20VC Roundtable: Is the VC Model Broken? The Biggest Disconnect Ever Between TVPI & DPI, Why Market Size is Dangerous, Why "Go Fast" is Terrible Advice, The Dangers of Raising Large Rounds at High Prices & Why Next Year Will See the Biggest Hiring Spree i

24:59We don't have product market fit yet. The job is still the same. But fortunately now we have time. We're not going to run out of money, which is to run out of iterations But now we have time when you have brought Mark that you know it the feeling is visceral and palpable and yes I get that it's a continuum But if you start to say real growth is the accelerated accumulation of attractive customers desperate for your advantage It focuses the mind on who you spend your time with and what success looks like and what revenue chasing looks like that isn't valuable. And that's what I'd like phenomenon Erics describing.

25:30I think the companies get in trouble because they get if they get engaged in revenue chasing. They have to make some artificial number. They promise to a VC and a spreadsheet. And so they go get that revenue anyway they can. And they they say yes to features that aren't added to the strategy or they say yes to customers who aren't going to stay with them over time. And next thing you know you have a leaky bucket and you have a screwed up sales model and your beauty economics go down. And it's because your marginal next customer should be increasingly attractive if you're getting product market fit, rather than what Eric described, which is the reverse, a lot of times they become marginally unattractive.

26:03But what Mike is saying is not something, in my opinion, that's very well understood among the people who are venture capitalists sitting on boards, giving direction. I have so many of our entrepreneurs say to me, when I talk about the kind of patients Mike's talking about, they say to me, well, my other VCs are pushing me to go faster. And I always say, well, do they want you to learn faster or do they want you to burn faster? Right? Because it does sound like you're that interesting, what you're learning. They're just upset that the lock box that you should have created, that we also encourage the founders to create in these moments, that you're not burning that down faster because they think if you do somehow, you're gonna magically get them the markup they want and the glory they want and the story they want.

26:43But they're not actually interested really in the pivotal question, which is what are you really learning about what you can do for your customer. That's a real problem, right? Because you're sitting on boards, including Mike and I are sitting on boards with people who are saying the exact opposite thing from what we're saying. And frankly, I think the advice is dangerous. And I go one step further, which is it is become the conventional wisdom of the industry, which is go faster. And what the hell does that mean? Does it mean learn faster? It's mean burn faster, right? It means what about it?

27:12What about scaling? Isn't that the solution to every problem? What's scaling? I think blitz scaling is this beautiful, beautiful idea of exactly what Mike said applied wrong in almost every context, right? And she's a lean starter and the blitz scaling are all applied wrong, right? You have true true product market fit. Okay, that's a magical moment. I do believe Uber had that and and what I saw You know, luckily being part of that journey as a customer as an investor. It was incredibly competitive Obviously lots of mistakes were made but the product market fit was extraordinary. And by the way, first mover did matter, network effects did matter.

27:48You know, there is this incredible blitz scaling burden and an opportunity to go everywhere once, which by the way has a lot of challenges to, but it makes sense in that context, the question is how many founders get themselves into that context? You have some scenarios where the product market fit is so strong and so obvious that the market will be satisfied. The end was involved with lift, right? well, Eric was involved with Uber, like Travis is going to raise a ton of money and go to every city in the country and every city of the world. And you're sitting here as lift, do you need to raise a lot of money?

28:20You betcha, right? Like the option to not raise a lot of money to be capital efficient is not available to you unless you're in a state of denial. Or like with Octa, we had product market fit. Microsoft was going to come in with our identity solution. The market was going to be satisfied. So the question is who's going to satisfy it? And if you don't go fast enough to penetrate the market in an accelerated pace, you'll just get out muscled by the incumbents or by the person who's willing to do that. But the problem is, I agree with Eric, we got to a place in the industry where people thought Litzkilling was the answer every time.

28:53It's really not. It's an edge case for a very rare condition where it's clear that the market is pulling these features out of the market massively quickly, and somebody has to fulfill that demand the first. So many times I want to show people say, oh, we think it's a market that's big enough for multiple venture sized outcomes. And that can very often be the case. But the actual outcomes vary extraordinarily in size. Respectfully Uber and Uber have been very differently priced today. How important do we think market dominance is when we think about enterprise value investing today and how that leads our thinking when investing?

29:30This is sort of counter industry, but I'm not a macro -market its investor. I just think in venture we all want to feel like we're smarter than we are. By the way, there is no market analysis on Uber and Lyft. I don't say there was none because clearly the world went the way it did. But I don't think anyone who is good at market analysis could have predicted how that played out. And I'll tell you another story with trade. Yes, one of the reasons we didn't raise a lot of money was we were the last ones in and people just thought it was played already in the in the programmatic advertising market.

29:59But one of the reasons we didn't raise that money is Jeff always wanted optionality to sell the company for a a couple hundred million dollars because he wasn't convinced he could build enough company battling. That's a good story. But he really didn't know and wasn't sure. He didn't want to have all this capital stack that he had to satisfy that would screw up the value. The truth is like a lot of the very best things we've invested in. There were so many reasons you could argue the market wasn't that interesting. And I think the markets that are the biggest if you really wanted to market analysis, they're unbelievably crowded.

30:29So then you get into like, or how much of that market can somebody really take? So we get into this sort of a little bit of a threshold question of like, is there a market? Like, do we believe there could be a market that is of any meaningful size? And then we stop and say, the rest of it, we don't know. We can sit around trying to feel really smart about this. It's fact of mics like, you know, can you predict the future? I think a lot of ECs want to believe we're in the future, predicting business. I'm not in the future, predicting business. I'm in the following people have very, very clear points of view about how they want to solve a customer problem of business.

