consistently see this in our team and with our GPs. We get calls from our GPs at like 9 p.m., 10 p.m., 11 p.m. when they have a problem or they have an issue. They have a conflict of interest. They're thinking about a staff member. They're thinking about a cross-fund investment. They're thinking about whether they should sell a company and what piece to sell.

25:46And they're calling us late at night. That's the call we want to get as an LP. And that's the message we want to send to every one of our GPs. When you're having a good day or a bad day, when it's late at night and you want to talk to one of your LPs, we are the LP to call. And we're always going to pick up the phone. How do you earn that first call? You show that hustle and ability to help and be a partner from day one. I mean, everything I mentioned from you, they're ideating their deck, pushing them in all the right ways, helping them and giving them the feedback, helping them set up the firm.

26:15They see you as a true partner, not just an LP-GP relationship. Sometimes I think about this. We're actually talking about my mentor, Eric Anderson. He taught me this, which is there's some advisors that are, me and him have had many fascinating conversations over the years, but he said that there's two types of advisors, ones that are absorbers and ones that are amplifiers. So sometimes you call an advisor and with a big emergency, you end up basically, instead of them being there and listening to you and helping you, you end up having to calm them down. They amplify, they make it worse of an issue.

26:54And there's some advisors where you could tell them our fund is going to deliver zero X and they're going to start like coaching you through it. Those are kind of the two extremes. Is there something to that? we are the type of partner where if someone calls us with something, we're not going to tell them, oh, this is what you should do. We're going to actually work through it with them. And they're the ones who are going to make the decisions, but we're going to show them potentially all the blind spots we've seen over the past two decades. I'll give you an example. So if a manager calls us and says, I got this position, I can sell a piece in the next round.

27:26Should I sell or not? How much should I sell? Or should I just keep rolling? We're not going to have this strong and Greg should say, oh, you should sell all of it, or you should sell 50%, or you should roll the whole thing. What we're going to tell them is, let's actually talk through it. And how would we talk through it? We'll say, okay, let's think about where this investment is in which fund, where's the life cycle of that fund. Let's think about what is the return profile of that investment at that stage you're thinking of selling relative to the fund size. Tell me how well your conviction level is in that company at that valuation going forward and what the potential return profile would be.

27:56Now, the manager talks through all these things with us. By the end of it, they actually come to the conclusion themselves because they're thinking through all the different avenues and all the different dimensions to make that decision. That's why they're calling us. They're not calling us to say, tell me what to do, but tell me about all the ways I should be thinking about this and all the different blind spots that I haven't seen before. Hunter and Satya from Homebrew says that every round you need to be either a net buyer, net seller of the company. And that's the way to look at it. Is that how you look at it?

28:24It depends. You would answer those questions, right? Like, where are you in the fund cycle of the fund? Do you have conviction in that company? So if you have a lot of commission in that company, even if it's returning the fund, you can say you're still an ad buyer. Maybe the valuation is attractive. Maybe you see significant 5, 10x plus upside from there. Or maybe you don't, where you think valuation is overstretched. I'm already eight years into the fund. It's returning three times my fund. So I'm going to take 1x DPI on the whole fund out to de-risk. That can be a great way to do it too. It really depends.

28:54As a fund-to-fund, you're investing into the top GPs. So you guys are in some ways slightly misaligned, meaning that the GP is managing their career. They want to always make sure they have this 2X, 3X fund at a minimum as an LP. 3X, not 3X. So if they're one of these 25 funds and the LP in many ways wants the most spikiness. They want them to get a 15X or 0X in theory. Why do you think the LP wants spikiness? I think because they have more shots on goal because they have a portfolio approach. You feel that way about funder funds? Well, that's actually my question for you. Is that how you look at it?

29:29We've looked at our performance over this. We've consistently generated great returns for our LPs. We've been very fortunate. And this is all thanks to our GPs we've backed. We have had some funds that have been spike, underlying funds that have been spiky. But we've also had significant consistency where we find a significant chunk of every one of our funder funds is 3x net or above. So I think we shoot for more durability and consistency in our underwrite than let's try to get spikiness. And it goes back to my point of participatory or lead. If you're constantly participating in deals and not leading, you will probably hit an entropic in one of your funds.

30:08But hitting an entropic every two years is really hard. So if you hit an entropic and you own less than 1%, you're going to have a 10 to 15x fund, maybe more. But that model for you to be spiky every vintage predicates on you finding an entropic every two years. It's really hard. We want GPs who have a consistency in their strategy. And maybe there's a bucket, it's a 90-10, maybe it's 80-20, 70-30, where that 30%, they can still find the entropics of the world, but they're focused on their bread and butter, which is leading, co-leading, in the lanes where they have the right to win. That's where you can see more consistency.

