E429: Dr. V on AI, Market Bubbles & Finding the Next Anthropic

0:00Dr. V, you spent nearly a decade at Lightspeed before deciding to spin out. And before we started recording, you said that the market right now is undervalued in venture. Why is that? This is something I learned from Chris Sheppey, who was one of the founders of Lightspeed. He said the market always seems to be overvaluing technology. And 10 years later, you realize it wasn't. I've kind of like learned to tune these things out. But you look at the data, right? I mean, if you look at, let's say, 2000 and 2009, when I was starting my first company on the aftermath of the global financial crisis.

0:29The total market cap of private technology companies at that time was maybe close to like 50 to 80 billion. And then the largest company was Facebook, 15, 20 billion in market cap. And you fast forward today, we're talking about multi-trillion dollar companies. We're talking about a private market that's in aggregate of about$5 trillion. If somebody had said we would be sitting at a$5 trillion of private market cap, even three years or four years ago, it might've seemed ludicrous, right? And here we are. And mind you, we've only seen AI disrupt coding in the world in a realistic way. Most of the revenue of Anthropic and OpenAI are coming from coding.

1:05So whether it's medicine, engineering, physical automation, when I look at the degrees of possibility, it just feels very, very large. And the very rough back of the envelope math on that is market cap of the private companies versus venture capital going after those private companies. For perspective, if back in 2008, 2009, the top funds in Silicon Valley were probably raising like$500 to$1 billion funds. And even that was like, wow, that's crazy. There was no SoftBank,$100 billion vision fund. There are no mega hedge funds. And I look at like even just Lightspeed, Andreessen, Sequoia, now increasingly, interestingly, Benchmark and many others, like you're already in excess of$50 to$70 billion.

1:51The markets have completely reset in terms of the capital scale and expected value. And the big unknown is whether AI will actually disrupt labor. I don't think it's an unknown, right? If you look at the impact that Cursor and Claw are having on coding, which is inherently engineering labor, from like writing sophisticated code and research level code to implementing basic systems, like systems implementation and stuff, very different levels of sophistication. And you're seeing AI kind of eat into a whole bunch of that. For me, the question is less whether it can disrupt labor. The question is what kinds of labor get disrupted first.

2:30My point of view is that categories of labor where there is low cost to going wrong, i.e. there's a little bit of course correct available. You don't require a lot of trust. And then second, ones where there's a deterministic right answer and you can actually close the feedback loop, improve the model on a continual basis, which is why coding is so perfect, right? Because when a code is written, it's expected to perform in a certain way. It either works or it does not. Along those two axes, you're going to see things evolve. And if one end is coding, probably the other extreme end is medicine.

3:00Cost of going wrong is very high because of multi-systemic nature of biology. It's very hard to attribute a response or unintended response of something solely to the algorithm. You've said that the old venture capital playbook no longer works. Why is that? The venture playbook has changed. 10 years ago, venture was not a media business. It was a reputation business where investors would invest in over decades and they were known for investing in certain companies and therefore became aspirational founders to raise capital from. Fast forward today, right? Sourcing, especially at the early stage, is very much a media business.

3:38You've seen the adverts of like CBPNs getting acquired and recent horror talks about the new media. Harry Stebbings has deployed over a billion dollars reportedly. There you go. And so there was kind of like this moment where a lot of podcasters were raising funds to varying degrees of success. It is now widely established that distribution is important for a venture firm to be able to see the best opportunities. And then all the way at the end when you're exiting, right, 10 years ago, investors were not really thinking about exits that proactively. The conventional assumption was you're going to have 10 investments.

4:10One or two of them are going to hit it out of the park. Eight are going to like probably go sideways, which don't need any management. The other one or two that hit it out of the park are probably going to go public. So it was kind of like a low effort, more laid back style of planning exits. Fast forward today, we're in a very difficult public environment. And so as an investor, you have to kind of build this muscle of continuously asking yourself whether you should be telling a company, buying more in a company. consequently have an ecosystem of relationships of buyers or sellers that you could trade with.

4:40That was not necessary many years ago. Companies are staying private much longer, but the average tenure of an investor is reducing. The average time an investor stays at a big firm is reducing. Why is that? I think it's just like maturity of the industry. It's become more competitive. I would say - Are they getting poached from other firms? Absolutely. All the time. I used to joke, there are three types of investors, right? There's ones that don't perform. You're going to hopefully find them over time and transition them out. Ones that are high performers, but then you're at the risk of losing because they want to go start their own thing or somebody poaches them.

5:11And then what you're left with is the stable middle, right? And that is the dilemma of a large firm. What's happening more structurally is that several parts of what an investor used to do are getting institutionalized. They no longer sit with the investor. For example, marketing. All of these funds now have big marketing teams and investors are collaborating with them. And that was not the case when Bill Gurley was writing his blogs or Fred Wilson started writing his points of view. Think about exits again. Lightspeed built a capital markets team to kind of create that discipline at that scale.

