20VC: 27 Years of Investing Lessons on Picking Founders, Price Discipline, Reserves and Selling Positions | Can Seed Investors Compete with Multi-Stage Venture Firms | Why Returns Will Not Worsen Moving Forward with Peter Wagner, Founder @ Wing

25:00I'd rather have been doing that in sales tech than, oh, here's a better CRM, unplugged sales force and plug it in. You see, I don't even know, like, to me, that's a fool's errand. You know, that's not happening. You mentioned Gong, you mentioned Pine Cone, you mentioned Snowflake. I think we also learn from mistakes that we make investing -wise. I'm just intrigued on, like, your biggest size -wise. What was your biggest size -wise? And how did that change your mindset? You know, Harry, like, my biggest miss is also one of my biggest wins. So, like, you know, we were seed investors in Snowflake, and then in Series A investors and we were positioning ourselves to lead this Series B and had a lot of conversations and I think a lot of agreement with the founders around a $10 million Series B that was a good size for Wing 1 which is a very pretty small fund.

25:50And then we underestimated how rapidly the venture market was moving in terms of the size of financings and that $10 million financing suddenly wanted to be a 20. The lead check went from six to 12 and we felt like we couldn't do that, you know, within Little Wing 1. So we passed. What a dumb move. Biggest, you know, adventurous bike, right? You know, this is our company that we were already working in and and because of the size of the financing, we still love the company, right? You know, but because literally because of the size of the financing relative to the size of our fund, we didn't step forward into that.

26:24And it's, I think, as an opportunity cost. Obviously, it's not a loss and an incentive lost capital, but as an opportunity cost, probably the biggest opportunity cost I've ever been involved in back to this thing we were talking about earlier about being the focused player in a scaling industry with large pools of capital sloshing around and this definitely informed my point of view of it. Why not do it? Why not just resize? Because I understand in terms of proportion of capital, you have to be cognizant of percent of fun size and how concentrated you are. But why not just resize given your existing knowledge of the company?

26:59Resize what? Like the fund? No, resize the check. You said it went from like six to 12. I'm saying why not invest just three or six? No, we didn't really have that opportunity. You know, because there was... I had to do 12. Yeah, no, there was an opportunity for a lead investor and then the existing investors, you know, were not backing off their pro -rata. So you're either going to do 12. Or just play your pro -rata. You know, that's what we ended up doing. But obviously in retrospect, I wish we'd invested the 12. and the firm that did invest the 12, I think it's like the best investment in their history.

27:33You know, the series be its snow. And so that's a big lesson learned for sure. I, one way I get to be fair on you, you're right. When you look back with rationale, 10 % of the fund would be highly concentrated in the early life of the fund. It's understandable. Yeah. Well, still painful. But you know, it's okay. I mean, we can laugh about it because obviously it's, you know, it was a great company. I think in terms of like actual losses, you know, like, like, okay, sure, it's fun to talk about, you know, a success and Pretend it's a loss, but like in terms of actual losses Here's I just want to you, hard pita.

28:09That's my weakness One of my very first deals like in my first year in the business, you know I I was spending a lot of time on the broadband build out and you know networking technology and I invested in this competitive local exchange carrier, a C -Lec, that was going to build out National DSL network because it just wasn't happening fast enough and there was so much demand for it. And this ended up being a huge win, the company went public, it was worth quite a few billion dollars and I was like wow that was that's great, let's do some more of those. And what I didn't really realize was sort of like it was an unnatural moment in time that companies like that could be built on venture capital.

28:48You know like we were doing high yield debt offerings You know, out of a startup, you know, to build out, you know, this broadband network and to quote one of my favorite co -investors, that works until it doesn't. You know, I went and invested like two or three other of these next generation communication service providers that were led to deploying broadband and voice over IP and all these cool new technologies, optical networks. and we were doing high yield offerings and, you know, and then 9 -11 happened, access to capital kind of went to zero for those sorts of things, and that there were some big losses that piled up there.