30:42The other thing is, if you think about fund of funds versus like other LPs that have one pool of capital. We don't have one pool of capital. We raise our funds every two years. So we want to show consistency in every one of our fund of funds. In order to do that, we don't want one fund to be spiky and the other one not. So we'd rather have two 3 to 4x net fund of funds in a row than have a 5x fund and a 1.5, 2x fund. So even on the GP level, you don't like that spikiness? Oh, we'd love when we have a 10x fund. But coming in to do the underwrite, we're not underwriting a 10 to 15x fund. we're underwriting on the reasonable exit assumptions with where the manager is playing, their portfolio construction, their right to win, their team, can they generate 3 to 5x net?

31:23If the answer is yes, great. And then if they outperform, they can get a 10x plus. But that's not the expectation we come in with. Everybody talks about the power law. It's almost right at this point. And everything is driven by these power law outcomes. Depends what markets you're in. So if you are a$75 to$100 million fund, you focus on technical founders, or you focus in maybe not the hottest AI areas, which are both in terms of round sizes and valuations through the roof, you can still do really well and get a three to five X net fund. Like take healthcare IT as an example. Healthcare IT is not going to command multi hundred billion plus exit outcomes.

32:03Most likely. I mean, there might be a few companies like that, but it's like open evidence, et cetera, but there usually aren't as Summer is here, which for me means occasionally trying to escape New York City on the weekend. When I get time off, the last thing I want to do is worry about keeping my personal finances organized and my budget in balance. With a little advanced planning and powerful software tools, I can enjoy the summer knowing my money is taken care of. Monarch is the personal finance app that tracks everything. Accounts, investments, saving goals, and spending. Get your first year of Monarch Core for half off.

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33:29What I like about Monarch is that it takes the mental load of managing your finances off of your plate. Instead of checking multiple accounts and spreadsheets, you could see everything in one place. The AI Weekly Recap is especially useful because it flags spending spikes and upcoming expenses before they become surprises. I also like Monarch's AI Assistant. You could ask questions like, how much did I spend on travel last summer? Or how many subscriptions am I paying for? And get answers instantly. Use code INVEST at Monarch.com to get your first year off Monarch Core half off at just$50. That's 50 % off your first year at Monarch.com with code INVEST.

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34:30Instead of checking multiple accounts and spreadsheets, you could see everything in one place. The AI Weekly Recap is especially useful because it flags spending spikes and upcoming expenses before they become surprises. I also like Monarch's AI Assistant. You can ask questions like, how much did I spend on travel last summer? Or how many subscriptions am I paying for? And get answers instantly. Use code invest at monarch.com to get your first year off Monarch Core half off at just$50. That's 50 % off your first year at monarch.com with code invest. You're really underwriting to, can I at$1 to$5 billion exit outcomes generate exceptional fund level returns, even less than a billion dollar outcomes?

35:09And if you do that, you can generate consistent returns. So, but if you're one of the big firms, so you are on Sandhill, billion plus funds, I mean, you are playing the power law on steroids. That's what you need. You don't need one. You need three to five Decacorns huge outcomes to return multiples of your fund. I mean, we did this analysis for the big firms. You need anywhere from$30 to$50 billion in exit outcomes every vintage to generate a$3 to$5 exit fund. $30 to$50 billion. Now, it's possible, right? Because we talked about Anthropic, OpenAI, Tatterbrick, SpaceX. But you got to have that every two years.

35:44It's hard. I remember only a couple of years ago, Founders Fund was telling all their LPs, we need to hit$100 billion outcome in every one of their funds. and a lot of LPs told me that's just crazy. And then now you have these$3 trillion plus. And Founders Fund has done an amazing job, one, identifying those companies, but also doubling down on them across multiple of their funds. Concentrating. Yep. By the way, concentration comes in two forms and both are powerful. One form of concentration is what I said, ownership upfront, defending it so that you think about the exit math relative to fund size.

36:17The other way to concentrate is dollars over the fund. So percentage of dollars in a single deal. So if you have a runner, in the portfolio. We are totally fine with the GP putting 20, 30 % of their fund into a single company. We're totally fine with that level of concentration. We just backed the fund. It's a fund one and their concentration limit is close to 40%. We're totally fine with it because we trust the GP. They're going to invest early in the companies and they have a great way to assess the mid-stage, late-stage risk of that company. And if they want to double down, they should do that.