5:43And so now an investor needed to come into a Monday meeting and talk about their plans for exiting a position. That conversation is now happening. Different set of people on a much more regular cadence. And they started this capital markets team while you were at Lightspeed. They were just starting when I was at Lightspeed. What does that capital markets team do exactly? Number one, list of companies that a venture fund owns and segment them discipline into what you want to buy or hold, and then what you want to sell. That itself in a big firm where you have 30, 40, 50 investors. And by the way, you have thousands of companies even getting to that level of clarity takes a lot of work.

6:23The second is developing relationships in the ecosystem that actually allow. For these exits to happen. For example, big funds are now using a variety of tools to actually exit companies. They're doing continuation funds. They're doing GP secondaries, LP secondaries, encouraging M &A. Firms like Lightspeed are also doing buyouts now. So they kind of like could be a seller and a buyer, right? Arguably. And so that ecosystem, as it continues to develop, requires a continuous relationship building and awareness of how people's strategies are changing. Saying that you want to manage liquidity and you want to provide liquidity to LPs sounds extremely obvious and sounds like everybody should be for that.

7:05But the question then becomes, who is buying these assets? Everyone I talked to on the show is chasing the same thing, an edge. And more and more, the edge comes down to your information, not just having it, but being able to trust it when the stakes are highest. AI is doing more of the information gathering for you every day, and most tools are very good at sounding right. The summary reads clean, but can you trace it back to the filing, the transcript, the specific passage that drove the answer? Or are you just trusting the confidence of the output? For investors, that's not a minor concern.

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8:12See it for yourself. Start your free trial at alpha-sense.com slash how I invest. That's alpha-sense.com, how I invest. What we are seeing now is that the participants in private markets have structurally expanded, right? 10 years ago, the conventional wisdom was M &As are done by incumbents or big tech companies, public companies, either crossover funds, or there was some combination of growth capital, very sophisticated institutional capital. What's happening is the following. The biggest structural shift is that there are a lot more participants. In particular, I believe that the family office world is far more switched on to alternative assets.

9:00In fact, we invested in a company that's actually rolling up small wealth management firms. And one of the offerings is to offer alternative products to the young generation as the wealth gets transferred. So you're seeing more and more of entrepreneurial energy on that side, and they do not hesitate to sort of make direct investments as well. Right. The second is sovereign wealth funds. Sovereign wealth funds were not participants in the private markets in a way they are now, even like 10 years ago. The sovereign wealth kind of market at large, it's about 15 trillion dollars of capital. Right.

9:37By and large, sovereign wealth funds are extremely under allocated to venture. Nordics, for example, have historically never invested in alternatives. Of this$15 trillion, about five, about a third is getting invested in private markets. Granted, it includes venture buyouts. And about two thirds of that is getting invested in direct investments. So for every dollar that they are investing in private equity fund, multiples of the dollars getting invested in direct purchases of stakes in companies. And that gives you breadth of and different types and scale of buyers. GIC and Tomasic were early adopters of this.

10:18They would put large checks into venture funds like Sequoia and then ask for direct investing and to make introductions to them for those follow-on rounds. It's one thing to say, I want to co-invest. And it's another thing to say. Is that because they have the infrastructure to process the deals? It's a capability, right? The best companies are always competitive. Their rounds are going to be kind of unplanned, right? How much notice does any shareholder of Anthropic have, whether or not they're going to raise another run of capital in the next six months? Very little. I can tell you that. Even they are hearing things as the market is hearing things.

10:52You have a co-invest opportunity that pops up that needs basically a decision in less than five days. And we are talking meaningful chunks of capital. And most institutional LPs are not set up for that kind of work. The LP underwriting world is relatively slower paced. Typically, these guys meet maybe once or twice a month in an investment committee. And so by the time you did, you don't even have enough time to take it to the IC. Very unusual as well. That's very cutting edge. One of the common traits among the very top LPs is their governance. They don't have to wait to their quarterly or biannual meetings.

11:28But once or twice a month is very unusual for an investment committee. It's hard. LPs are trying to work around it. But by and large, I would say the co-investment motion for GPs has been underwhelming. Even today, like we are a young fund. We are absolutely interested in showing our best companies and positions as they're coming up for follow-ons to our LPs. Co-invest is one of those things that 99 % of LPs say they want to do and probably 10 % do on a regular basis. I think 10 % is an overstatement. I think it'll be like 2%. I was thinking about this when you mentioned the family offices doing directs.

12:09I have a saying that the only thing worse than two and 20, or today two and a half and 30, is 100 and zero. Meaning you don't pay any fees, but your investment goes to zero because you're adversely selected. And outside of very specific niches that family offices dominate in, let's say they had some widget business and now they have a widget deal. family offices are the most adversely selected party in the market. Look, one family office in one, right? Each kind of family has their own dynamic in terms of where are they? Are they in wealth maximization? Where the entrepreneur who made the money is still allocating?

12:45Are you the third generation, fourth generation that's wealth management, where you're in sort of more wealth preservation mode and dabbling in risk on the side? My personal point of view is that it's really hard to deliver returns consistently. It doesn't matter what you're learning, whether you invest in crypto, you invest in private markets, public markets, so much so that I have made zero investments outside Lightspeed or my new fund in the years that I've been in venture over the last decade. I have purchased zero public stocks. People ask me, hey, why don't you practice? Some doctors practice while they're doing this.

