518. The Power of Founder Mafias, Why Venture is Bifurcating, and Lessons from Good Strategy, Bad Strategy (Ross Fubini and Manish Patel)

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0:23Ross Fubini: Welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran, and this is The Full Ratchet.

0:39Ross Fubini and Manish Patel join us today from the Presidio. Ross and Manish are managing partner and general partner, respectively, at XYZ Venture Capital. Ross is a Midas-less seed investor and was an early backer of Anderil, while Manish joined Google before its IPO. He's taught at Stanford School of Engineering and has been a VC for over a decade. XYZ has backed companies including Anderle, Peregrine, Apex, Cape, and Chapter, and has backed 40-plus Palantir-sourced companies, including three in the last quarter. Ross and Manish, welcome to the show.

1:19Ross Fubini: Great to be here, Nick. Thanks for having us. It's good to see you both. Ross, let's start out with you. So XYZ turns 10 this year. Give us kind of the quick two minutes on what was the original thesis and what part has survived the past decade. You know, it's all just overnight success every day up and to the right. No, it's really been quite a sojourn. As you said, coming up on 10 years. You know, most interesting, you know, the original premise of XYZ actually ended up planning out as being correct. So back in 2017, if we had talked about XYZ and I would have been begging you like, hey, you got 10 bucks, I'm doing a new venture fund.

2:08The premise would have been there is this little data company called Palantir. You don't have heard of it unless you lived in downtown Palo Alto. but it is full of the best, most talented young people in the world, and I'm going to back people coming out of that ecosystem. And that was the core idea. And the long story short of it is that it's been incredibly successful, not just because Andrel, Peregrine, Chapter, Apex, Cape, others were all backed by Palantir founders, but those folks really were the beginning of starting several really interesting waves of technology in the public sector in defense and space just these really really transformative categories where those companies existed other companies like them have existed so it's ended up being like a really really successful successful journey to go build out here.

3:11We've just now over 130 companies, billions of dollars to deploy and a lot of fun in the way. Were you an early contemporary or friend of Peter Thiel, Alex Karp? They're unique individuals, kind of build companies in a different way? Yeah, definitely. Palantir was built in a very unique way. It's one of the things that was most compelling about it is its culture. The history of Palantir was largely written by three people in the earliest days, a guy named Shamsankar, another CTO, Aki Jain, the president, a guy named Bob McGrew. Bob later went on to be chief research officer for SAM at OpenAI. And those three folks really ran the business along with CARP and the original founding team.

4:05And I introduced Aki Descham. And Palantir then and now was an incredible consumer of expertise, consumer of wisdom. And it was a real learning machine kind of culture. And I was just fortunate because I knew a couple things. I've been around in the Valley a while, now a long while. And I would go to meetings with them and we'd work on pricing. And one meeting, the next meeting, you'd show up at the second meeting and the team would be like, well, we tried one idea, it's great. We tried the other day, it sucks. We're going to get to the third. What else you got? It was this constant consuming of like, not more than insights, of ideas and experiences from outside.

4:56And that learning machine is what was really attractive. And so I got to be part of that quite happily as an advisor and later investor. But it was that intimacy with the company, which only had all these talented people. Because then and now, Palantir is full of these young people that basically get, this term forward deployed was created there. What does that mean? Take a young, talented person. Maybe they were a student of Manisha's who just graduated, so they're eight years old. We're going to take you out in the world and be like, great, you're going to go to pick an insurance company, a bank, a part of the government, and go find a big data problem that Palantir's foundry system is going to be really useful to solve.

5:44And try and do that in six weeks. We'll see you later. It turns out that kind of culture is incredibly good. It's just a crucible for creating entrepreneurs. So you get companies like Chapter. Chapter's a really boring, incredibly important company. In the US, everyone over 65 will get Medicare. You're my parents, people in the audience. Turns out that process is awful because figuring out how much to pay for drugs, super complex, very hard data problem. The government itself doesn't know what it pays for drugs. Okay. In comes Chapter. We're going to organize all that information and we're going to do a great job of helping my mom decide who she should get her Medicare from.

6:32And that's what Chapter does as a brokerage. Kobe, the founder of that, is former Palantir. And Kobe had a passion for his big, big, big, tremendously large, you're spending a trillion dollar kind of problems, and had this data understanding. And so in building Chapter, he created a better brokerage for my mom, your mom, everybody that's going through these decision processes. And that's the kind of people that came out of this. out of Palantir. You know, tried as it is, it's really first principles of like, what's the data problem? Why doesn't it work? Where is it broken? How do I drive my product into existence?

7:12And that was true for them. Certainly true for Andrel in the defense space. Certainly true for Apex in the space space. So that's like, that was the unique idea that existed back in the early days of XYZ. And rare but true, it ended up being correct. We've just built on that same network into other networks, defense companies and other defense companies, insurance and other fintechs. And that's been the process of building out XYZ. I'm glad you said that, like the first principles, the way of thinking. I was on a call yesterday and somebody asked me, you know, why haven't there been more successes in Chicago, which is where I'm based.