36:48Founders Fund has done that beautifully over the past few decades. And they have a 40 % concentration risk on a single deal before they even know the deal they just put that in their docs yeah we didn't push back we're totally fine with it we love gps who have conviction i mean we invest with conviction i just told you we were fine being more than 50 of the fund like we love seeing that in our gps as well you've talked about right to win one of the interesting things about right to wins is they're kind of like unicorns there's many different ways that you could win in many ways there's a game theory around it once everybody discovers the right to win it starts to be competed away.

37:22What are some interesting right-to-wins that you see today in the market? We've backed a fund that's focused on the Israeli ecosystem for multiple decades. They have a true right-to-win. They have a brand in that specific ecosystem. We backed a technical fund that's incredibly technical, that's camped out at Berkeley and Stanford, essentially co-founding and coding with the engineers. That's not something the big firms are going to do. And that's a round that actually ends up being one to two million before anyone even discovers that company that that manager can do. I mentioned we have done a fund and we're the biggest investor in it where they're focused on specific subsectors, whether it's like energy, retail, insurance, supply chain.

38:01And in those areas, they do the research upfront. They co-found the companies. They have a right to win. It's that entrepreneur that they recruit or co-ideate with. Even if they get a term sheet from a bulge bracket firm, they're not going to go with them because from inception to getting to the point of the term sheet, that firm was responsible and helpful throughout that whole process. So they're going to be loyal to that firm. That's the right to win. So we care a lot about if you are not one of the big firms, do you have true differentiation at the stage you're playing, meaning technical founder of the pre-seed before anyone else sees it, or do you have a right to win in that specific end market in the way where you're actually doing the work.

38:44So you will see in our portfolio, we have the big firms. We have the firms that, I would call them challengers, that have done well. I mentioned the very few firms that have over the past two decades been able to challenge the big firms and maybe join their leagues. And then we have the seed firms that are playing in a different ball game, but they have a right to win. Those are the three you would see in our portfolio typically. We were talking before you were recording about media and specifically very niche media. Talk to me about that strategy. Yeah, that was you. That's what I was saying.

39:15You should raise the fund. You got a real right to win because I remember when you started your podcast and like a couple of years later, you had 400 plus and have a real following. Thank you. For our podcast and for our business, the combination of the one-to-one relationships and also just the crowd and just having a captive mind with GPs, LPs has proven to be extremely useful. You've invested into a fund that has a podcast with very technical CIOs and CTOs. Tell me about that. Oh, yeah, we did invest in one. It's focused on technical founders in security, DevOps, I would say AI engineering, AI opportunities.

39:55And one of the GPs there started a podcast a couple of years ago focused on technical engineers. and even engineers and buyers at the enterprise level. I believe it has the highest subscriber volume of any technical podcast out there. And that's brought deal flow. That's brought a following. That's brought customer introductions. So that's been a great flywheel for the whole organization and for that GP. That's where the alpha is from access on multiple levels. If you think about the speakers they've had on that podcast, It's everyone from like essentially all the companies we talked about and the CTOs of those companies.

40:32The other thing they did recently is off of the podcast, because it's been so successful, they created an incubator, which is attached to the podcast. It's now a studio. It's in the same building, but companies can come and build. They can benefit from the community that's coming from that podcast because it's engineers. Essentially, a lot of the products they're backing are usually used by the engineers themselves. So those entrepreneurs who are thinking about starting a company can now stay in that space for 6, 12 weeks, learn from that community, learn all the pain points, build their company, and that manager will have the right to win because they created that community to begin with for that founder.

41:08You've talked about accolades strategy. You guys are at$8 billion right now. You mentioned you have$500 million funds. How much of that is funds versus co-investments? It's mostly funds. We don't do a lot of Convests, and there are some LPs that do Convests incredibly well and fund the funds that do well. I think we've looked at our track record over the past 25 years, and I think we've done a great job in primary fund investments, and that's what our strength is. By the way, as a firm, that's how we've always operated. We don't go international. We don't have multiple different strategies. We do venture and growth equity.

41:45and we tell our LPs for as long as I've been in the firm, we're not the smartest LP out there. We have a singular focus, which is why we've done well. And so most of what we do, long-winded way of saying, is fund investments. Why is that? We think we're better at it than doing direct investments. If we started to do co-investments, I think it's not enough for you to just piggyback off of the GPs, especially in an environment we are in now where there is a lot of adverse selection. Like if we are going to see a series B, series C deal, why are we seeing it versus everyone else in the 3 ,000 firms out there that are supposed to see those deals?