31:02And when they explain that to me, there's like this magical experience I have of, wow, they really thought deeply about this. And they might be right and they might be wrong, but they're doing a lot of things that make me think they're gonna get this right. And I wanna go join them in this journey. And I don't spend a lot of time going, well, is it only a $3 billion market or is it a $200 billion market? It's a very dangerous model that makes you talk your way out of, what would you say was a market for Pinterest? You could either say it was all of the commerce in the world, maybe, or it's like a digital collection website.

31:32Like what, I don't know, does it even have a market? I think it'd be easy to talk yourself out of that company just on that basis. And it relates, I think, to the prices people are paying in seed right now. So like a variation of what Eric's saying is, some of these markets are so big, any price is justified in seed. I just don't think that's true, like not even close. And so I think even back to some of the ones that have worked, If you if you pay five and a half post for lift or like what what did you guys do Uber at like yeah It was actually if you remember crackly it was it about five and a half post as well.

32:05It's fourth rate The old days of adventure 2020 VC And thought 13 .6 percent of live for seven hundred fifty thousand dollars. Okay. Now let's say that you paid 20 post You'd have to invest two point seven million to get the same amount. Let's say 30 post You'd have to invest over four million to get the same amount now how big is your fund? How many deals can you do and if you can only do a fifth as many deals you're taking 5x the risk in terms of just the probability of getting Any equals more than one outliers, right because like seed funds are like crazy Ridiculously risky you need enough shots on goals so that if you have some skill you can get some outlier results But if at a given level of ownership you're required to vest 5x more You're either have to have five times bigger fun which means you have a five times bigger or you have to do a fifth is many investments, now your risk is ratcheted.

32:58So that's been my model. Well, it took me a while to figure out that means as a seed investor, and I tried to do late seed, okay, and there is a difference. Yep. At least half have to be win at real winners, at least half. To make that, I'll do the 30 post, right? The 20 post, I'll do it. But I have to believe there that with a relatively high degree of certainty, it will be success. That's right. It has, I did it. She's real. Half half go in, half half go in, and it's the same investor, half. Which means it has to have been de -risked. And so like I look at it like price and risk don't just have a relationship.

33:29They have an almost direct relationship at seed. Like the higher price you pay, the more risk you're tolerating by paying that high price. And the more risk take out, you should expect to justify that high price. But that's us what happening here. You know, you see companies with like two L O I is raising at 30 post. And like, you may, that's the problem. That's the problem, right? But you may make money on that one deal, but if you do a portfolio of those deals, that's a recipe for getting great I want to run a hypothetical for you for just a moment on left Mike and I'm not intermittent the story but to me if Zimride had raised six million dollars or to 30 post day one And it was Zimride right?

34:07It was a pretty big pivot that happened and they were burning, you know Just run the math the typical venture math of you know divide by 18 $16 million or divide by 24 so they're burning $3 ,400 ,000 a month and they're running out of money and they say You know if we're realizing that we'd rather be in ride sharing We don't really think this carpool thing is the right. I mean it was a different kind of carpooling thing But is the right approach? Let's go raise more money even today Would they find a market what a for for capital like for a company burning three four five hundred thousand dollars a month in the middle of a pivot with a 30 million post.

34:42My instinct is like, no, right? And I think some of the reason why you can get capital in that moment is because there's room for investors to give you another shot because your burn rates low. They can still come in at a reasonable price without trying to recap. Recapping companies that are not clearly worth anything yet. It's not a business anyone's in. Right? There aren't investors. I mean, maybe inside or is a little bit, but there aren't investors running around looking for opportunities to recap zero revenue companies. It's a different form of risk, which is the likelihood of success, in my opinion, goes way down for those companies, which is super counter -duty, because you're like, well, but they have more money at a higher price, doesn't that mean they're more likely to be successful?

35:23And I don't think so. But I think that's why the theory goes to actually the most attractive place to be investing right now, because many of them have been significant E .D. or ISPA because of the markets today. the price inflation is actually significantly lower and less than it was. And so you can get your two million Aeros, three million Aeros, with actually a lot of D -Risking done at 30 -40 million. It's a lot better than it was for sure. It's a lot better than seed it's right now where you can often pay 20 -30 for none of that D -Risking. I'd rather pay a 15 -20 % bump for that extra D -Risking, wouldn't we all?

35:55Here's what I think about all these rules, the 20 -15 -5 POS. They're all accurate, right 62 investments, but here's the challenge I always come back to like and I know there's math adventure, but it's a business of outliers. And so a lot of these rules make sense on paper, but like hooray the series A is at 30 post instead of 60, but if it's not an outlier it doesn't matter, right? It doesn't matter. And all these rules are so good, but do they apply to the ones you really want to invest in? So Jason, here's the thing I would put out there and I don't know if you guys would agree with me on this, but I'm becoming more and more believing this.

36:30I believe that the outliers usually start out at a low price because they're outliers, because they're non -consensus and right. People tend to believe that the world is divided between low price deals with low upside and high price deals with high upside. I don't agree with that. I disagree with that. And so I believe that most outliers, it's axiomatic that they're going to be somewhat unpopular and strange. At the time you had to decide at seed, most of the great investments in seed investing have been outliers at a reasonable price. But what's weird is it's not because we negotiated, well it's not because Eric negotiated well with Uber, we negotiated well with Lyft.

37:06It's because we saw potential that others might not have seen. That was the market clearing price for a non -conventional idea with a lot of risk. But to me that is the job description of seed. Like like that's our job is to find those. If there's too many investors paying too high prices, I think we just have to deny the premise of those rules. I think we have to avoid the tendency to wanna chase that because I just don't, I don't think it's gonna lead anywhere other than just indexing startups. Can I, can I put you guys on the spot? I, hands up first. I haven't stopped that discipline in a way.