7:56And the only thing I could think of is I believe the first generation of successes here taught bad habits. I think the DNA was wired a certain way, which worked for a handful of individuals. But every time the spinouts from those companies come and pitch me, they want to raise 10 million bucks out of the gate. And I ask them, how many customers have you spoken with? And the answer is zero. And so it's very much like an if you build it, they will come, set of spin out founders. So my question for you is like, we've seen these successful mafias like PayPal mafia, et cetera. Like, do you see fragments or presence of this style of thought and this DNA in the companies that are spinning out of an anduril or a ramp?

8:44Do they bring that DNA with them to their new company? uh i i think in spades i think that's exactly right that that's what's what's happening there and like maybe let's just use those two examples because we backed a lot of people at palantir and a lot of people actually at a ramp so very different cultures but um also um have really founder advantage cultures the ones that we've seen we already talked a bunch about this with Palantir is it's really obsessed with access to the problem. Like who is the person? How are they feeling the pain? What is broken? What is the intention with the customer or even like what the market is trying to do?

9:33And if you can get to work with the customers that have access to the problem, then you can understand it. You can figure out what's missing, what to build, And then there's a lot of like belief in yourself, like I can do it. I'm uniquely able. You know, all the confidence that goes with that. It's part of founding once you've discovered that problem. And again, that was a deep and big part of Palantir's ethos. It's like you're going to do this thing that nobody else has done because you are so forward because you're in the mess of it. You're chewing the glass for whatever is the problem you're going after.

10:13term. And there was joy in that, joy in like I'm on the plane, you know, on the red eye to be on site. Like all those ideas were really good experiences. Secondly, there was success in ultimately being able to solve those problems, those problems being just big and scalable. So it wasn't Dropbox and saying, hey, we are going to have consumer adoption or Atlassian's, you know, fast path to go to market through developers is and said, no, if you can work with people that have all the billions of dollars and solve problems for them, you can get paid hundreds of millions of dollars. And that was an aspect of that culture.

10:53And then there is a bunch of learning attributes that were rare, entrepreneur attributes that were rare. A second one, just to kind of give another color, and we can talk about SpaceX and how it would focus on verticalizing supply chains. But I think Ramp is another interesting one, where the Ramp team in general, in general, the leaders and founders we see from Ramp, they are just revenue hunting missiles. It is like, where is their money? How do I get the money? Who has the money that I should be getting? Send me some of those, Ross. Send me some of those. I mean, God bless, right? And it is just, by the way, there are two parts there.

11:36Where's the money? and I am going to get the money. And you need both of those things. And that's been a, it's just been a really, it's really been a really compelling rubric. It doesn't mean every ramp company works. It doesn't mean every Palantir company works. But it's that, again, the element of the confidence that I've seen this is like, if I can figure out where the money is, I can run faster and get, I can win. I can beat Brex. I can come into an established category and dominate it. That, as a rubric, I think is a ramp culture. And so we back companies like NationGraph and folks like that that have come out of that ecosystem.

12:20And so, again, to your point, Nick, I think a lot about these cultures and what are the cultures designed and wired to go do. and if you can find that pattern, you just want to keep backing people. It's the reason now why we back three founders and we'll do another 30 as they come out, coming out of Andrel because we think Andrel has a lot of strength in understanding customer needs within the government and how to move products into the government. So that's make it one culture that creates another culture that's also advantaged. And now if I could say one more thing, I think that's just the whole path of venture is just kind of building these networks of networks that are advantaged.

13:04And Sequoia has done that and Andreessen's done that. And then we're just doing those same kinds of things. That's ultimately how you build and scale something that can win. Love that. So let's talk about firm building. And Manish, I'm going to put you on the hot seat. We've been friendly for a while now. So, you know, you nearly started this firm together with Ross once before. why you know what changed what made it the right time to do this now and join xyz well ross and i

13:36Ross Fubini: have been friends i think since i had hair so that was a long time ago and uh we you know and i think the thing that's so interesting in my lived journey in venture capital i was always uh a little hesitant to do things with friends because that whole thing of like don't church and state. Don't mix business with friends and all that sort of thing, whatever that rule is. And I think one of my live, learn lessons in venture is that, you know, different operating company, that is exactly what you want. You want somebody who's a partner and partner is a very different word than collaborator or coworker, et cetera.

14:11Ross Fubini: It's somebody that is thinking about the best in you when they say, you know, don't do this deal or have concerns that really weighs on you. Your, Your response back should not be like, now I'm going to sell you into my deal. Let me tell you why it's all, everything's A plus and it's going to be an amazing deal. You don't get it. And I think that's what happens a lot in venture. Nick, you know this, in some of the big partnerships, it's kind of a bunch of guys that meet on Monday and it's a joint checkbook. They come back together the next Monday and are kind of horse trading on deals. Many ways to win in venture, by the way.

14:41Ross Fubini: I'm not saying that's a bad approach, but I think some of the best, best partnerships, There actually is this idea of like a friendship and a trust where people push you. It's very competitive, but they make you better. And so my own live lesson in venture over the last 15 plus years is, you know, with Ross, he's brilliant. We've been talking shop forever. So I have no problem telling Ross to his face. Well, that's stupid. I don't understand. And then he's able to like have a conversation with me about it versus pulling punches. And I think that keeps the integrity of the conversation and you get to the right answer in a deal.