42:23Now, there's nuanced situations where there's parada from a manager, which is why we could see it. But I also don't know if we would be great at assessing those opportunities as a direct investor. Whereas I think we're really good at assessing those opportunities as a fund investor when we're underwriting a first-time fund and the right to win. That's where our strength comes in. I don't know if our strength comes in assessing a Series B company. By the way, if we did do a lot of these deals, you would have to do a lot of them because you probably have some zeros. And you want to make sure you have a diversified portfolio.

42:51And trust me, we can't lead or co-lead. So we have to participate. It goes against everything I just said. We would have to be passive check, participate in everything. And I don't even know if we're good at it. So I think we know our strengths and weaknesses. And we know where we can play with strength. And we're fiduciary to our LPs. So we stuck to more fund investments. Now, we do do co-investments, but more on the private equity growth side. So it's a big part of our firm as well where these are more bootstrapped capital efficient software companies. Why do we do those and not on the venture side?

43:20You typically invest in the same round as the manager at the same cost basis because they just have capacity in the round and their fund can fill it. So we're fully aligned with the manager. We come in on the same timeline as the manager. And even more of a benefit if there's no economics to the deal. Said another way, you don't have to diligence whether this is one of the better deals of the manager, one of the worst deals. If it's a core deal on mandate coming in the same cost basis and only because they don't have enough capacity from their fund, you have great alignment as a co-investor in that deal.

43:51For us, we're investing alongside top funds investing for the first time. What's the failure mode on that? Series B like five years ago was the toughest round to invest in because you hadn't fully proven outscale product market fit, but the valuation was high enough much higher than the series a is like the hardest round to invest in series b today is all over the place my sense is from the deals you mentioned that you looked at in the deal by deal forget the nomenclature they're mature deals like they have product market fit they've proven it out gps are falling over themselves because to get into the deals because they were subscribed if you're going to be in that stage of a company's life cycle I think it's actually, it makes sense for you to say, the signals I'm going to use is the traction of the company and the current syndicate of the company and try to get as much as I can in the deal.

44:44But you likely will participate because the rounds are just way too big to begin with. Last time we chatted, you said that it was one of the most confusing venture environments that you've been in your career. Why is that? I mean, everything I just said, I could be wrong. The whole industry has changed. Micro VC is the most competitive I've ever seen. I keep calling it Micro VC because that's what it was in 08, 09, 10. But seed is now the most competitive and the most confusing place to invest in. If you're a new seed fund, there has never been a harder time for you to start a fund and to invest your fund.

45:13Late stage has emerged as a whole new category in venture because companies are staying private longer. And we can talk about why. AI has broken the rules of fundraising, valuations, company traction, and everything around there, which has led to fundraising at the firm level, fundraising at the company level. I mean, last year, 10 firms made up more than 50 % of the fundraise, 18 firms, 80%. Do you unpack that? Why is that the case? But because you have five companies in the last two years that have raised more than 50 % of the capital on the whole industry. AI has broken the rules of all those things.

45:48So yeah, that's why I'm confused. And then we talked about the different categories in venture. In my mind, there's only four. There's pre-seed, challengers, big firms, late stage. And every single one of those categories is challenging to navigate today. You're constantly talking to your top GPs who are in these funds that are continuously raising these rounds. Databricks, OpenAI, Anthropics, SpaceX, a lot of these reach Series H and beyond. Series M for Databricks, can you believe that? Series M, yeah. I met Ali probably two, three years ago when it was like a$10 billion company, and it's grown multiple since then.

46:32They're almost at that in terms of revenue. What's your sense for why companies want to stay private longer? Well, two reasons. Forget that being a public company is hard and you have to report quarterly. That's been the case for a long time. the two structural changes that have happened more recently is there's more private capital available. So these companies you mentioned, they have options in the private markets to raise scalable capital, to do acquisitions, to scale in a way they couldn't before. They can raise billions and billions of dollars in the private markets. By the way, if you told me a private company in 2026 can raise a$30 billion round, I would have said no way.

47:12Entropic did that in one month. So you can actually raise sizable capital in the private markets today as a private company, if you're one of the 0.1 % of those companies. Secondly, a lot of the capital that's being raised by these companies can be secondaries as well and tender offers coming from the teams themselves. So if you think about using the examples of those companies, like employees have been able to get liquidity in the private markets from private capital. In the past, If you were an executive at one of these companies, you were waiting for the public markets to buy a house. Now you can do that through the private markets.

47:46So there's less incentive for you as a management team, as an employee group at one of these companies to go public because you can get liquidity in the private markets today. That's why the average unicorn is 12 plus years now. I had a fascinating conversation with Matt Whithiler from Wellington, and he gave me a couple of stats. There's roughly$3 trillion in the venture market. there's 127 trillion. 3 trillion of what? 3 trillion of capital deployed in the venture market. There's roughly 127 trillion in the public markets. And Wellington did this analysis of all public tech companies prior to the SpaceX IPO, and only four were predicting more than 30 % growth rates.