37:37I was like, I either deploy or I die and into good founders. Have you done the same or did you stick to discipline? Yeah, so the, the way we think about the question, Harry, is, first of all, we do not focus on ownership. We actually think that's a very problematic mindset. There's a whole bunch of downstream issues, including, first of all, our missions about alignment with the founder, and the whole ownership mentality. You can twist yourself in pretzels trying to explain some notion of how that's aligned to the founder, but I don't think it's aligned to the founder. I also think it forces you into a position where you really can't be a great collaborator with other investors, because you always have to own, what you always have to own.

38:13So it becomes a great excuse to sort of try to create a context in which you get to express your conviction with a fixed rule of some sort. But I think to a great detriment both to the founders and frankly even to returns for a bunch of reasons. So we don't really focus on ownership. The other thing I'd say sort of on your point there is do we ever lose discipline on price when we see a founder really want to work with or we willing to pay more for sure. Right we look at price as one attribute across the whole decision making of an opportunity. So there are without question companies I would have invested in over recent years if they had not been priced so high.

38:48But given where they were priced, I just it just tip me in the wrong direction. The risk reward of this opportunity isn't where we wanted to be now. Well, we ever regret some of those. There's no question. We're going to end up regretting some of those. But if every single time I like something, I was just prepared to pay things that I thought the risk return on was kind of crappy. I don't think that would have been a great way to express our our work as investors. Right? So we are looking for, look for where this company is right now and what they're trying to accomplish. And us also feeling aligned in the journey, are they priced appropriately?

39:17And we do index that to what's going on in the markets. But yeah, when we look at something, we say, look, there's such a good chance that series A, this isn't going to be worth anything more than what the founders asking for today. That doesn't seem like a very good risk reward trade off. And I don't think the founders often appreciate two things is how much they're turning off investors. that might have been good investors for them, but even bigger, how much risk they're actually taking on their next round? What this round does in terms of creating risk for the next round? I think founders have lost all perspective on the risk they're taking on the next round.

39:49I genuinely believe it's been... Venture has been so gamified the last five years and everyone's to blame. Everyone's to blame. I just don't see raised 1 .5 to 200. It's just a get... Even to the best founders, it's a number. Literally the smartest people I have worked with is just a number. It's just... It's just... It's unsolvable, I think. I remember what I was a founder, and I was raising money, people say, don't raise it high price because if things don't go well, you're going to be a bad shape. Well, you're like, I'm going to be the one that wins. That's why I'm doing this. If I didn't think I was going to win, I wouldn't do this start up.

40:18So it's possible to get into a headspace that says, well, this may not work out, customers may not want what I'm selling. You have to believe even when you don't believe when you're a founder. So I think it's hard to get somebody in the headspace of quantifying risk like it's an investment thesis. I think they either think they're going to succeed or not succeed. For investors that a founder wants to work with, they will actually accept, you know what? I don't need to optimize. I'd rather work with this investor. I think it's a better opportunity for me than let's say some party round of investors or some investor.

40:52They gave them very high price term sheet, but they're not excited to work with you know when I was graduating from college, my mom would talk to me about all these other kits that she knew around my age, getting amazing jobs at Morgan Stanley or Goldman Sachs. And what she meant is these are good brands and they're high salaries. And I was like, I don't know why you think that's an amazing job. Like what makes it an help me understand, because maybe I'll go pursue it if you help me explain, if she can explain to me. Why is that an amazing job? But I think it's a lot of the same logic, right? People who self -select to realizing that those brands and those jobs are not what they're really looking for, even though the salary might be higher.

41:28pretty quickly realize like this is not the optimization equation that I'm chasing after. Now that doesn't mean there are lots of people I try to explain that to and they don't want to hear it. I totally agree with you, but there are a lot of founders who really do get that it's not the optimization they're most interested in. The distinction I would make is that it's less about do they believe they might not raise in the next round. It's more just like, hey, I want to work with Eric. So I value the advantage work with Eric. I'm willing to take a little bit more dilution or lower price for that privilege, right?

42:00Because that's how I'll work with who I will work with. I just think of it as a different optimization and getting out of this motion that the only optimization that matters is the price of your round and the Dollars I think at 20 % I think a great founder will take a 20 % lower or delta term sheet to work with a high someone they really want to work with. We on 20 I think it may be mythical. I think it is a lot. The other thing I was gonna share on this, I was talking to another investor, founder, from the West Coast this past week, who is saying look, the advantage of a lot of money at really high prices is that's where the talent wants to go.

42:34And I think that's been true, but it's actually started to become a little less true. Because I think there's a lot of talent who realizes, boy, that's a big capital stack for a company at that at your phase. Wait, you only have $5 million, dollars and you're bragging about your 300 million post -money valuation and the 60 million capital you used raised? I'm not sure that's the best place for me to be. Some of this stuff is starting to shift a little bit largely because so many of these unicorns are going to be, you know, unhormorant or whatever the right term is unwinged, unhormed. I think it's true for the seasoned folks, the folks that have been around for a while.

43:06I'll tell you, I've interviewed 10 or 15 up and coming first time had a sales recently. Okay, out of jack -a -corns and unicorns with good outcomes, every single No kid wanted to join whatever a heptocorn or pentadeca corn. No kid. I put kid in quotes. It could be any age, but they all want to go work at the hot start. I'm proud. I just think it's the more mature folks that maybe view it differently. It's by the way, this is I think another facet of what Eric was describing earlier, the problem of raising too much of my two high prices. It totally distracts you from the real question, are we getting product market fit?

43:39If somebody's saying I can't hire a bunch of high priced, prestigious people in my company, unless I raise crazy amounts of my crazy prices, you're answering the wrong question. If you have product market fit, you're gonna be able to hire at will from the best people all the time. But like if you don't have product market fit, you have a first order question that you have it answered. And that's what the purpose of the round should be, and that's what you should partner with, not based on nonsensical, status seeking silliness. Or sophisticated folks, if you're new to the industry, you're looking for everyone has to look for signals.