15:11Ross Fubini: And when I was thinking about what do I want next in my career, I just ran towards this opportunity to be able to work with Ross because I felt like we had been working together for a decade plus already, talking about deals, doing deals together, just thinking about the world. And so we already had the shorthand built up. And so then when I came into XYZ, it's like you hit the ground running because you've already been doing the job. And that was super exciting for me. so so manish we were just talking about networks and spin outs and ramp and andurl you know you were at google for a number of years do you think the contingent from google that starts new companies do you think they're different types of companies than maybe an andurl and what what does that look like you know what what's the iconic google founder good at yeah it's funny because my so i was lucky enough to be at Google before the IPO.

16:04Ross Fubini: If you look at the cohort of people that sort of now have become legendary that I had the chance to work with, these are folks like Chris Saka, you know, Hunter Walk, Gokul Rajaram, all these amazing people. Eli Gill all used to sit around me at Google. Sundar used to sit behind me. It's funny to always think like now he's the CEO of Google. You know, a lot of those people became venture capitalists. It's kind of a funky thing. When you think about like the PayPal mafia or even what Ross was saying about some of the Palantir Mafia, those folks ate glass in a very, in a hard company, hard to build.

16:36Ross Fubini: A lot of the Google folks, weirdly of that era, became angel investors, company builders of a different type, and venture capitalists. And so that network has paid huge dividends to me. But it was like, I think a little bit of the lessons learned. Google was a very intellectual place. I think it got a couple things right out of the gate that I think just amplified over time and that a lot of luck as well. And so when I think about the types of Google companies that have been started that I think are really brilliant, it was less of the, you know, like zero to one, but as people that are thinking about big infrastructure problems, because that was really Google's secret sauce, you know, people that could think very, very big, a little bit heady, a little bit intellectual, but could kind of see the surface area of a problem in a different way, because they kind of lived on Mars building this stuff at Google, and then brought it back to Earth, you know, because they saw problems way ahead of the curve.

17:24Love it, love it. So Ross, I'm going to go back to you. Typically on the show, we're talking trends, we're talking deals, we're talking sourcing. But I want to start out, if we zoom out a bit, I want to ask you what you think is critical to get right on the firm building side. We're all trying to build a firm. We're trying to secure the opportunity to do good deals for decades and build a legacy brand. You're on that path, Midas list. You've done a bunch of fantastic deals. Talk to us a bit about how to build the firm the right way. So two things. The first is building on what Manish was saying before.

18:09I remember a discussion he and I were having before he joined and called him one night and asking for some advice about this deal. And it was kind of a mediocre idea, a really good person. And I'm like, well, I'm trying to reason through, like, why is the mediocre, sorry, why is the good person working on this deal and all this stuff? And we've probably talked for like 20 minutes, keeping away from his family. And he's like, well, what else are you working on? I'm like, well, you know, I've heard Bob McGrew. Bob was the first employee at Palantir, our chief research officer at OpenAI. He did all this stuff.

18:46and I'm, you know, Bob, I've been iterating on ideas and Manish is like, why the fuck are we talking about these people? Why are we just talking about Bob? I want to be in the Bob train. Bob builds, you know, the billions. And I remember this so to speak, I'm like, right, right, right. Manish is the correct idea. I have the wrong idea. We've been focusing on the wrong thing for this entire conversation. Literally text Bob like, hey, let's get that next meeting going the next day and get on that. And so the reason I mention that is because sometimes you need partners that get you to kind of pull your head out of wherever it's stuck to pay attention to what's really important.

19:24And that can be indeligence. It can be that you love something. It can be that you're stuck somewhere and you should do a thing or you shouldn't. That's what a working partnership looks like. And that's what's exciting, period, to build in our partnership. and it comes from our friendship and respect, et cetera. The second thing I want to tell you is I've been in a lot of partnerships. I built this one. I built Village Global. I've been in big firms before. Those firms are all great. Most firms, very quietly, the people do not like each other and they do not trust each other, more importantly.

20:05And because of that, you get a bunch of backup behaviors that are not good. An example of that is take reserve planning. This is like in the weeds, but this is you do an investment. You know this, of course, Nick. You do an investment, you get a pool of capital that you can concentrate into different companies. A problem there is if it's you, me, and Manish, if Nick and I, if we don't trust Manish, we're going to put all those reserve dollars, those extra dollars into our things because we don't know they're going to work, but we know Manish's are not. and that creates a lot of backup behaviors that make bad decisioning sure animosity yeah yeah and so this is like culturally what i believe is this deep set of like it is all this like understanding respect expertise pace intensity all those attributes together that's trite but true it is like a marriage you have to have a deep fondness for each other fondness for people's points of view and that's what you're trying to build in and it's not because the other model doesn't work and a bunch of these firms that do work and do survive and they're great pride of that existence but i just don't think that they learn and execute in the same way they don't they don't figure out that it's bob not whoever else i was working on working on and they don't realize that actually many should get all the reserve dollars because my things aren't the right things to be backing right now, but you have the humility of figuring that out together.