48:28So the public markets are starving for companies. I mean, look at the Bessama Cloud Index. In February, March, if you look at the SaaS index, there were six companies trading at 10 times revenue when Saspocalypse hit. six companies, David. Two years ago, there were dozens and dozens. Above 10 times EV to the next 12 months revenue, six companies. Now there's more. There's like 13 to 15 because companies like CrowdStrike, Datadog, Cloudflare, Snowflake, they've shown enough acceleration of growth from AI, the public markets have rewarded them. And Palantir is the only company trading at an astronomical revenue multiple, now SpaceX as well.

48:59But if you look at just SaaS companies or Bessemer Cloud Index, Palantir is the only one. So if I think about a Databricks or Anthropic and their growth rates, if they were to go public, those growth rates in SaaS don't exist today in the public market. So they would trade at a premium. So it got me really thinking about this, which is my thesis is that all things being equal, if things were truly equal, companies would stay private longer. Why? The most important thing is just being able to think long-term. The public markets just, it's not even a quarterly, it's on a daily basis, makes it so difficult to make long-term trade-offs.

49:39And when you're building for the future, you really need to think long-term. And to your point, I think the only reason why even SpaceX, taken to the extreme, why did SpaceX go public after 24 years? It's not because Elon Musk got tired of being a private company. It's because they had literally exhausted the capital markets. You mentioned a statistic, I'll give you another one. 75 % of all capital in venture capital in Q1 2026 was deployed to five companies. Said another way, if the rounds were 25 % more, there would be literally no capital. Forget about the seed rounds. Forget about Series A, Series B, Series C.

50:15Exactly. There would be no capital. So if there was now instead of$3 trillion, if there was$6 trillion in venture, what does that mean? That means that all these companies could have done an extra round. Anthropic could have done a$2 trillion. SpaceX could have done a$2 trillion private mark. There's no lack of capital in the private markets that would want even a 1.52x. They may never say it. They don't go around fundraising. I don't disagree with you. But there's a lot of capital. But what's really interesting about this is that a lot of people have the view, well, the private markets, there's some kind of bubble or there's too much capital.

50:49And they use history as this guide. But if you think about it between the competition between the private and the public markets, so many of these companies previously would have gone public. The Amazons, the Google, they went public so much earlier. In their life cycle, yeah. And my thesis, as these companies go public and return capital, a lot of that capital is actually going to go from the public markets back to the private markets. Said another way, the higher returns you have in the private markets, the more capital shifts from the public markets into the private markets. and continuously basically keeping companies private longer and longer.

51:27If you put a gun to my head and said, where would the venture market be in five, six years, I think there's still room for another 2x in kind of total market share. So let's play this out, David. This is a really interesting point you're bringing. Let's say we go from the$3 to$6 trillion, and these companies can raise another one or two rounds, like hypothetical SpaceX, before going public. When they do go public, even today, like SpaceX and Tropic OpenAI, instead of Databricks, you look at their cap table and they've been raised so much capital in the private markets, getting liquidity for those investors and those companies, it's going to take a really, really long time.

52:04It's not six months, 12 months. It's many, many years potentially just because I don't know if we have seen private companies at the scale they are, at the scale they've raised in the private markets, go public and then see full exit liquidity for their initial venture investors or their mid-stage or their late-stage venture investors. So I'm really curious how that's going to play out over the next few years. And if we go with your analogy of like, well, let's take this amp up another 2x in the private markets, it'll take even longer. So we might be looking at, let me ask you this more concretely.

52:43Say you invest in a private market's antropic at$2 trillion at the end of this year, and it goes out and goes public in Q1, Q2. What are you doing? Are you holding it for the next? You just invested a year ago. You're a venture investor, late stage. Let's say you came into an SPV. Are you holding it, or are you selling it to a click one and F2X? There's a couple of things to unpack there. I was also an investor in SpaceX. One thing that SpaceX did, it's very underrated, but they really engineered around liquidity. So they have a bunch of unlocks. They do, yeah. It's more formulaic. It's more formulaic.

53:20This idea of making hundreds of billions of dollars liquid in six months in the same day, if you think about it from first principles, it's an absurd paradigm, and it should never be that way to just dump liquidity into the market. It shouldn't even be legal. It's just not good for anybody. so they've created gates on that i think a lot of people are going to look at that and i'd like to see that implemented as a best practice it also rewards venture investors that want to stay long the company they don't have this intense pressure to sell before everybody else sells so i think that's going to become more commonplace especially for these big ipos but in the same conversation with matt he mentioned i believe wellington's roughly a$2 trillion organization and they're barely getting, in most IPOs, they don't get their desired allocation.