44:08As a new hire is the first time, you've gotta look for signals, right? and listen, we can mock a unicorn round or a deck of a round, but I only get one job at a time, right? So I get to make 20 or 30 bets as a first time at a sales. I've got to look for signals, right? So I do think these signals matter. This are using favor to some degree what you're saying, but at least I'll throw it out there as advice. If you're coming into a company as a senior executive, and you have a CEO who's bragging to you about how big their last round was and dollars and how big the post money was, ask to see the financials and compare those financials to what they're claiming in the vanity met in the vanity of financing.

44:42Because when you see that massive disconnect, where you're like, wait, that's crazy. Like this company hasn't done much yet. You're in a pretty tough place. That is a place that is probably not gonna play out the way you wanted to. I can't tell you how many VPs I interview all the time. If from my own portfolio companies, like ethical founders, and I ask them, well, what do you think of the metrics? They don't know them. Yeah. I would say nine times out of 10. In the interview, I'm explaining Harry looks like he lost all of us. So you have... or hairy, so like lost control of the state. My question to you is that there's a huge amount of these unicorns with these ridiculous valuations in a million in an hour.

45:17What happens to them? There's this year thousand. So what will happen to unicorns that are doing okay? But they're never going to get back from that last round price. What happens to these hundreds and hundreds of unicorns that aren't that? I think the answer to question areas is a little bit of a depressing one. One of three things are going to happen to those companies. They're either going to take the extraordinary amount of cash they got, cut their burn rates down and figure out how to build real companies. And by the way, many of those will still never raise money ever again, but they'll build real companies and find real exits.

45:44They're going to try to kick save somewhere because they might have something kind of working and they're someone out there who's willing to buy it, but it's going to be for catastrophically low price relative to the valuation. They're just going to go under because it takes them so long to realize that this extraordinary amount of money they raised is actually liability, not an asset, and they're just can keep going because they're going to think they can figure until they make it and nobody's ever going to fund them again. Again, like, if you're recapping a $100 million revenue company at a billion dollar valuation, but it really should be recapped, people will do that work.

46:17But if you're recapping a $3 million run rate revenue company with a billion dollar valuation, there aren't a lot of people who are willing to do that work. Right? It's just not work that people want to do. Do you think these founders, do you think of the thousand unicorns that all makes sense? I think a lot of them will will quiet quit. Yes, like I raised 300 million to billion I can't see it Eric great There's a 200 million dollar exit and y 'all get a carve out and I'll make some money But I can't recruit a team anymore. It's too much work like I just I'm not gonna truly quit But um, you know, I'll go to Spain, you know, I'll do whatever I will work three days a week in my side I mean, I just it's almost natural to quiet quit if the way if the way does too crushing right of expectations I think sooner or actually in a lab quit, you know other allows you to still be more like quits too.

47:00See ya, see ya. I mean, I think that's a great year of forgiving money back. I really do. Like I actually think that if you want to maintain your... Give it back. You want to maintain your integrity and you jona product market fit, you raise money to crazy valuation and you don't want to have this thing as burden on your back for possibly years. And by the way, the quiet quitting thing doesn't really get rid of the burden. Maybe you don't day to day stress about it, but career wise, it's still sitting there for you. Giving back the money on your balance sheet makes sense in that context. But I think that has to come from the founder.

47:33I mean, I think that's the learning, right? It's really in ships with their investors. There's a difference between, you know, an investor walking in the door and saying, I've lost faith in you. I want my money back. It's like, what if I don't want to sell their company? You say, yes. You should probably sell your company. These these selling the way are I think are nuts. I think similarly here, you know, there have been times where I would have loved somebody to keep going because I really think they would have found their way and they just, their heart wasn't in it. But I'm jogging about when the founder is an honest relationship with their investors and they're talking about, look, weren't it top place?

48:03I'm trying to figure out how to handle this. It may be the right answer. I offered to give money back as a founder, right? For my series A, when I wasn't sure, they said, keep it, right? Stuart Butterfield offered to give his back. I think my learning from Harry and Eric, you can't ask. You could nudge, maybe you could send a link to this old article on Stuart, but if you are, for a million reasons, it doesn't work, right? There's no point in asking. I don't think there's any point, right? You would go as far as saying it's quite inappropriate because I think the assumption of asking in a way, I mean, maybe for the only investor in the company, but the assumption of asking away is the sort of notion is the VC, well, that's still my money.

48:37It's not your money. It's the company out money. And there are multiple parties to the table and stakeholders that need to be thought of. And so to be like, hey, I'd like my money back. You know, that's very different. Like, what's the problem? So I won't do that where the company is. and here's a range of options, right? And you could say, look, one of them might be, we send the money back. You gotta be very careful where you're crossing that line between, I'm starting to act like this is my money versus I'm one of numerous parties, and I acknowledge this is the company's money, this is not my money.

49:08What if you're actually doing it because you're aware of the damage that will be done to them if they don't with the lead investors who would maybe not say good things about them, maybe not fund them in the future? There are cases where I've been an angel before I was a hey I would probably give the money back than 60 % left. I don't mind you can give it like 25K of my money but actually way better to give back 60 % say we tried it didn't work but thank you for your support and I'd love to come back to you when I do my next company. Then run down a clock that you kind of know isn't running down and lose the big firms money kind of pissed them off with lack of progress and losing their money when actually you can have saved your most valuable resource which is time anyway.

49:48I think the truth is the big firms is they barely care. That's they barely care, right? Barely care. Yeah. Yeah, I think it is completely, in most cases, quite disengaged capital. Sometimes you need them to do basic things just to complete a sale or whatnot that is very important still to the founder. And you can't even get, but this isn't everybody. There's some great funds out there. You can't even get them to sign off on documents, right? Like if to call your other VCs to make phone calls to convince them to respond, I think we've had a period of quite apathetic capital where it's like, well, you're important in my portfolio I care and if not I don't care and I think frankly being in business with people who don't care There are actually some upsides, but mostly it's not a great place to be I have one of my top investments right now like I mean there's a few asterisks and daggers But there's nothing not to love okay double digits an error growing triple digits a very multi -billion dollar fund Let the precede owns 15 % of the company asked 28 times to just show up to one board meeting just being an observer Just come to a one board dinner we had a while back that was 40 minutes from their home Nuts nuts won't come to a very nice won't won't do anything nothing for 15 % in the precede right?