29:22I had one company where we had invested pretty substantially. I had Goldman Sachs and Morgan Stanley co -leading the IPO, which they never did even then. You know, so they were signed up as co -managing, you know, underwriters. Nine months later, company was out of business. That's how fast access to capital flipped, and for a business like that, if you don't have access to capital, you know, you don't have a business. So is there a less and no takeaway from that then? Yeah, there is, which is like some, you know, some businesses might be good businesses, but really aren't venture appropriate.

29:53And that's kind of what I took away from this. There's a lot of opportunity to build, you know, big network operations type companies, and you know, look at the build out of the cellular industry, for example, or, you know, the, But there's also a capital intensity and a sort of financial engineering elements to that that make it very difficult to think you're going to do that out of venture capital, which is really built more around a lot of IP, a lot of team tenacity and unique perception and you know more moderate amounts of capital. And so I you know I applied that lesson in other sectors later, steering clear of you know certain super capital intensive clean -tech projects.

30:33This is my question that which is now you have defense and military, you've got climate, you've got battery and energy, you've got a lot of like very real physical, heavy capital intensive categories that Vandran thus is applying into like never before or maybe you'll say history rhymes, but are they making the same mistake do you think? Yes, and you know and you can get away with it sometimes just like I got away with it with that early deal. If you can find you know other people's money on advantageous terms to fund you through the value of death there. Big important companies like Tesla wouldn't be what they are today if there wasn't certain miracle financings that occurred at just the right time.

31:18Then people see those sort of hero experiments and they think, well, let's do another one of those, not appreciating the singularity of the unique circumstances that actually allowed some of those situations to prosper. I think the nuance of every situation is often forgotten. And then we try and extrapolate so many commonalities, but there are so many intricate little things that lead to certain events happening. He spoke earlier about kind of being a prisoner in some mental confines. I had Peter Fanton on the show. I guess you worked with it excelled for... Yeah, Peter and I were partners for six or seven years.

31:55I have tremendous respect for Peter. You know, the day he told me he was leaving us and going to Benchmark was one of the most discouraging days of my career. Really, really missed working with him. Yeah, I think he's exceptional, but he's at on the show. Price is a mental trap. I'm intrigued from your many years investing. How do you reflect on your own sensitivity and relationship to price and when to pay up versus when not to? Right. Well, I think Peter's talking about that, you know, through the lens of early stage investing. Because certainly if you were talking to a growth investor, they would not say that.

32:31You know, like, like, President, why? You see when you're doing growth stage investing and ask any of the people that were piling, you know, large sums into into companies in 2021 and early 22, how they feel about price right now. And, you know, so price ruling matters. But in early stage, right, is there are some ways you can be over overly obsessed with price and it's not to say that it doesn't matter but I mean I'll give you two examples or two ways that I think about it. One and this is kind of obvious like a low price is never a reason to do so make an investment right so there's no no no price you know that is sufficient justification for for something that is you know otherwise flawed.

33:10I think some people call that a value trap. Then what about the flip side though and what I found is when I'm getting really nervous about a price getting too high, often actually what that also is, it's an indication that maybe my conviction is lacking. I don't have sufficient conviction around this investment, and so queesiness about prices is actually a symptom that my conviction is thin, and that's like, that's an important voice to listen to, because I might not actually be, you know, price may not be the, you know, the main thing that I'm worried about, but it's, but it's revealing this other thing that I need to pay attention to, so anyway.

33:45I had a conversation with one of my partners, they said, you need to be more open -minded, Harry. I said, why? And they said, because I bring a five on 25 tea, and you were just like, nope, you don't care. You don't care. And I'm like, five on 25, and we need to make a decision by the end of the week, is not a deal that I ever wanna do. I don't care. And the second part I totally agree with, no ability to actually really understand what you're getting into. That's a no fly zone, I agree. So I totally agree. I will of course do a 525 if there is the ability to build a relationship. There's an existing relationship many different things but the time compressed hey, and it's got to be very quick you're with me right?

