20VC Roundtable: Why Early Stage Founders Should Not be Investing, Why Great Founders Have Low EQ, How the Structure of VC Firms Will Change, Will Founder-Led Funds Compete with Sequoia & Is Investing a Team Sport?

24:30I'll be pissed as an LP. Absolutely, if the returns are in good, you should be. It is an interesting topic, right? And if you read these LP agreements, which it's worth reading, I didn't read the ones I signed the first time that wasn't there. But if you read them, there are a lot of provisions and I sure everyone on this podcast had to add an exception to the boilerplate that says everything you do will be for the fun. Okay, I had to have it back in my first one in 2016 to create a discussions, right? I'm like, I've already got this community, I'm already running it. But the thing is all they care about is returns and if they see it as an edge, it's attacks.

25:06And I think the last thing an LP wants to do, Harry, you've done this, I think we're almost at the 3 ,020 VC, aren't we on 27 something? Yeah, yeah, yeah. The last thing an LP wants is an undifferentiated manager, the last thing, and they'll cut corners, and they'll invest in someone that didn't finish high school, and they'll invest in the 10 ,000th whatever. But if they perceive an edge, they'll take the risk rather than the person that slugs to the office, you know, VCs, 4 and 1 half days a week. The real question is just what's the bar? How much better in an LP's mind do you have to be than a sand, if it's just, if sandals to exist?

25:39A sandhill VC to justify the tradeoff, right? How much better does the edge have to be? Now the interesting question I would say, maybe you guys know or Harry, you know, from interviewing in 2024 going forward. There's so much retreat from LPs, right? And I'm lucky. I have pretty good LPs. It's really, I didn't really earn them, but they're in a lot of better managers than me. And they're dropping great names. Do LPs wanna invest in the hot blogger or hot whatever in 2024? I don't know if that appetite exists, right? Or the founder see, like, do they wanna run this experiment going forward or is the appetite declined?

26:14It's a question. One I speak to TUNY -LP is a week and so I don't know whatever has been 50 since the correction. I've not really seen them drop great names. Some of them are downsizing, significant. What were they've got mandated outflows in the case of endowment funds or hospital institutions? But they're not dropping great names. They're still open for business. And actually, do you know what? The ones that are struggling are ones which don't have existing relationships and are indifferent to each other. If you have built a relationship over years and you actually have something different, LP's dying for anything different.

26:51Oh, I've got experience in a network. Well, great. Well, I do think there were a lot of VCs with subpar returns that were still raising their third, fourth, fifth, sixth, seventh funds. That is very unlikely going to happen in the future. Sorry, VCs that were doing that from LP's. And so I think these LP's are going to be much more discerning and if someone is not performing if a manager is not performing, they will switch to a better manager. They might do one more fun, but they're not going to do two more funds with that manager. I get you. And then sorry, I'm just going, there's also a - You're learning Harry, because you do talk to more than any of us.

27:25The idea of investing in new emerging managers that are either founder -led, brand -led, non -traditional way of having differentiated, you view the appetite as strong as it was two years ago. You view the appetite just as strong. Yeah, if you have a true form of differentiation, it could be the carry sharing model that you have across your portfolio The way that you structure the team the media plan. Yeah, absolutely if you're undifferentiated Yeah, it sucks and it's fucking hard What also no one's talking about is the migration of LP capital that was going to China Which was I haven't forgetting the stat but it's about 20 25 % of US venture dollars used to go to venture in China Well, that's my greatest out there.

28:02I was on a conversation yesterday on that. Yeah That's over Yeah, that's over and that dollar goes down. There's not a song going back into P or credit or public markets. They're going back into venture, but just venture in the US, blogger, Europe. And so there's that. You've got the rise of the UAE on mass, which they have been for years, but even more so now than ever before. I think everyone's actually overly pessimistic on this. Hop your right. That's my view. That I ran over. Sorry, guys. In terms of like team comms and one I worry about, How do you guys talk about it to your teams? They are in it for the company and then you've got this money maker on the side.

28:40How do you bridge that one? I might be on far end of the spectrum on this I have never also been one to ask our employees not to do other work a lot of our employees are also angel investors Sit on other boards and I think that's great for them I don't think that lettuce should be something that demands 90 % of somebody's waking hours It's always been in our culture that people have other activities and that as long as they're doing the full job That's on their plate that that's something that we like are proud of what about doing a pizarre I'm it's really late. I'm just going for a fuck it Jason's like Harry stop But what happened to going above and beyond let's say I'm in sales I can get more leads.

29:21I can do more outreach. Let's say I'm in marketing. I can do more copy more ads I can test more channels like I go home and work at my my desk laid into the night. And actually, if I were in sales or marketing or any of these functions, if I didn't have those extra things, Jack ought to have much more output for me. I just, I think I see it differently than it. Well, I sort of believe it, but yeah. I also see this, it is, it is, I mean, keep going with your answer, but I don't think it's a hype with it. I think there's a lot to be considered here. I think you might be right that on some level, you can get more out of somebody if they are burning the candle on both ends.