50:58That's just it is what it is right, but to me it's there's like nothing not to like about this company other than it might not be snowflake Right, he's just one go to the big problem of the unicorn hunting the whole business is outliers all the matters is outliers mindset which is anything that's not an outlier you're irrelevant but these are still people's lives right? In every word of life. Well was everyone of our best companies, well with every one the founder founded something before that wasn't a success. Even if you say from a self -interested standpoint which I think is kind of lousy given how many employees were talking about how many individuals were lives that they really care deeply, deeply about the company.

51:35Even if you say self -interestedly behaving like this, I think has a real cost. And it's one of the reasons people love around Conway and Ernst Street always took such a long view of his role and his job. Instead of treating people like you just described Jason, which I know you would never do, but we see this, we all see this and it's a spotlight. Jason, you know what I mean? You know what I mean? You're a response whether you're cool up in the atmosphere and say, hey, get to the board. I tried four times. Now, how many emails and zooms can you do? is especially the great deflection is being nice.

52:07See if they're at jerk, then there's a playbook, but if they're just nice, but I can't make the wedding hair nice, but I can't, I just can't, I'm off. I just think it's going there. I think it's interesting sign of the time. So when I started as a founder, you would, I would never see this activity, right? You never seen someone own double digits. You know, a top, a top performance start up, not even show up to one board meeting, but it's the side of the time. Can I just direct conversation? I do use one of the ones that's for LPs that are asking is every LPs asking you. How should they view the pro -avantage?

52:36Almost the entire investment world is a momentum investment world. And we all have our time including, I mean, I think of the big -dollar sopurns are also momentum investors. Why? Well, because any asset class that you see appreciate like crazy over even a short period of time, you start wondering whether you're foolish to sit it out. And so money just flows like crazy into these things. And you've got to decide as an LP, do you want to be part of that momentum investing pattern and then go find the best momentum investors. And all four of us have an idea of some of who those folks are in our industry.

53:08And by the way, when you bet on those momentum investors, when a cycle shifts, they're gonna get destroyed. The best performing fund of the dot com error was the fund that had the worst outcome after that error. When I need to name names, but I think most of us know that was. And I think you just gotta decide, like do you wanna be a participant in the momentum? It's not that hard to figure out who's really good at that game. or do you want to work with people who have a much longer view? And then you've got to figure out who's a fit for that game. There are good times to be buyers in our industry and there are good times to be sellers.

53:38Rarely is it both. It's rarely a great time doing a buyer in the seller. In 2021, one of the incredible times to be a seller. And anyone who didn't see that was completely playing momentum. So you can't sit it out, adventure for a whole bunch of reasons, and I don't think very many do, but I grew it in like, that was a go slow time because it was a lousy time to be a buyer. It was very hard to buy if you cared about what is intelligent buying and I joke I tweeted this But I never felt more like a day trader in my life. We it was covid We're all sitting in front of our computers We do pitch after pitch just one after another after another and we'd have no time to get to know anybody They would just say hey listen.

54:15I have a turv sheet. We'd love to work with you guys Are you interested by the way the price astronomical? What do you think felt like a day trader? I think there are aspects of this business back to thinking fast and slow which Mike mentioned But there are aspects of this business where thinking fast can be very valuable But I think the really good investing is not thinking fast. It's generally thinking slow and that period was not very conducive to that Do we get a mulligan? Does anyone get a mulligan for that? I don't think so. I think it's it's indicative of What type of person you want to be in business with because we could have another bubble Maybe we're starting it right now with AI that goes crazy right now And you might want to be in business with the best momentum investors for the AI bubble because there might be enough outcomes comes fast enough that there's real money to be made there.

54:56And you just have to decide, like, how do you think about investing as a LP? And then, yeah, you maybe don't punish the guys who had the crazy momentum because they got wiped out after that because you get it. Otherwise, you're just a momentum investor too, which is, that's fine if that's what you want to be. Said with a tiny bit of cynicism, but yeah. I agree with that, but when I, the thing about, LP's a tough job, you know, it's, it's so slow and you have to have your own outliers. I don't think you could say too many times on 20 VC that you can't make money in venture unless you invest in the best managers Right, and then the best managers most of them peak and then you end up investing when they're in their declining faces and hopefully they've built a team under them, but like it's you might as well invest put it on QQQ if you can't find out Lier funds right it's so hard, but what I would say is what I've learned from my LPs if it's a small base But they're good is listen you have to have a construct and if you don't allow They're all going through some sort of Mulliganism because otherwise you can't you can't survive You've got to take a batch and say this one's bad and for many folks.

55:53It's not just that the distributions have been awful You know if you don't give you if they don't give themselves a Mulligan They they may have trouble with their with their own sources of capital and their own jobs So I think Mulliganism is gonna go up and down the stack because LPs after survived too Jason You beautifully teed me off for one final topic before I let you go You said distributions that the question that I'm asking is what will crack open IPO Windows We saw on price way up on the first day. That was a surprise. I wasn't expecting that. We saw Plavio now I'd say being priced at upwards to 6 .8 billion.

56:26What will it be that will crack the IPO window open again? So I have a funny view on IPOs that I'm not I'm not sure is very popular, but I think there's sort of this first Well, the succession with going public that is kind of unhealthy going public is not really what I think most people think it is It's certainly a liquidity event potentially six months later or more for investors. It very rarely is for the founders or management in a meaningful way. So I think the question for the founder or the CEO or the management team in these situations is, do I see a very, very long road where I want to be building this business?