34:25I'm not being unreasonable. I'm actually I totally agree and we you know we pass on things because the time compression all the time and how much do you Regress it less frequently than you might think You know if I just try and think of the times where it's like oh boy but yeah, we saw that deal, but we had no time to make a decision so we passed and it ended up being intergalactic. It doesn't come up that much. There's plenty of things we don't see and there's stuff that's outside of our scope that we just don't work on at all, but the stampede process, I think, I just don't think the best companies are built that way.

34:59Founders need to take their time too in understanding who they're getting in business with. This is a long -term life decision and I think the best founders do that, like when I met Edel Liberty, you know, the founder of Pinecon in 2019, he hadn't left AWS yet. It was like early 2019. I ended up leading that seed financing in the fall of 2020. That's how long that went on. And that was necessary, you know, both maybe on Dense and took me a while to get it. But also, you know, Edel was also very, you know, very persistent and I just, you know, came to know what he was all about and develop such sort of high regard for him and what he was doing.

35:40But it took some time to get there. And in the end, you might say, oh, boy, Peter, you overpaid for that seed project. Like we invested $7 million at 35 posts, right? I go, 35 posts for a company with no revenue and no customers and blah, blah, blah, blah. No, that's what we did. But I had conviction at that point around some important things. And I think in retrospect, we're glad we did it. And, you know, is that a fentonian case where, you know, we avoided the mental trap of price, mate, mate. What was Planckon's latest price? Yeah, it's measured in the billions. There you go. That works. Yeah.

36:15I can guess the price is one thing. People often think price and ownership are one that they're not. Like, ownership is very different still. How do you think about ownership in the right levels? Like, you know, I tweeted something this morning and then, you know, a founder, Dancer, Oka came back and said, Oh, I never let around be over 10 % dilution. And I said, well, that's very challenging because you've just excluded a bunch of great investors from ever investing in your company because the max, I guess, eight with two from existing. So it's a challenge. How do you think about ownership and what's enough for you?

36:46Yeah, this is a great question, Harry. You know, so when I got into the business, you know, there was the 20 % rule, like, oh, we need to own 30%. You know, and I'm pretty confused. Like, it went like early part of your meetings, I heard that and I'm like, why? Where'd that come from? Why 20? That's a number. Okay. What about some other numbers? Nobody just sort of, isn't it about how much gain you make and the return on capital and all this? I think it was just an artifact of size about comes and size of funds at a certain moment in time. I think 20 % ownership, with some delusion later on what constituted a good outcome at the time would return a fund, or maybe twice return a fund and so the math hung together, it was the relationship between all those things.

37:32All those things have obviously changed now. Fund sizes are different, outcome sizes are different. So there's no real reason the 20 % rule should make any sense, but I think that the logic that especially if you're devoting real time to a project, which is what we do, it isn't early stage lead investor, and not just time in the first couple years, but through the all life of the company, there's only so many times you can take a shot like that. So the result of the impact on fund returns needs to be of a scale, you know, that it merits that given, you know, the power law distributions and the statistics about, you know, how often a particular investment is going to work.

38:06And so it still argues for maybe not 20%, but, you know, pretty substantial ownership. If, you know, you're expecting really significant time intensive contributions from that investor. And I think one of the reasons why some other the founder that you quoted was able to do business that way is there's been so many new entrance that have pounded into venture that maybe aren't devoting that kind of company building craftsmanship to their projects and they're really pursuing a spray and pray strategy or a capital deployment strategy. And they think the name of the game is access and having 100 portfolio companies there's no big deal because they're not really spending any time with any of them.