21:40And that's what I think you're trying to uniquely get in a partnership is that learning machine and then the excellence that comes from that. And that's what we're trying to build here. Love that. So I want to double click on these deals that take a while to take shape, right? You were talking about reserves and it can be tricky figuring out where to put money. you've got this framework. It's this non-consensus to consensus framework. We're all trying to plow money into non-consensus deals, but at some point, they have to work. They have to become consensus. Give us a breakdown of the framework.

22:21Maybe in the case of Andrel, what was non-obvious in 2017 that is obvious now? Yeah. So the idea is there's two interesting deals to do, in my opinion. One is the deals that are non-consensus that become consensus. And then the others are the ones that are consensus that maintain that consensus. Why is that a good idea? Okay. In both those stories, the company is progressing, you're making revenue. And when you go from non-consensus to consensus, the multiple that the next investor and the IPO, et cetera, is willing to pay is going to jump up. So I go from non-consensus, my Andrew deal, when it was first starting, definitively non-consensus, literally could not get Sequoia to take a meeting in the end.

23:15Radioactive. Truly, for a bunch of reasons, 7 % take rate from the large primes. Service is heavy. They all trade like crap. There hadn't been a history of people selling to the government, successfully making money. All those things were huge negatives. Just the category was completely uninteresting as an area. Sure. Forward deployed engineering, not cool at the time, right? Yeah. Yeah, forward-deployed engineering is, I mean, now Palindra's made so many of these ideas that the government and forward-deployed so palatable, and it's created words for talking about it. In the early days of Andrel, the idea was relatively simple, which is I'm going to make products versus services.

24:06So I make products for the government, and I'm going to sell those products. But both those ideas were non-obvious. First of all, the government primarily bought services. It tells you what to build. You build it and you get a 7 % take rate. Sometimes you're building a commissary for the NASA cafeteria, and sometimes you're building a new joint strike fighter. So the idea that Andro had is you could build, figure out these products and build them. You could pay product margins. And then secondly, you could successfully sell them to the government. That also was anathema to most of what the Valley had been successful.

24:40We'd seen Google. We'd seen Facebook. Look, we hadn't seen go and get the money from the largest spender in the entire world, which is the US government. Full stop. Healthcare, defense. In the world. And the Andrel team had a unique understanding how to hyper iterate and prototype and design a set of products and then figure out that those products then could be sold to the government. the biggest thing that they understood that has now become more obvious is a small number of companies palantir among them a few others primer scale um they started training a set of people here in the valley about how to do go to market for the government and that was a rare scale in I would argue that is still the limited resource in building government-focused companies.

25:43It's people that understand what's called capture. So we don't call it sales, we call it capture. And the reason is because there's government dollars. We're about to have our budgets going to go through at the end of September here. Someone, somewhere is going to get any given dollar that's provided by the government. You have to go capture your dollar for your program, for your effort. and that was a very poorly understood idea and that you could be successful building a company out here in California at the time. But the thing that I knew is Brian Schimp, the CEO of Andrel. I'd been working with him for years through his rise up at Palantir and I knew Brian was going to be a master of this and he built an incredible team both that could build technology companies and this go-to-market motion, that's what made Andrel so, so, so very successful is being able to get on that change in awareness here in the Valley.

26:42And it's been thrilling to see because that success, I think, is to get so many other excitement for government companies. And ultimately, that's what you want as a citizen is you want your government, your defense and otherwise to run better. And that's what all these startups are trying to do. Love it. So while we're talking frameworks, Manish, I would love your insight on AI, right? A lot of AI usage today is VC subsidized or it's CIO mandated. And when usage numbers look identical, how does one separate signal from mandated usage? What's the real stuff versus what's forced? How do you think of that as it applies to AI and investments you're doing in the space?

27:29Ross Fubini: No, it's a great question, Nick. I think particularly in this moment where everything looks like it's winning, you know, I think the VC subsidies make it so easy for people to buy AI or any kind of new product. And you see these velocities, which are bananas in terms of adoption. But I don't really, you know, one of the things I always think about in venture and in business, all revenue is not equal. It's very, very different, different types of revenue. And I think the art of it is actually going behind the revenue and looking at, well, why is somebody buying something, right? Looking at kind of the human behavior of it.

28:00Ross Fubini: I love to use this lens all the time where whether it's a consumer company or an enterprise company, why is somebody using something in their daily life, right? Does it go from a novelty to a necessity? Does it become a basic thing that I do every day? Because there's only so much time in the day and so much budget in the day. And how much of this is making me, as an individual, whether I'm a developer at a big company or a consumer, making me feel good, making me feel like I have superpowers, making me look cool, all these messy human things, those are those latent needs. And I think that's the thing that doesn't get talked about enough in the current sort of AI bubble that we're in.

28:36Ross Fubini: Because a lot of people just talk about, oh, it's just going to make you do things faster. These workflows, this automation, it's like, does someone even need that, right? I feel like a lot of that is incremental thinking as people think about AI. A faster workflow is nice, but the real question is should that workflow even exist, right? And I think people that start to think about that, I think that's the AI native stuff. That's like, oh, it's not this like duct tape together thing that software patches up. It's like, wow, it's a totally different way to do things, right? It goes back to that, what was that, Henry Ford?