56:59And I'm really excited about where at least do I believe this business will thrive over a very, very long period of time? And if that answer that question is not necessarily annual liquidity, it's a great company to sell. Don't go public, right? I think the SPAC craze was just a waste of everyone's energy a bad idea And I'm not saying there weren't any good SPACs, but generally speaking it was a path for companies that were not ready to be public companies To go public because there were financial sponsors who made money taking them public and there was glory and then the next day There were a public company and they weren't really ready to be a public company and by the way being a public company if you're not ready Is miserable.

57:34I think if you're a strong company you can go public in almost any period of time as long as the market volatility is not insane like the great financial crisis. If you're really ready, you probably can go out in almost any environment. Certainly gets easier when there are other people doing it and getting good results. The other thing is who cares with the first day prices? I just think it's like this obsession that's just kind of silly. I think the reality is if you're going to go public because you think you're going to be able to value over a very long period of time. Just because the market isn't friendly in the first three months, who cares?

58:05That should not be how these decisions are But again, this is all part of the short term thinking of the people who get to benefit in the short term. Instead of the long term thinking of the people who really are the ones building value. So it's sort of like the builders versus the trans actors. I can let me put this back when you then Eric. Stripe in the next six months. If it were to be priced at 15 to 20 if you'd a market as a comparable to Andy and if you had your long -term view of it being a $200 billion company in 10 years, it probably should do that. Yeah, I think if they have a long view on the company who cares what the price was in a moment at times It's just another example of why over capitalization over pricing Causes so many problems, but if you're a striped investor got it a hundred billion I don't really understand very well why you would be upset about from going public a 20 billion Either you eat well, hold on Lesson I'm with you.

58:56I'm with you Because it's embarrassing or because you owe up paid a moment in time But you're captive to that. That's a fact now. So the question really is do you believe the companies ever going to return for you or not? But if the company's ready to be a public company then sure like you'd rather have access to liquidity when you want it Then just have it be private forever as if like private companies valuations are not going up and down anyway We just don't see it. We just pretend despite the private companies are more volatile than public companies in truth We like pretend they're not at all volatile and somehow their valuations are whatever happened in the last round some months ago I just think it's silly and I think if you came in at 100 billion So let it go public at 20 billion It either will become much more valuable in your return or you're gonna cut your loss at some point and accept the fact that it's ever worth that But I don't understand this obsession of like well the day it goes public somehow it has to be worth more than What I paid it makes no sense There's only one window where I think you could argue being somewhat short -term makes sense.

59:58Inventure you get these acceleration period windows like late 99 early 2000, what we saw in 2020, 2021, where companies are valued in ways that are detached from their fundamentals. I think a big part of success in venture for better or for worse is you have to have enough companies in flight at critical mass in those windows. Number one, and then number two, you have to be smart enough to sell. And so as much as we loved lift and opta, you know, in those years leading up into 2020, we're like, okay, we demonetize these things, right? Because there's a lot of excitement about tech stocks right now, and these prices are really high.

1:00:36And so I think that it doesn't happen very often. It may not happen again for another 10, 15 years. The next 10, 15 years, it's companies, I think, are going to be much more valued on fundamentals and what they're really worth. But there are these windows, usually last about 18 months where the difference between selling then versus not is massive on your returns. Those are great windows for selling companies. I actually think the IPO inflation of those periods really has long -term detrimental effects. It's very urgent work for a company that went public at 10 billion that today is worth 1 .5 billion.

1:01:11Very hard. You're all just rowing for the whole company. Yes, so the best of these Cs in 2021 were not doing that That made deals because they were selling. The people that impressed me most are those people, right? Then I know a few. I'm not sure they want me to measure who they are, but like, there's a lot of people I knew who understood what was happening and were like, right now it's time to sell not to buy a few. Did it? Yeah. A very few. I've waited a few. I've waited a few. They were in some of the same companies as others in those same companies and their funds 5X better or 10X better than the people who made the same investment decision.

1:01:46Here's everyone's thought on these IPOs, right? Going to some of the points. Actually, myself, I've made maybe five investments that are seeded that are now at 200 million decent growth and efficient. There all be to be, Clayvios is going to be worth, I think, close to 10 billion. Everyone's planning, and there's a right, it's just part of life, right? My concern is that multiples remain mediocre, right, for all but the best. And if folks that are doing 200, 250 million, that there's nothing bad about them, trade It's six times revenue seven times revenue. So on one level so be it right but the cascading effect I think on venture in B2B hasn't been yet been felt I don't think that's been felt and if great ones are worse sub two billion I actually think a lot of this model's broken and I worry we're gonna have heartbreak coming if multiples don't Reflate and maybe it's all interest rates and zirpen, durpen, warp But I think these are all great companies, but I'm like God if these are if these are one point X billion and people aren't gonna wanna do even the three or four or a million dollar rounds, right?

1:02:43This is gonna cascade all the way down the stack. I think these good ones are gonna IPO in the second half of next year. I have a lot of money with Harry that it's an IPO week in the second half of 2024. I just worry about the multiple. Hey, that no return to normal, Jason. We say like, oh, they need to. Even in me, I hope they're all worth at least 10X. I'm a bit of 10X kids since I served as a founder. 10X, 10X, 10X, but the markets are at 6X, right? Unless you're at this snowflake data dog level, they're at 6X. It's not a great multiple. I think the dangers we get this very fixed mindset of what like the world's supposed to be.

1:03:16It's supposed to be a number. And I think the reality is the world is a pretty big range. Mike used the word before a probability distribution. The world of the probability distribution. The reason it's a number, right? I think a very healthy way to think about the value of a company is, and this sounds crazy, but it's, you're going for your series, whatever, series B. And you say, look, the value this company should be somewhere between 80 and 150 million. That's a big range, but that's actually the reality and by the way, it's true in the public markets You know, it's like you take a public stock and you know, what's a fair multiple for a healthy SaaS business?