29:59That's probably true. What I've also seen though is things like employee retention for long periods of time is extremely valuable and so a company that retains employees for five years instead of one and a half on average those employees are gonna be so valuable in years 3, 4, 5 and so things that a company can do to retain people for longer Outperforms incremental work hours in most cases in my view I also just don't think that like the only optimization function of a company is to squeeze every last bit of productivity out of everybody and maybe that's where I'm like alone there, but I don't think that's the only consideration here.

30:33And so that's also where you just choose what kind of company do you wanna build? And do you wanna build a company where people can have other components to their life? And that's something that we've always wanted to let us. Well, I think that's the extra, sorry, I am, but I'm not like, you know, pushing them to a desk at midnight, but actually, when you go home and it's eight o 'clock in your partners, you know, reading the paper, you could be reading the latest, um, demon gen techniques or the latest ABM techniques. out of kind of passion, I'm not like forcing you at your desk, but you're doing things around the job that make you better.

31:04Do you, do you want, would you have a problem with people who work with you having another activity? Yeah, yeah, I would actually. So that's, I think maybe that's the difference, even though you have two, you say it, I have two, but you don't. They're aligned. They're exactly aligned. We leverage media to be a better investor. Like they are directly aligned. If they they were like, we do two things that are highly aligned. But I'm happy to listen to them. If you're like, hey, I'm joining a video editing society and they want me to be a chairman. Sure, show me the ways that it makes you a better video editor.

31:38Yeah, we get that. Also, like sales teams, hey, I wanna join the board of sales loft, I'm just saying. I'll find the latest sales tactics and techniques. Cool, I'd say that's aligned to your job. That makes sense. To say what I would say, Harry, that the people I've worked with who have been the most impactful people, It is extremely higher that they also put in the most hours Maybe because they got so inspired and they had so much fun They put in the hours and that made them a better It's not necessarily because they put in the hours that they were the better employee Necessarily it could just be because they they love what they're doing or some for some reason I was able to inspire Jane, but I wasn't able to inspire Tom It's very hard to know how it goes But I do think it's probably good for their career If you're a 24 year old, putting in working more hours is probably going to accelerate your career than if you're not.

32:28Now, the other flip side I would say is that if you can get a good 40 out of somebody a week, that's amazing. Most companies are not getting anywhere close to 40. So now for some people they have to work 60 to get the 40. For some people, for an experienced person, they can work 40 and get 40. But a lot of companies like you're lucky if you're getting 20. Or why are we not getting 40? Why are we lucky to get 20? Because they're doing other things in their own Instagram and they're not as engaged and either they're not inspired by the company, there could be a lot of reasons. Sometimes I think people work less than they used to.

33:02I think they work the same. It's just they're not present nearly as often. Jack, I totally hate you on employee retention. I mean, it's super important and you see the benefits of people post five years. I actually sat down with one of the biggest ex -adamazans and they don't have side activities generally at all. And the reason why we have such amazing employer retention, amazing performance. Our company stock went up every year significantly and we've got richer and richer. Leaving was losing. Is performance above all in company stock the ultimate driver of retention. Not today. There's no way it is today that I think the company is the biggest driver of retention.

33:36I think there are a few special companies that have such commanding market dominance and appreciating equity value to extreme degrees that the rules are gonna be a little different in those cases. So it's hard to map to Amazon and Apple and Stripe and some of those where I think like the merely very good company that I think the rules are a little bit different. Why do they leave open AI then? Like you get a $80 billion tender off. You think why would anyone in their right mind? What, even if they don't love the job, right? If you're doing tender offers at 80 billion, I might stick it out another quarter or two, wouldn't you?

34:09I think 22 out of the first 25 people Facebook left after within the first three or four years. But it's accelerated with, and I'm just, I mean, I'm having a little fun with Jack, but it is open. Forget about whether we happen to have an open on this, but it's faster. I mean, how fast it opened AI, get to 80 billion faster than Facebook, didn't it? Why are they leaving on? The more you're winning, the more likely it is that people will stay. And they'll stay longer. That's only one variable. And there's lots of other variables. Why people stay and why they leave. And also depends on the types of people you recruit.

34:38A lot of times like the companies that are winning recruit these incredibly founder -oriented people and those people leave to go start companies. And so you can't keep that person for that long. And so there's lots of different types of people out there that you need at different stages and there's lots of different reasons. But just because everyone's leaving like in Facebook's case where so many of the first 25 people left early doesn't mean that's a bad company. It turned out to be an amazing company. Just because everyone's staying doesn't mean it's a good company. There's lots of other factors that go into it.