38:48And so that's the type of investor that you'll get with that type of a model. Peter Aaronberg said on the show the other day, listen, with the massive increase in capital supply that we see in Tevantia, you will fundamentally just have worse returns. I think to your point there, you know, the movement away from 20 to probably closer to 12 to 13, you can pound that with dilution and fun sizes increasing. I'm not optimistic about the future of venture returns with Roger in that one. Are we being too negative and do you disagree? It's a cyclical business and so I think there are moments in the cycle when returns suffer and the factors that you described are part of the reason that there are other reasons but every time somebody pronounces the death of a venture you know then something changes and it's not the death of venture it's the transition of venture away from a boutique asset class to a commoditized industry like private equity where you have much lower Britons across the board in the same fashion.

39:46Yeah, no, and we've heard this before. This, this type of statement has been made at multiple times, even just starting, you know, the time that I've been in the business and it's, it's been wrong every time. What, what was some other time? I'm just intrigued. I want to learn from you. What was some other times when they said that and why were they unjust then? I'm just trying to learn so we don't make the same mistakes. Yeah, post 2000, we went through a large reset. And there was a lot of people doing math saying like, oh, you know, for, you know, all this capital has been raised and, you know, to earn a decent, you know, venture style return on this capital, then, you know, this amount of, you know, value needs to be created, which means this many IPOs of this size.

40:26And that's just not possible, you know. So buckle up for permanently reduced returns. And those guys were so wrong because it ended up actually that the outcome sizes did increase. The number of them did increase. Like what's going on is you just have technology becoming a more and more important component in the global economy. You can look at this just by measuring tech sector, narrowly defined tech sector as a percentage of global GDP. And that doesn't even count the technology enabled component tree that's in other sectors, you know, like financial services or whatever. And so I think just the relative importance of technology and its benefit in everything we do, it has increased so rapidly that it's kind of kept pace with the depressing factors.

41:11Now, it's cyclical, right? So there are times when you're overshooting and then there are times when you're undershooting, but, you know, sort of normalizing for the cyclicality over the somewhat longer term, I remain quite optimistic. You mentioned the cyclicality, though. I think people forget the sickle -cality of liquidity and venture sucks when you look historically unless you take advantage of very small windows of liquidity where you can generate outstanding returns, truly outstanding returns that beat all other asset classes. I'm intrigued from your lessons and experience on liquidity.

41:43What are your biggest lessons on liquidity management and getting out at the right time? Yeah, I'm pretty bad at this Harry so there's there's others there way better And this is true personally like I tend to hold the public stocks of portfolio companies that have done IPOs And I just have written many of them straight into the ground You know sometimes it works out well, you know though, and I think that more than makes up for it I still hold a lot of our Facebook investment, you know back from the Excel days Never sold a share of snowflake and you know optimistic that that'll turn out to be a good decision.

42:19But there's counter examples too. You don't control the environment. You have to just recognize it and act appropriately. I try and really listen closely to the management teams because they are so much closer to the action. If you're talking about should you sell a private company or not, their recommendations need to be really discerned and closely understood. I've made the mistake of not doing that. You know, well enough in the past. I mean, there's an example in my mind right now where there was a team that was recommending a sale. It was a little surprising that they were doing it. You know, they even had a buyer on the line and the board didn't even know this was going on.

42:57So like, what are you guys doing? You know, this business is going great. And, you know, and they weren't very articulate. I think they're a little embarrassed, you know, that they've been running this kind of rogue quartet of operation. And so, so we didn't, we didn't sell the company. And it ended up six months later that I fully understood the situation and it's like, oh, they were right. If only I had been a little sensitive and instrument and trying to understand where they were coming from. You know, you want to pressure test, but at the end of the day you got to pay close attention to what's coming out.

43:28The show's got more and more successful because I asked questions that I'm just too interested by. I asked Roger Aaronberg when he mentioned some of his successes, but a question that I think to a lot, which is, you know, you mentioned holding Facebook stop that, you know, Excel was a phenomenally successful period for you in terms of your wealth generation. Do richer investors make better investors because they are not so scared? Yeah, I don't know. And I mean, you could ask the same question about founders. This is like the argument for secondary sales and, you know, it's a very closely related point.