1:03:49There isn't a fair multiple like it's a fixed number in a moment in time interest rates change the market change right now The risk for your rate is 5 % it's a pretty real number, right? And so I think the idea that there's a singular right is what's wrong, right? And I think the reality is SaaS multiples for good companies are probably five to 15 times to huge range You gotta kind of get out of your mind. I'm not used to specifically chasing all of us, like me too, that there's like this singular number. And then the crazy thing even within that is people have to extrapolate the number as if two companies are exactly alike and no two companies are exactly alike.

1:04:23So people start throwing around these things are like, well, there's no way a company could be worth more than 12x right now. Or well, if it's growing faster and it's more profitable and it's sure it probably should be worth more, right? And so I go to some of my SaaS companies that are having a lot of challenges and they're convinced of EC should pay exactly what the Top quartile is in the market and you're like, I don't know if you want to look at columns you're probably bottom quartile of those companies Right, but no one wants to hear it and everyone wants to sell You know, it's like you know, it's a salesy mentality Of course we all should be to some degree try to lean into our best attributes or whatever we can get But I just think it helped your way to look at it is there's a range and there's a probability distribution and the markets are going to move up and down and build in trends and value.

1:05:08That's the biggest thing I try to say to our founders. Focus. This is all the side show. Valuation is all the side show. The dilution isn't even your financing. The dilution is how you use your burr -ray. That is where all the dilution lives. Are you creating value from that burr -ray? Are you comparing negative value from that burr -ray? That's the whole game. In trends and value, focus on that. The rest of it, you can't time markets. They're going to do what they're going to do. I'm aware of time. I do want to finish on on and bad. Me and Jason quite like that, especially when I win as many of I think I will do with his optimism on IPOs.

1:05:41So what bet will be like to place? Is there any that comes front and thand to you? I would bet the last few years will be one of the biggest disconnects between TVPI and DPI for venture funds in venture history. But I don't know if anyone else will take the other side. I've only anyone who will take the other side on that. It's amazing how many LPs I talked to you. We still are not there. And how many VCs I talked to, who are you with me on that? There are definitely people on the other side, maybe not this group. That derivative one could be, I'd like to, I'm usually trying to be pitty, but the pace of hiring next year, I think will outpace anything anybody expects.

1:06:15I think I'm worried about public multiples, right? Is my number one worry? Actually, don't think venture fully makes sense. In B2B, I generally don't think it works, but I think the re -exceleration that I see in cloud is happening so quickly. And Salesforce just said today, you know, they laid off 10 ,000, they're hiring back 6 ,000. Sam Sara just crossed a billion, they said they don't have enough sales capacity. They're hiring sales people as fast as they can in a billion of revenue. This reflations happening everywhere, even with interest rates, right? Even with everything. And I think we're not predicting what that J curve or that logarithmic curve is gonna look like next year.

1:06:49And I think it's gonna change everything. I think everything's inflating because cloud spend didn't take a pause. Cloud spend is still growing at double digit rates. Right? No matter what happened with our portfolio companies. Something around hiring or acceleration. I think hiring, I think average hiring will be like 20 % in public leaders next year. I think they'll be hiring 20 % or more. I think layoffs are so far behind us. 20 % or more, I think the average public company will hire next year. Would anyone take the other side of the 10 grand? I think the hard thing for me, and I don't know.

1:07:18I just judge you from my... Just night bike over the years. I bet it's cooler. I am so not macro in the way I make decisions or do things I actually don't have an opinion on Jason's question and I think there are a lot of people who would say well Embedded in your job is the requirement to have a point of view on that and I actually don't think embedded at all in my job Is is the requirement of a point of view on that so it's a it's very interesting me even just like listening to you a lot Jason over the years and recently with Harry I actually always enjoy hearing the macro of you like like it's one of the reasons why like I've got a no Seth Claremont a little bit is like I'm super interested in people look at very broad swathes of what's happening in the economy We should have a very micro view of how we do our job So I don't have a I actually don't have an opinion on that Yeah, for me the job is sort of like you know when you're in the Galapagos Islands and you spot some finch with a weird looking beak That nobody's ever seen before that's kind of what Eric and I try to do right?

1:08:11It's like bird spotting you're not like it's not very macro It's like these companies come one at a time and it's the first example the world's ever seen of that company And we may never see one like it again And it's like that's the filter we've got to have tuned to volume 11 and the math Romarkets gonna do whatever the math Romarkets gonna do spotting those companies early is kind of It's just a different type of intelligence if you could call it that and then you have to it It's like an eight to fifteen year journey with that company so the market's gonna do a lot of things over that time and it's gonna go, you all kinds of crazy.

1:08:42I think the weirdest thing over the last 14 years I've been doing this is that the market was largely straight up and so the right for so long, right? I mean, there were little blips, the debt ceiling defaults, you know, and the mark down of American credit. Like there were, but those things lasted a few months and then boom, market just kept going until late 22. So I just think of it as like build intrinsic value, the markets will go up and down over time and you're gonna get exit windows eventually. And some of the best things we've done, they've just taken a really, really long time. Like Seaky was a 2010 investment.

1:09:15I think it's a great company. Dave led that for us. I think it's going to ultimately have an amazing liquidity event for investors and for anyone who wants liquidity. Does that need to happen anytime soon? And are we reliant on the market for that to happen? Maybe the timing of it, but I don't think we're fussed that much about the timing as long as they keep doing what they're doing. The other crazy thing to add to it, just sorry, I just can't help myself, is like so many times in my venture career, illiquidity has been helpful, right? In the sense that like, Thank God, yeah. Right. Like, if you're asked me to make a really analytical, political judgment in that moment, should we take more chips off the table?