54:17There's much more capital that wants to get into those opportunities, which goes back to, there's only before SpaceX four growth tech companies in the world, now there's five. Obviously you need to be diversified as a public investor as well. So I think this meme around this finite amount of capital that could go into top in the public markets. By the way, this is where I think I'm gonna be wrong, I said this earlier, if you had asked me three years ago, can a private company raise 30 billion in one month? I would have probably said no, but it happened. But if there is 30 billion of capital interest in a private company in one month, I would imagine there is many multiples of that for that company in the public market.

54:56Roughly 10 % of retail, even less, was filled at the SpaceX IPO. And that was 30 % of the IPO. I think 25 billion roughly. So maybe we'll all be fine and there's enough liquidity in the public markets for these companies. But I do think I'd like companies to revisit the six-month cliff and to engineer. I think you should have some unlock at different types. And I think it should be - The way SpaceX is doing. Yeah, the way SpaceX is doing. One of the other things that's really making venture difficult to underwrite is AI and specifically how quickly the AI ecosystem is changing. How does that change how you approach investing?

55:36It's really hard. And we don't try to, so we're not macro investors. Like we talked to a lot of people about the AI opportunity set, but we're not going to say foundation models are going to be winners. The inference is going to be the winners. App layer is going to be the winner. So we should only invest there. Like we're going to invest across the board in the best managers. They're going to decide where it's best to invest. That being said, the landscape is changing pretty significantly. And there is significant competition app layer. Foundation models can undercut the app layer as well. We're seeing that on a monthly basis, whether it's the public markets or the private markets.

56:08The other thing we're seeing is that there's a lot of experimentation in AI. I'm literally thinking about the enterprise level adoption of AI. And we're seeing this a lot at the early stage, which is concerning, where a company can go from 1 to 5, 1 to 10 in ARR. And I'm using AR in quotation marks because the company hasn't even seen a year of renewal cycle, but it's scaling pretty quickly. They don't really have a persona analysis on their customer. and it might be experimental revenue for every, like it could be, hey, I'm going to deploy, I'm going to deploy this solution for three months and see how it goes.

56:40And if the company takes that and multiplies it by four and says, that's my ARR and goes out to raise a round off of that, that's tough, but that happens. And I think experimentation is so quick in AI from an adoption standpoint, and there's so much competition that especially at the early stages, it's really hard to differentiate. Now, if you're one of the big companies or one of the app layer companies and you have scaled to$100 to$1 billion in ARR pretty quickly and you've shown the renewal cycle, you have great net retention, that's far more sticky. But if you're in the less than a one-year-old company but quickly showed traction, it's still a really hard place to invest to figure out if that's going to be the successful company.

57:20You've seen a lot of these companies go from zero to 10 and then down to zero. Well, the problem with the private markets, David, is they stay on the book's not at zero for a long time. Like it's not as efficient. So like company that goes from zero to 10 can raise at 400, 500 million and say they get stuck there or they go down from the 10 million revenue. You might still market at four or 500 million for a number of years. So private markets are not immediately efficient, unfortunately, from that standpoint. I mean, we're still looking at companies from the COVID days that are still marked up at 30, 40 times revenues.

57:53You look at their counterparts in the public markets, they're trading at three times. You would think, where is it described? Like software company that grows at 15, 20 % today, that's venture backed, that was done vintages 2017 through 22, can't go public. Like it's not growing enough. It's not like a Databricks. And it's concentrating at a fraction of the revenues it's being held at. So I don't think you see that roadkill right away. But I do think you can see plateauing of performance. And that's something we look at when we underwrite managers as well is traction of the underlying portfolio companies over a longitude of time.

58:29Do you oftentimes see big disparities between marks of different managers? Different managers, not as much, but we do see discrepancies in marks and how we think about where the mark should be. Not always, but sometimes, especially for two reasons. One is with COVID and the valuations were high, and two, Caspocalypse. Caspocalypse has re-rated non-AI venture-backed software companies. If you are not showing acceleration of growth from AI, if you can't show the resilience, if you're not growing at least 30 to 50 % plus, that company today, if you're not in that category, you're not training it 10 times.