29:08Ross Fubini: You asked people what they wanted, a faster horse or electric car, right? Like most people aren't thinking about the electric car in this moment. A lot of the ideas you're seeing are incremental. They're that faster horse idea. So what I get excited about as I look at AI companies is like, who's really building the electric buggy? Who's revolutionizing something in a completely new way? Those are the companies I think that will be built to last. So what do you think of a company like Whisperflow, right? It's like a core part of my stack. I use it all the time. But I mean, it feels a little thinner, right?

29:40Maybe not as durable, maybe not completely reinventing something that's a necessity, but it's certainly sped up my work a lot. I just hold down a button and I record everything I want now. I don't have to type it. How do you square the circle of long-term durability and necessity?

30:00Ross Fubini: Absolutely. I think Whisperflow, great product. The question I have, though, is they've bought the chance to be a company that can be everlasting. right if it's just translating my conversations and transcribing them and doing summaries of them nice but incremental but they have the chance to do something with this user base with the audience they've bought right so the question i have is what is the real long-term durability what what is that team building towards right if they're building up a you know this data profile from a niche and they create the avatar from a niche so i interact in meetings in a completely different way These are some bigger idea there.

30:35Ross Fubini: So I think they clearly have great customer base and growing. But the question is, what do you do with that, right? And I think a lot of companies are in this moment because venture is so easy to raise, easier than ever right now based off even resumes and just there's so much demand for these revolutionary companies. What are you going to do with this kind of chance that you've kind of bought yourself? Are you still managing expenses with outdated apps and spreadsheets? If so, it's time for Ramp, the leading U.S. spend management platform covering corporate cards, travel, AP, and more. All built to save time and extend runway.

31:11We use Ramp at TFR and it's been a game changer. As our preferred partner, they're offering listeners$150 just to take a demo. No need to sign up. Head to ramp.com slash partners slash TFR to claim your$150 before the offer expires. Now back to the interview. How are you both thinking about underwriting in this era, right? Like we've, you know, what used to be a series A. Everything's a trillion dollar underwrite.

31:39Ross Fubini: That's it, you know? Everything's a trillion dollar underwrite. That's the baseline, you know, that justifies it all. 100%. You know, but where I'm going with this is like, what used to be like a six on 30 series A, I remember one of our first notable series A's was a six on 30. And like, I remember so many LPs saying, And this is ridiculous, the multiple on revenue that this company is getting. But now that's like a very lukewarm seed, right? We're seeing 30 to 40x, you know, trailing 12 months, multiples, even higher. And in some cases, like Instinct just raised pre-revenue at a$2.5 billion valuation, which is, you know, more equity value than Airtable just sold for after 13 years.

32:24So we'd love to hear your perspective on kind of the cycle and underwriting that we're seeing. Yeah, we talk about this all the time. There's maybe two big ideas that we've talked about. One's Manish's, so I'll let him cover companies that are defining the ecosystem. I'm going to say something different, which is so many of the companies, and of which Whisper is a great, great example, they are so of the moment. And by that, I mean like super interesting what's possible now. It's incredible what you can do with a model around, you know, dictation. It's incredible what you can do, you know, with models around transcription in medicine right now.

33:17There are all these, like, the present moment is incredible. I'm pretty indifferent to the present. I want people to build things that are way more what if. Like, what if this was possible? That could be, what if I actually used all these stablecoin rails and created an alternative to Visa? that could be, you know, what if robots got adopted through the manufacturing process, where normally that's a kludgy, slow process, but ours is going to be fast, and here's our theory. But not just ambitious, like that's a complete cop-out, everyone's looking for ambitious founders, but people that have a really different view of what the future is going to look like, And it's because the present is so interesting, but because it's so interesting, there are 50 people doing every single obvious iteration.

34:16And it doesn't mean some of them won't work, but it's starting to get less interesting to me. And so that's the stuff that we're mostly drawn to. and that could be in the fintech or enterprise or robotics space because all those have a lot of dynamism to them, but you're looking for founders that then come to you with the unique attributes, that unique, again, that ground truth that they've found through customer discovery and then those are the things we're going to do. And yeah, in this market, that ambitious founder might get that done at 50 or God's sakes, 100, Jesus Christ. And some of that's what's on the field.

34:58But really, you're looking for the shortages, I think, great ideas. That's the big thing. And then some of those get really big, as you've talked about.

35:07Ross Fubini: Yeah, I think the lens that I like to use sometimes is, especially in these moments where everything is so frothy, having been through some cycles, looking at a company going back to basics, right? And it's like, why should this company exist? And over time, will it be a fundamental part of our economy, right? Those are the big companies. Sometimes people say, oh, it's a 100-year company, that sort of thing. Will this company be part of our economy? Will it be something fundamental that's necessary, kind of an infrastructure in some shape and form? Even if I think about my lived experience at Google, to the world, a consumer company, but it's kind of infrastructure.