43:59I kind of think no. I think hunger is important for everybody. Some people stay hungry even if they have substantial personal balance sheets. you know, and they have these other things motivating them besides besides just just finances other things are trying to achieve or just their their personalities are wired a certain way. I guess I kind of go the other way on that. Vita, I want to move into a quick fire. So I say a short statement you give me your immediate thoughts because that sound okay. Sure. Okay, so let's start with what if you changed your mind on most in the last 12 months? Uh, the important importance of marketing in venture capital.

44:32Well, the industry has scaled to the point where just things like word of mouth and direct personal touch, you know, are insufficient to reach the market. And even though I happen to prefer working that way, but I just have to get over myself a little bit on that. You know, I never forget this GP in London, he's one of my famous and best in Europe. He said when I was 18 and I was doing the podcast, fucking podcast. No one gives a shit about podcasts, right? and I'm like, you're still not coming on the show now. And now every firm has a podcast. I'm glad that that's changed. Tell me, what's the biggest or best investment advice you've received that sticks with you most?

45:13Jim Swartz and Arthur Patterson told me, like, look, pick an area that you think is interesting and make yourself the world's like leading authority within it. Don't worry about what's going on elsewhere and chase after other stuff. Good things will happen elsewhere, but if you do this, it'll work out. I think that's right. That's why I'm always talking about focus and they used a term called the prepared mind, which was how they were describing being the world's leading authority in your area. It's a trade of many great ambassadors, but you have to be willing to be lonely for long, long periods of time.

45:44You could be a young person there in a large firm and say, I'm going to focus on Web 3. And Web 3 is in its winter period now, and may come back, may not come back, I'm not making assertions. But if you had focused and others around you had done enterprise or AI you are in you know the bottom half of the firm It's tough. Yeah, I mean part of that is you also have to be willing to call a spade a spade and sometimes you may have been Yeah, you know We're mining a particular vein for years and you just have to say you know what like no more So this this isn't fanning out like I I devoted a substantial amount of my time to clean tech at one point You know, just because and this was in like 2006 2007 2008 and it was because you know No one else at the firm was spending any time on it You know, I sort of felt like it was an exposure point and I was like, okay, look.

46:32I'll do so I'll do this at least with a fraction My time for a while and ended up I you know I think that my biggest contribution was keeping us out of those deals Berlin I'm tell me what's the biggest mistake you see young and emerging VCs make? I think overreliance on quantitative metrics in investment decision making and in early stage, I think the dependence upon this sort of suite of metrics as indicators of whether you should invest or not, it has its place, but like if it's over applied early on. Okay, so it's a crutch because they lack the courage of their convictions. Me asking you, how do you create an environment where young people don't lack the courage of conviction?

47:14Yeah, well, I mean it gets back to that enough rope to hang yourself, but also some guardrails to keep you from losing confidence and so pushing that accountability, but also that group support, you know, sort of in tandem is part of it. You know, I mean when you're doing, you know, like that metrics are great, but I mean, you know, you need strategic analysis, you need judgment, you know, you need a lot of other things that won't show up on the spreadsheet and you got to develop those skills too if you want to be a good investor. And so making sure that that is part of the program is important.

47:47What's the piece of advice you hear most often given that you think is BS? That venture is a scale game. I think it actually kind of runs quite the opposite. That excessive scale gets in the way of excellence. You can be too small too. You know, it won't be wrong and scale has its benefits. But I think it's a self -serving argument. You know, that sort of scale trumps all. I just don't buy it. Was it tough doing wing at Excel? You have a fundraising machine. I mean at best you rock up and say hi and thank you And then with wingers like you actually have to fundraise because it's your fund and you're founding a firm Was that tough just to make the transition?

48:24There's a lot of demand for unadulterated early stage venture capital You know being practiced by experienced people with a track record and a lot of the very best people with those track records you know, our within aircraft carriers now and the LPs are somewhat frustrated by, you know, okay, maybe I get to put a dollar in the early stage strategy and I got nine other dollars, you know, going across all these other strategies. And so when you show up with a pure play early stage strategy with, you know, people that know what they're doing, like there's a fair amount of investor interest in that.