1:09:48I might have said yes, but we couldn't. And then the company just kept building value. Right. What other example is we were very slow in the way we exited the tree desk because we were board members and we owed a lot of the company. We felt a lot of responsibility. I was a board member and we were very large older as a fund. That was a gift. I don't know what we would have done. We didn't believe in the company. So it was aligned, right? We really believed in the company and we felt a lot of responsibility. Eric, at peak, how much was your position in the trade? That's what. It is public. We owned, I think, 12 .5 % of the company at the IPO.

1:10:21So it was a big number. And it was a big number. Well, it's a much bigger number today. And we definitely did take liquidity before recent times. But yes, if you're LPs, thank you, sequence that properly. Just for our 20VC because we always hear this behind the scene. They think because you know you didn't you didn't distribute it all I mean you're on the board right do they do they criticize you Do they have any feedback on it Mike and I both were lucky to have a relationship with with weather gauge and Timberliancis once said to me about actually over Secondary he said you're probably right to get some secondary and he said but except the fact now that you're wrong because You're either wrong.

1:10:54You didn't take more or you're wrong that you took it But just if you get over the idea that you're wrong You'll you know, it's probably the right decision And I was like dealing with like what does it mean as an investor to think about right and wrong right and I think our Investors look they were so happy with with that story of that company from start to finish and the way it went down And the company burned seven million dollars before going public and a lot of them held for a very very long time We've never been criticized except for people just trying to express their preference on these situations whether they'd rather get cash or stock And the reality for us is people, you know, it's just different people on different things and we just have to use our best judgment about how to handle it.

1:11:33I'm going for it, but fuck it, why not? It's Friday evening. The biggest mistake in comes a company that you should have sold but didn't and the hell. Yeah, if anything, it was selling too early, it would be my regret. So I sold some of my Twitter stock when it was valued at a little over a billion. And you know, at the time I had invested in the prior company, ODO, which did work out, F gave me the money back about put it in Twitter and then it rides up to a billion valuation and you know they couldn't decide if the CEO was gonna be and you know the fail well was happening a lot And I was like, you know, I'm pretty pretty seriously in the money on this Maybe I should sell some and you know this was kind of in the early innings of web too There weren't you know biggest exit so far been YouTube it close to two billion and so I sold some of my Twitter stock Billion dollar valuation.

1:12:20I regret that I that was a failure of imagination on my part per the learning from that was when a company has product market fit, that's a rare thing. And when they have strong product market fit, that's an extremely rare thing. It's like don't underestimate how important that is relative to all other things. Jason, I've only had, I've had three billion dollar cash exits and zero IPOs in 10 years. Hopefully I have some IPOs next year. So I'm not, and I've had once good secondary I passed up, but I've never sold a share. And the selfish reason simply, and maybe this is a bad way to think about it as a GP, but like I'm not the most successful entrepreneur investor, but I'm not like terrible like I have a few nickels in the bank if the fatters are any good I'd rather double down like worst Case I'm even worst case I'm down 20 % who cares but look at the trade desk I mean billion I feel to 40 billion we go with it like it's not that it's limitless But I'd rather and I don't even want the capital.

1:13:08I don't want to pay the taxes either If you can't hold I certainly don't want cash So I'd rather just I'm a multiple not an IR guy and if you're an IR guy I think there's a lot of games to play right because you want to optimize it but I'd rather just keep throated in the middle as long as possible. And I think more likely than not, it's going to work out for you, right? If you're at scale, if you're north of 50, 100 million in revenue, the fatters aren't going to quit just worst case you lose 20 or 30%. It's not the end of the world, right? There's ever sold to share. Maybe I will, but maybe that's down everyone does.

1:13:37But and for what it's worth on the listen, I've only been doing this 10 year, but I asked all my LPs this question back really recently. I had an out a potential secondary that would have been material, right? And they have no distributions last year. And they all said, yeah, just just leave it in, right? they just leave it in. So I'm sure LPs are a different story, but I went around and asked my anchors and they also just just leave it in and so leave it in, right? People want. Even today, I learned that people want it. They want an outlier fund. This panel has not lacked energy. That's what I will say.

1:14:03I love doing this. Thank you so much for putting up with the terrible moderation, which I clearly failed out here. But you've been fantastic. So thank you guys. It's been fantastic. That was fun. Yeah, and we have the For a busy day out, this is fun. Fun conversation. Very fun. Warden the absolute blast. And if you want to see the full video, that incredible discussion, then you can check it out on YouTube by searching for 20 VC. But before we leave you today, listen to this. Mercury has been a breath of fresh air. Getting started was maybe one of the most only fun boarding experiences I've had.

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1:16:06And finally, I need your help, I need your input on the 20VC mirrorboard as I'm booking new guests that we should feature on the show in 2023. Head on over to mirror .com -20VC and leave your suggestions with digital stickiness or comments. That's mirror .com -20VC. Miro actually sponsored this episode. For those of you that haven't used it before, it's a tool that I think is really powerful in game -changing. Just ask the 1 million plus people who sign up for Miro every month. It's a visual collaboration platform packed with the right tools, tech and 10 -plates to grow your product, vision, idea, org at scale.

1:16:47Miro acts as a single source of truth across teams. That means getting buy -in much faster from teams like marketing, engineering, sales, product, basically anyone who needs to have a say to make gross projects grow. And even though it seems like a simple digital whiteboard, it's much more, hashing out a sound acquisition strategy, brainstorming, rethinking your sign -up flow, use mirrors as a research template. However, you need to grow, mirror can help. We use mirror all the time to brainstorm future shows, vote on potential guests, and leave know for the rest of the team in our own time. Check it out today again at Miro .com forward slash 20VC.

1:17:27As always I surpew appreciate your support my com. Wait to bring you an incredible episode this coming Friday with the CPO at Snowflake.