35:42Ross Fubini: It is how people for the last 20 plus years have accessed the internet and the World Wide Web. It became fundamental to the way we do something. I think in this moment where is it a trillion dollar, Is it a$2 trillion? No idea, right? No idea what that means even. I mean, if you'd asked me, I left Google in 2010, is Google going to be a trillion dollar company? I'd be, you're out of your mind. That's crazy, right? So the fact that it's now whatever it is,$2,$4 trillion, it's like, I'm a believer, but gosh, I wouldn't have not expected that 15 years ago. And I think in this moment, it's kind of back to like, does this thing become fundamental to how I do stuff every day?

36:17Ross Fubini: Is it infrastructure? If you think about that, I think it really cuts through a lot of the noise because honestly, I think it's hard to conceive of what's the difference between a trillion and five trillion. I don't really know the weight of that. Right. So we've talked a lot about these consensus bets kind of on one end of the spectrum. We've talked a lot about these formation bets. Right. Finding these early people with an insight or a secret and something that, you know, has yet to play out. What do you think happens to the venture firms that sort of play in the middle? Right. They're not doing the hyperscaling, crazy consensus stuff, and they're not doing the formation.

36:54I mean, Nick, I think it's so deeply hard. And my view of this is right now, and this is definitely talked in our own book, and it happens to be all of our own books, which is I think you're either this founder-centric investment firm. What does that mean for us? It means you've been there since the beginning. You believed in whether it's Chapter or Andrel or Apex or Cape or pick your example of your own portfolio. You've been there early and you've realized through all the steps, it's inflecting and you could put more dollars in. You can be that closer partner the whole way through. And that's an interesting journey to be on.

37:34I think in the other extreme, there's basically the platform players. And these directionally, I'll take away from anything here, but directionally your power is brand, and it's access deals, and you can employ lots of money, whether it is SpaceX at, you know, 300 billion or, you know, whatever, trillion, you're still making money from there up. I think, but that's the maturing of the asset class. I think those are where the two opportunities are. I think everything else in the middle, and I can think of a lot of names to name, they can be successful it's just really hard and I think the honest thing we talk a lot about partnership at the beginning of this I think a lot of them are fragile to that one or two good person in that firm that retires or that great person you thought was going to work out and they don't because they're really they're structurally disadvantaged if you don't have early and intimacy and intimacy to the business, or you don't have this brand where directly everything kind of comes across your plate.

38:43You can decide if that's the one you want to do. It's much more fragile. And again, I think this is less like we're smart, we're dumb. Other people are smart. I think this is just the full, the maturing of the asset class, the same way you could like gaze into the public markets and be like, well, these ETFs won and these quants won and everything else in the middle is fucking throwing darts. And that is just facts. And I think we're going through a similar maturity in the venture ecosystem. And that's what it looks like right now.

39:14Ross Fubini: Yeah, totally agree with that. I think that it's such a, the maturity asset class is driving so much of this. And I think you look at the size of funds and even in like driving these valuations, there's all these unique things happening over the last five, six years. The scary thing I think is, and I think about the asset class as a whole, there's been so much winning over the last decade in the assets class and not that much of losing. And the learned lessons and the muscle memory a lot of these young investors are building is probably not the best, right? Nick, you've been around for a while.

39:44Ross Fubini: Ross and I have been around for a while. I mean, when stuff goes sideways, it goes really sideways. And I'm worried about that moment. Yeah. See, I think the firms are going to be okay. Because I think at the firm level, there's always another. it's it's it's uh it's 2023 all your fintechs imploding but you're telling your lp's like i got this other thing coming yeah this is i feel like there's always like ballast in the firm it's like always selling the future exactly you know like that ship sunk but this one just went out it's gonna be great 2021 vintage is terrible for everyone let's forget about that yeah yeah though uh though i mean the part that does get missed there is there's a whole 23 was a funny example because there are all these people that got pushed out of firms because it had to be somebody's fault that we did all those deals it's like the firm's good yeah i'm good scapegoating industry yeah yeah just like you know it's like scapegoating humans being humans right it's tricky so i think i think the venture firm keeps keeps going yeah but uh but uh it's it's definitely more bruising for some than for others well ross if i've learned anything on this show vcs are are masters of the spin.

40:56Dude, you know this. Don't tell anybody. The job is mostly sales. Selling great founders you want to work with. Selling LPs. Selling execs to join your companies. It's 100 % that. Now, there's got to be, we all know, there's got to be meat to the meal. But like, all the execution is just, it's sales in all these dimensions. And I took me a long, that took me a long time to learn to understand.

41:26Ross Fubini: I had to reshape my brain coming from like operator world to understand what venture was. And now I really define my world in two ways. My job is to sell money and customer service. That is it. You know, I am always available anytime for the founder. That is the job. You got to love that part of it. And it's just like, everybody's money's green. What is my special sauce that I'm going to add? And who are my people too? I think, I think a little bit of the realization of like, not every deal is for me and I'm not for every deal. Right. And I think probably that's maturing and sort of what it means to be comfortable as a venture capitalist.