13:20I just don't know how to be good at that and this at the same time. That's the school of thought that I subscribe to. And so sure, if you're going to dabble in things and operate on vibes, chances are you get maybe lucky or unlucky. You could make money. You may not make money. But over a long period of time, it'll be very hard to produce the performance that you want to see. You said something earlier about Lightspeed getting into the buyout business. We see General catalyst growing. I think they're approaching 50 billion in assets. What do you see in terms of the future of these multi-stage firms and their asset management strategy?

13:59What happened with private equity firms two decades earlier, whether it was the KKRs and the Blackstones and the Black Rocks, they all emerged or broke out with a part of the business. And then over time, other parts of business sort of also took roots and became massive. Blackstone was not a real estate private equity investor in the early days. Now it's their biggest business. They're the biggest commercial real estate owner and it's their biggest business. And so I think what's going to happen here is the same. A lot of these firms broke out, came into eminence, became famous for doing great work in venture capital.

14:35And they are increasingly trying their hands at new other adjacent types of asset management. And I do think like the kind of buyout that let's say Lightspeed is priced to is very different from the kind of buyout that let's say Summit or TA is doing or kinds of risk they will take, the premiums they'll pay for it are very, very different. And so I do think there is room for innovation. There is room for multiple strategies. That's the kind of path I see. Keep adding products, regions, keep adding scale. Some firms have decided to invest in public markets alongside privates. People are increasing asset center management through a variety of different ways.

15:13And I would say that, look, my mom always said she's a CPA. She's like, follow the money. And so if you look at the asset management business, like if I was to step back and say, okay, like what is an asset management business and how does it get valued, right? The value of the business is disproportionately linked to the recurring and less correlated to the performance. It's hard to model for any investor. And so if that is the core variable that drives the value of your business, then seeing firms optimized for that makes sense. Something paradoxical and almost people don't want to talk about.

15:54But as venture capital firms go from vintage to vintage, as they build out their businesses, their right to win does increase, all things being equal. The problem is that oftentimes their fund size outpaces their right to win because a lot of things do compound. Their relationships, their brand, their institutional know-how, the mistakes that venture funds start. In the first vintage, you oftentimes have very hungry GPs, but you also have GPs that are learning. But VCs, actually, as they grow, there is some natural growth rate that should be provided given some of the advantages that accrue to a growing franchise.

16:31Venture is a compounding business. any success that you have in the first fund, any things, any learning, all compounds in the second fund. The reality is that like people who run venture funds are also humans. They have the same ambitions and wishes and worries and insecurities that any one of us has. And so they don't want to get left behind.

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20:38Let's say you were doing only software in the first fund. Now you start doing software and crypto. Very different animals. But by and large, I agree with you that if there's consistency of strategy, you get better at the craft and your odds of success increase. You've been venturing out for a decade. What are some other common biases that smart venture capitalists make over and over again? I would say that in venture historically, investors have relied on their network to yield the best opportunities. If I'm an investor in your company and you send another founder, you think well off because you were to college with them.

21:22Chances are they are interesting because, A, I know you and I think you're high quality. B, you're only incentivized to show me the good stuff. And so a lot of venture opportunities originated that way. So the positive side of that is if you have the networks, if you've inner circle companies, then you're going to get a lot of deal flow around those companies. The shadow side of founders of Airbnb and founders of Stripe and founders, many other founders like that began as total outsiders. They did not. It's the Peter Thielism. Silicon Valley is the outsiders becoming the ultimate insiders. Correct.

21:56It's a bunch of outsiders and they've produced like some of the most iconic companies of the last generation. Bias is a heuristic that helps cut through a lot of noise and focus on a few things that matter. But at the same time, it can also blind you to opportunities that are high quality on their own merit, but are just not getting your attention because of the way you function. I would say that is a big bias. Second thing, an investor's career, whether it's their progression in the firm, whether they're leaving or joining another firm, whatever it is, that's happening much faster than companies exiting.

22:31And so in the interim, what's the yardstick to know whether someone's doing well or not? It's markups. I let a deal in is now marked up by some famous person at a healthy price or not. That scoreboard orientation has become much more of a bias in the current. Markups are great. I don't have an issue with them, but I would say that when you start optimizing and the whole system starts aligning around them, right, forgetting that this is a transient mark, this is not true performance, things start to change. As an example, if you're a young person at a big firm, the only way you progress is is if you get deals done and they get mugged up, right?

23:11So now as a young investor, you have two choices. You can go after something that's hot in the valley and therefore is top of mind for people inside the firm as well. You can find something and bring that and advocate for that in the investment committee. Or you can go look under some unturned pebbles and go and find an idea or person that's kind of one standard deviation away, the classic contrarian. But you're not sure whether that deal gets done or where do you spend the time? You obviously spend the time on stuff that's more obviously interesting to the company. If every kind of young, ambitious investor is doing this inside every large firm, suddenly something that's hot becomes white hot.