59:07You're training it anywhere from two to 10 times. And if, God forbid, your seed-based workflow, sub-20 % growth, like you're in the sub-three, sub-four times ARR. The private marks on a lot of companies that are in that, not necessarily workflow, but take system of record company growing 20 30 percent i'll just use a random example 100 million dollar company growing 25 percent organically say there's no price increases organic 25 percent growth break even rule of 25 company what do you do with that company say it's 300 million in arr 25 percent break even rule of 25 can't go public it's not growing fast enough bankers are not going to want to take it public it's not a sexy ai story it's not accelerating its growth it's not Databricks.

59:49It's not the Entropic, OpenAI, etc. SpaceX. So what do you do? Private equity would have bought that company two years ago. They're not interested anymore. They're interested in an AI story. They're interested in an AI native company that can accelerate and be resilient from AI. Maybe there's a strategic acquisition, but I find that hard to believe because even strategics in their boardrooms are talking about how do we reinvent our product from an AI standpoint. So what happens to that company? Question for you. It's not a bad company, but it's just not good enough for the exits that would have been possible two years ago.

1:00:22My first gut reaction was, remind me of search funds. In business schools, you would go and find these mom and pop companies. Are there now going to be$300 million or$1 billion? So let's say this company is sitting on the books at 15 times revenue right now. So$300 million company sitting at$4.5 billion. Well, search fund is going to come in and try to buyers for three times. If that. You're not wrong. There will be buyers. You can find private equity investors that buy value and they're fine with a 20, 25 % grower, but they are going to pay nowhere close to where it's being valued on the books.

1:00:55Oftentimes in these sticky situations, you have it across asset classes. People could have the luxury of marking mentally an asset at whatever price until there's a come to Jesus moment. Somebody needs a liquidity. Somebody needs to move forward and then overnight it gets sold. Yeah, I agree. So we think a lot about that. I mean, when we underwrite a new manager and we look at their historical performance, like we don't just take the marks. We think about contextually where the market is, where the company is playing, and what the actual valuation of the company would be. You have concern about the venture market, but you're also very excited about the venture market.

1:01:30What makes you most excited about it outside of just AI? I tell my wife, this is the only job I believe I'm good at. And at this point, I'm locked in for the rest of my career. And the thing I've enjoyed the most about this job is the managers we back and the people we work with. They're just exceptionally talented people. And what excites me the most is, one, we get to work with the smartest people. And I always feel dumb in the room with the managers. But then you fast forward three, five, ten years. And the manager you backed at that PowerPoint stage where you wrote the PowerPoint with them, their deck, their strategy, you help them set up the firm, and they're massively successful.

1:02:04That is the most gratifying moment in our careers. Like seeing that from inception to the success story actually playing out, if they're one of those top 20 firms out of 3 ,000, that to me is probably the most gratifying part of my job. Is that the best example of a relationship compounding in your career? I'm a big believer in not being transactional with people. So, I mean, I talk a lot about this, like call me at 10 p.m. I really mean it. and I am a big believer in non-transactional, vulnerable, highly connected relationships with people. And that has compounds in many different ways. It compounds in transparency.

1:02:48It compounds in trust. It compounds in learning from each other. It compounds from growing together. That can be within your team. That can be with GPs and that can be with LPs. So I'm a big believer in that. That's how I've always operated And there is a certain group of people that really resonates with that. And I have seen those relationships truly compound. Just to put my master in psychology hat on, the reason for that is typically people will start with a little vulnerability. So they might call you and ask you almost a technical question. I have an LPAC situation. What do you think about this technical question?

1:03:25And as you build trust with that person, they'll give you more and more trust. And that starts to really compound. It starts there, and it gets to the point where we are having daily slacks and text messages with our managers. So it gets to that point. It's exactly right. Is that what's compounded the most in your career? Yes, that's a big part of it externally. I mean, internally, just the team I work with, like the people I work with are... Actually, we did an onsite with a manager recently, and we talked about the concept of can colleagues be friends or not? And there are many firms out there in venture firms where the colleagues are not friends, but they're just professionals working together.

1:04:04But there's really not a big connection outside of work. And there are some firms where that's not the case. They start out as friendships and then that's the foundational layer, or they're almost like, I don't say family members, but they treat each other like family members because they're so close. That's the foundational layer on top of which they build a firm. And then there's a professional setting. I'm very fortunate and where the compounding has really happened is the combination of both at Accolade because the partners we have I work with them for decades plus and it's not just professional relationship it's not just friendship I consider them family and having that combination is really really hard I remember when I was in Stanford business school and I was fortunate enough to run the venture club for a year and in my second year there and a lot of the first years come and they talk about how they want to intern or they want to work in a venture capital firm.