41:59Ross Fubini: Like there are companies, which are amazing. There's like, yeah, I probably had no right to see that deal and they probably should never talk to me. Right. Like, like I, that, that makes sense. But there's this other class of things. Like I should go win that deal all day long. That is my people. I need to seek them out. Yeah. By the way, this is also true. Really quick. I wonder, this is true of your experience all the way to LPs. these are lps the people that invest with us um we had uh uh during our our annual meeting we were talking about one company unfortunately the company wasn't successful and it came up in the agm on stage it was like it was literally like discussion like this was so sad like it was like like i was disappointed my partners were disappointed we were like saying that to the people and afterwards we had multiple lps come up like that was so awesome because they're so used to it's all up and to the right and it was an inadvertent thing but it's part of I think us as a firm and you know Chauncey and Art on the team and everybody else is we're very transparent and that ain't for everybody there's a whole other set of people where that doesn't feel comfortable again the transparency is maybe worrisome but they don't want to hear about the thing that didn't work because then they have to report that or if they have to say that or have that in their head.

43:20And so that's another thing that, again, finding your people, I think is a big part of venture from the LP side to your partners, to then the folks that you want to work with. And then when it does work, it feels, you know, it feels fun. Absolutely. LP firm fit, firm founder fit. The whole way through, right? Yeah. When it comes to the LPs, like somebody was just asking me the other day, ah, Nick, doesn't it suck that you have to spend so much time fundraising from LPs. And I said, candidly, do I wish I could spend a little less time on that? Sure. But fundraising sharpens the spirit. Like if you figure out why you're here, why it matters, the product that you're uniquely selling and work for it, work your ass off for it, then you respect the money so much more and you can pitch better to the founders.

44:14Yeah. A hundred percent. I'll give you two quick examples of this. One is we have a late stage fund that piles in dollars of things we've already done. It has a really aggressive underwrite on it, 5 to 10x underwrite. And one of the reasons for that is because it means we go after our most ambitious companies. The other reason is because that product, that's a unique for our LPs versus something where they can go like, hey, I'm looking at 2 to 3x growth fund and that's what you should expect and that's what they can get. They can get it from a bunch of different people from KKR to some other growth team.

44:54If we're trying to do something more ambitious, that's good, but also that's what the market wants and then you got to go, that has to show up, but that's the expectation. So that's a part that's been really helpful, really, really helpful.

45:10Ross Fubini: Love it. The other one, by the way, if I can, you mentioned the role, the firm, that you have as a partner. In my early days of being in venture, I knew a guy. I knew a girl. I knew somebody you could hire. I had an opinion about product. I'm like you. I'm a founder. I had this awkward point in the middle of my career where I just didn't want to be a goddamn banker that happened to show up early. and I mentioned that to say now I know our job. Our job is to help the company raise its next round of funding and what does that mean? It means the company, whether it's Apex or Chapter or someone just getting started, they're always going to understand their business better than we will but we understand the venture ecosystem, what it takes to unlock the A, the B, the C, now all the way to the IPO and can help that company plot that path and a trusted person that understands the company and can do that, like that's very rare.

46:15Like, and that's, you don't see it literally around the table. And so it's a rare point. I see you nodding and it's, I think it's probably the same thing you feel. It's like, that's like, you actually have a lot of value you can bring to that company if you can help them do that. A hundred percent. Couldn't agree more. I think that that's, at least from my standpoint, that's the single most valuable thing we can contribute because we understand the venture markets better than any founder should. And they understand their business better than any VC should. And speaking of founders, you know, we're short on time, but I do want to wrap up with founder profiles.

46:50And you've both seen a lot and you've had success. Maybe we'll start with Manish and Ross. I'd love to hear you weigh in because you've got defense tech experience, et cetera. But, Manish, do you think the profile of successful founders has changed in the past 10 years? You know, are the winning founders today, is there characteristics, whether they're objective or subjective, that are different, that are required in this AI super cycle to succeed?

47:23Ross Fubini: Yeah, I do think, I think maybe two thoughts. I think a founder is a founder, right? I think there are people that are unique, special, irrational. All those skill sets of being able to recruit people and having them go on this crazy journey with you, giving up their million-dollar salaries at Meta and et cetera, that is all, I think, the same. I think the thing that's different in this moment is I think founding has become much more performative. I think because of the media cycle and podcasts and all these other things, just getting your message out there, it's become performative at some level.

47:57Ross Fubini: And that's, I think, a little bit sometimes the dark underbelly of people can pitch their book, tell these stories, go on their TED Talks all the time, but are they actually building something of value? And sometimes I think that gets lost. And I think that is the danger of young people because that cycle now, we're past – it's now – it's a learned behavior. I look at my young students at Stanford. Some of them could be amazing founders, but some of them just feel like they have to be so performative in the media all the time to build their product. And, look, I'm guilty of this too, right? When I meet a founder that's like maybe a big influencer or whatever, you're like, oh, that's interesting.