48:54And that was certainly our experience in raising wing one and all the subsequent wing funds. So I think we've had a very positive experience and we're very fortunate in that regard, but it is, I think it has to do with the nature of the product, if you will, and product market fit. What's the biggest mistake you see first time found as make? I think choosing expedience over the hard things that actually contribute to long -term value. There's sort of quick fixes and sort of feel -good measures that can take the edge off, whatever is bothering you at a moment in time. But those chickens come home to roost, So, this might manifest itself in a hiring decision, where you opt for good enough instead of holding out for great.

49:36This might manifest itself in fundraising, where you should have taken ready friendly capital instead of partners that can really help you. And eventually, those accumulation of expediences compromise a company. PENALTEMENT 1. Zero interest rate environment brought some poor investor behavior. What was the biggest sin of the Zero interest rate environment period? A large amount of capital finding its way into the hands of the wrong hands in terms of the people that would be managing it and investing it. We're not asking you to name names, don't we? What is the wrong hands? Like people who are inexperienced, ill -equipped, not knowledgeable, what does know this wrong hands?

50:15I think all they love, you know, I mean it just sort of don't understand, you know, what it means to, you know, build a company and be a steward of other people's capital. I mean, I'll give you a name, soft bank. Why did that ever make any sense? And who was that? You know, who was that good for? You know, I didn't think it was fair amount of damage being done, you know, by large amounts of capital being thrown around indiscriminately, you know, sort of damaging the very properties it was investing in distorting industry behavior. And again, not just from that one entity, but you know, others that we can mention.

50:48So I think the distortions, you know, are real. Do you know why they're doing it today? You know, some of the rounds I see happening for the hot AI companies are ludicrous. And they're from the same players that Bluntney made the same mistakes last time. I'm worried it's happening again from these large aircraft carriers. Let's say you win model, right? I mean, so if you're managing large amounts of money, you have to deploy it. And if everyone's doing it, you won't be punished. You won't be punished for a mistake that everyone is making. Is I think part of what drives industry big? But that's an interesting thing that going back to the question on rich and raster's being better when you're rich One would think and I would think not necessarily having as much as others I wouldn't be so worried about being punished if I've made a hundred million what you're gonna punish me for missing a Supercycle fine.

51:34I thought it was the right things to it at the time Yeah, I think it's more institutional behavior than individual behavior Even if you have a large you know a large firm, you know, there's lots of people there institutional self -preservation is sort of the name of the game and I think a goal of, and no one will state this, right? But a lot of what's going on is you want to deliver good enough returns to raise that next fund at whatever scale you can raise it at. And at some point, your investors are so committed to the vehicle, they become like your allies too, because the last thing they want to do is say, hey, this thing that I committed to makes no sense.

52:13I mean, that's a brave LP, you know, sort of vouched for something from multiple funds and committed, you know, very large amounts of money to then say at some point, you know, this decision I made, you know, was actually a bad decision. That's unusual behavior too. So these things become self -perpetuating. Final one for you, Peter. Ten years time wing. It'll be 2034. If everything goes to plan, we often ask companies this, as you know, what does this company become? If I apply that to wing, if everything goes to plan, what does wing become? This is the original mission statement, right? It's to be, you know, the very best partner to founders building companies that matter in B2B technology, you know, from their early stages all the way through to a self -sustaining company of enduring value.

52:53Ten years from now, I won't be leading that charge. The generation of investors that we've been developing here at Wing will, you know, hopefully have taken it to new heights, well beyond, well beyond what my limited capability to deliver. I look forward to cheering for that. Peter, this has been such a joy. Thank you so much for joining me and thank you for putting with my wayward questions and schedule. Oh, thanks Harry. It's been a blast. Really enjoyed it. I want to say huge thank you to Peter for being such a good sport. There were some very prime questions that were completely off -scheduled.

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