1:04:54And at that point, we had data from tens and tens and tens of placements we had done over many years from the venture club. And it was interesting. The number one reason, typically, a graduating GSB student didn't work out at a venture firm was team and culture. It wasn't performance. It wasn't compensation, but it was just culture and team. And so my takeaway way from that. And when I spoke with a lot of the first years was like, look, you can optimize for brand, you can optimize for firm, for the logos, but you have to make sure the team and the culture you have is the one that can compound.

1:05:31I'm going to use your word because if it doesn't compound, no matter how sexy, how great that firm is, it's going to be really hard for you to stay there for decades. The thing that needs to compound is your team and culture internally. You compound that, the rest will work. Oftentimes think a lot about, as we built this business with Curtis, we're now at seven people, and think about what makes something anti-fragile, and the relationship of the founders is extremely underrated. And you even see this in technology companies, which is where I learned this, which is you have two founders. Let's say they kind of like each other.

1:06:09They go after a business idea. It doesn't work. Maybe they go after a second one, it doesn't work. And then they respectfully close the company and they say the business didn't work. But you have two other founders that all they want to do is work together and they're compounding their relationship. They go after one business, it doesn't work. Second business, third business, fourth. And the mythology is always rewritten, which is maybe they had this pain point or they were laying on someone's mattress and they thought that they wanted to travel the world like the Airbnb story. But when you really get to know these founders, it's really the strength of the founding team and them wanting to find a way to survive.

1:06:47In Airbnb's case, it was literally they were selling cereals, which is kind of like this mythology. But why were they selling cereals? Why were they selling cereals for something that was an absurd business, which was blowing up mattresses and putting them in people's houses? It's because they wanted to work together. And that part is so underrated. It is completely underrated. I totally agree. If you have that foundation, the external work compounds on that. If you don't have that foundation, it's just really hard to compound. So we're big believers at this organizational internal compounding.

1:07:17Is that something you look for with GPs as well? We diligence that a lot. So if we are coming into Fund 1 and there's a new partnership, that's a big part of what we diligence. We've done a lot of solo GPs where that's less an issue. And if we feel like there is a concern or we have enough questions, we would wait until Fund 2. It's actually the one thing that's the hardest to diligence. If you're coming into a fund one and you have a two, three, four GP team, and they haven't had a formal historical time to work together, that is the hardest thing to diligence. Before we started the firm, me and Curtis sat down, we spent two weeks writing our values.

1:07:54If you had told me that a decade ago, I would have said that's the most performative, ridiculous way to start a business. We have GPs who write like tens and hundreds of pages together on values, what they want the firm to be, what their concerns are, their vision. And if anything, you probably should do that exercise individual and then come together and really discuss it honestly and transparently. And that shouldn't be a one-week process. That should be multiple months of dating each other to figure out whether you really want to partner together. So we do spend a lot of time on that process with the GPs if they are coming together for the first time to do Fund One.

1:08:28If you could go back, you're just graduating Stanford Business School and you could give yourself one timeless piece of advice, what would that be? My colleagues tell me this all the time, be more open-minded. The industry we're in is changing a lot. It's changed far faster than I expected. And I talked about how everything is confusing. It's because if we took a very formulaic, dogmatic approach to venture, it wouldn't be confusing. We would just say, we'd probably be wrong. Exactly. We would just say like, this is how we invest and we're going to keep investing like that. But the market moves away from you.

1:09:04And so one thing, and I've become less and less dogmatic and less and less formulaic over time. Being formulaic is important for that 70-30 we talked about, for the 70%, because it does lead to actual consistent returns. But you have to put in the context of the market and where we are in venture. And I'm saying it's confusing. It's because I'm being more open-minded today than I was when I was graduating from Stanford. Because I'm confused more about the venture market, we are able to do new opportunities in those three pockets, big firms, challengers, small firms. We're not saying this is where we play.

1:09:41This is where we have made money from 2000 to 2010. So we're going to keep doing that. To your point, we're going to lose money if we do that. So being more open-minded. It's a paradox of knowledge. The more you find out, the less you know. The other thing is like, we have an incredible culture at the firm where no one person has the answer. I'm a big believer in the process that drives truth-seeking. So we come into a room together, not knowing the answer, but I love the idea of getting to the answer together. We never have this like five people come into a room, one of them has the answer and is pounding the table and everyone's like, oh, yeah, great, let's do this.

1:10:18I love coming into the room saying, here's the problem. Even if I have the answer in my head or I think I have a hypothetical answer in my head, I don't want to say it. I want to come up with that answer together. So I'm a big believer in the process of truth-making together. And I believe we make better decisions because of that. Well, Ram, this was an absolute masterclass. Thanks so much for jumping on. Thank you for having me on. This was great.