48:31Ross Fubini: Like what are their thoughts on this versus somebody who maybe has no social media presence, right? Or you maybe don't even connect to that person. So I think in this moment in time, founding and entrepreneurship has become very performative. I think the way we celebrate people in tech and CEOs, if I think about Steve Jobs or Mark Zuckerberg, who are brilliant people but have become like celebrities, right? It's like the way young people kind of think about them versus like, well, they're a CEO of a business, right? And I think those things are not great for the, for founders because it's such a distraction from company building and company building is really hard.

49:04Ross Fubini: You know, that's always been hard, but now I actually have to have my like Twitter feed and all this other stuff too, just to kind of, you know, like running to stay in place. I don't like that part of it. Yeah. Any thoughts on that, Ross? Yeah. I just think it's, you know, so much grit to start and run these companies. I think that's that's the big attribute because it just like also this stuff takes 10 years and I mean I know Nick you know when the bond market is going to turn don't tell us don't tell us I know but it will or something else will and it's going to get really hard and your point it's not going to matter how popular you were on Twitter or how catchy your thing was, it's going to be like, well, are these people going to stay in my job?

49:55Did I find something when my market gets cut in half because all the startups in defense tech went away? They're going to go away. Don't know exactly which ones. That's the hard part. Those kinds of structural changes, you just got to be resilient so way through and just so, so, so, so driven to make those companies work. and I think that's going to be the measure of the people the whole way through. And I think that's just what we're always trying to figure out. In addition to like, you know, can they see the matrix of the company that we talked about before about what to build? It's that human element is very, very tricky.

50:37Very, very tricky to figure out. I love it. I love it. I've done a couple deals now with a firm called Altos and sit on the board with Honom. And he wrote this article called Foxes and Hedgehogs in Silicon Valley. And I still feel like it's one of the most valuable things I've read. They are amazing. By the way, they are an example of like in that firm, because we have a whole podcast to love us for Altos. On one hand, they are the Sequoia of South Korea. They see every deal, operate a brand, unchallenged in that country. And then they also do this intimacy early combos. combos. They're sneaky good at both of those things.

51:15So, you know, look, you know, one day XYZ is going to be big in Indonesia. We're going to be like, yeah, we got both sides of this coin done. No, they're amazing. Yeah. Really, really good. Awesome. A couple of quick wrap ups here, guys. If we could feature anyone on the show, who do you think we should interview and what topic would you like to hear them speak about? I mean, you should get Elon Musk to come in here and talk what his views about society. Let me call him now. Yeah, I like that one.

51:43Ross Fubini: That'd be good. Go for it, Nick. Yeah. All right. Do you guys have a book, article, or video that you would recommend to listeners? Oh, I'll tell you one of my favorite books is a book called Press Here. So I have a young daughter who's three. It's a book written by this French author, which is basically like a brilliant sort of mind trick of like you touch the pages and they do things, but it's just paper. So I love that book. I give it to anybody who's thinking about building anything. It's just so beautifully written and so simplistic. I actually have a full-on business book, and I read basically no business books because I'm bad at my job.

52:20There's this one book that's old called Good Strategy, Bad Strategy. And the basic premise is you should do things that you can do that cause your competitors to have to spend 10x, 100x the dollars to compensate for. And I think it's relevant if you're building against Andro or you're building against NVIDIA right now, or if you're the US government building against global adversaries. This idea of not like, I'm going to be 10 % or I'm going to get the upper hand. We're like, no, no, I'm going to invest in submarine baffling and make my subs really quiet So the Russians have to spend a bazillion dollars, every dollar I do, to find those subs.

53:04It has the equivalent just business stories in a really good-natured, engaging way that really resonated with me. And I think it's an idea of very much of the time. Do you have any habits or behaviors that are a secret weapon?

53:20Ross Fubini: Paranoia. Deep-seated insecurity is pretty good. Trying hard to earn mom's love. Would we be here without it? It's the only motivator. I do think one thing, we didn't talk that much about sourcing. I know you do in a lot of the other podcasts. Something that we do, I mean, Manish is a big deal at Twitter. I'm not on the socials a lot. Instead, what I do is I just go to my best founders and be like, John, Brian, Ian, who have you, Phaedra. I can't meet anybody as good as you. What the hell am I doing wrong? Who is the person that we couldn't hire you think is amazing, you used to work with, and I just go spend time with them.

54:08I kind of shake the founder tree to find more founders. And I think it works incredibly well for finding the next person to back. Also is a good strategy for recruiting as well if you're trying to build up your engineering team. Just spend more time shaking the greatness out of great people around you. All right, guys. And then what is the best way for listeners to connect with you and follow along with XYZ? You can always find me online. Just look for Ross Fabini. And LinkedIn is usually easiest. That's F-U-B-I-N-I. Also on Twitter and Instagram, a bit tougher.

54:43Ross Fubini: Yeah. And Manish Patel. Yeah. Manish Patel at Stanford. Sorry, XYZ. That works too. Perfect. Ross Fabini, Manish Patel, the firm is XYZ. Guys, this was a great ride. I had a lot of fun today and appreciate you joining me. Thank you so much. Thanks so much. Thanks, Vic.

55:07All right, that'll wrap up today's interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you. I can't tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that's a wrap for today. Until next time, remember to over-prepare, choose carefully, and invest confidently. Thanks so much for listening.

55:48Thank you.