35:06I think that's just one of many. I think the past I spent way too much time recruiting. You wanna spend even less time recruiting? I, well now I spend very, very little time, but I think there was, I think there's many, many years where I overspent the time recruiting. Interesting. You just hire too many people, so there's like, you just growing too fast. Maybe you spend too much time hiring great VPs at your company, so? Too much time recruiting the best executives? Yes. I generally think most of these companies like they should be figuring out how to run with less people. You should be spending much more time figuring out how to, get more leverage and don't the VPs need to be even better if the company's smaller or at least is good is it very Protects on VP because they don't have that many people in a manage and so it's like they've got to be a little bit more in the weeds They've got to be a little bit more about how to use vendors effectively and things like that and so maybe they're probably a little bit less Experienced a little bit more you're betting a little bit more potential.

35:58There's a lot of companies They're like a thousand people at a hundred million ARR. Yeah, it's pretty common crazy What do you think the least you know that is headed to space? What do you think the least you could do for a B to B company at a hundred million in the area? Because I know you I love when you write about this. I'm very attuned to it What do you think the least the least amount of headcount you could pull off? I think it's I mean obviously Vizio I think they hit a billion in revenue with 14 people with the TVs But that's a not a high -margin business. I think a good metric would be like a SaaS company Certainly the air are per person should be going up and not down It's 300 down in the public companies.

36:33It's like the highest in 300 K, 300 K. 300 K per person. I would say that would be the minimum that you should have. So in that case, that would be 333 at 100. Really bringing it back like, is there a limit to how much found -to -lad funds scale? Will we see billion dollar funds or is there a cap to how large they can be? I think if it's just a solo GP, whether it's Founder or not, I think in the end, some of these things are team sports and it's hard to build a real enduring company as a one person company. And that's true if you're running a SaaS company. There are a lot of these amazing SaaS companies that have like 20 million ARR and have one employee.

37:10You look at them, you're like, whoa, these are incredible, right? But it's hard to get like to a billion ARR with one employee. The same thing is true with venture. And venture is just like incredibly competitive. It's way more competitive than any type of SaaS business that's out there. You're basically selling the commodity, that you're selling money. Eventually, you are going to need to build some sort of team if you want to scale it. But what do you, because all you need to do is actually just go later, go to Series D and you can deploy $100 million checks. And actually, that same is probably possible.

37:40You could raise a billion dollar fund, $100 million in checks. Yeah, but I think if you're successfully deploying $100 billion checks, just the amount of diligence that you need to do on a company and just the amount of work. You think of like an insight which is one of the more successful late -stage like they have like a 20 -person team of value -aided deal They don't just have like one person do the whole thing. It's a huge huge deal It's very hard to go if you're gonna do it right. It's easy to deploy a hundred hundred million dollars That's the simple part the hard part is actually making consistent return Jason.

38:13What do you think? I think the question is can a can a founder -led fund compete with Sequoia? Let me flip it around and maybe you need a billion dollars to do that at some level. It could be But I didn't even go on the found it. But if you think about it, Ryan Peterson, Ryan Peterson Capital, I probably could definitely Thamal and Capital could. I think you could, Nugest. There is a crossover point where it's where you would need a huge team. So maybe it breaks for any traditional founder led fund, right? Because if you need 20 or 40 or 50 people, that might be a management burden. Unless you're the figurehead, like Elish from Freshworks, right?

38:48And Jody Bonsel with unusual ventures. I mean, they manage a lot of money. Are those founder -led funds or are they sort of founder top or founder flagship funds and there actually is a pretty big difference Right getting a call here or two with someone Once a year is not the same as being the partner on the deal is it and sure at Flex Capital I'm not the CEO so we have a CEO a full -time CEO at Flex Capital I don't think we would have been nearly as successful if like I was the CEO is that anything that I haven't discussed that you think we should discuss guys I'll throw out one thought I'd like to hear Orrin and Jack's thought.

39:21I was thinking when I was listening to them, I think one advantage to taking money from a founder -led fund. To raise the kind of funds that these guys do, you have to have a certain measure of success as a founder. And so I just don't know that founder -led funds today are going to sweat some of the things as much as a traditional investor would be, whose job was on the line in a different way. Their next on the line, I was just on with the CEO today at one of my most successful companies, but one of them, a mega big billion dollar fund, like the partner who doesn't run the place, is ensuring he can do his pro -radiate, isn't sure he has the juice at the fund.

39:54And like, this is a no -brainer. I just don't think Orrin or Jack are going to sweat it if growth slows a little bit at their portfolio company. They may help. I don't think they're going to throw their shoe at the monitor or at the board meeting. I think that's appealing for founders, right? I do think that's appealing. There's many things those of us who've been around for a long time don't like about VCs, right? But it's sweating the wrong things, being overly dramatic about small things, worrying about, Oh, you know, we said in October we would do 6 .8 % of we came at 6 .6 % and someone gets mad.

40:22And I just don't think that Jack and Orrin, even if you run out of money, I just don't think they're gonna sweat it the exact same way. But I just don't think that downs are as dramatic. Challenge me though, maybe you do throw your shoes at the monitor, but... I think my not shoe throwing at the monitor is more a matter of my constitution, as much as anything, which is maybe just like... But your job doesn't end if one of your investments fails. Your life doesn't end, your career doesn't end. The outcomes of the matter, they still are very important to me, but it's hard for me to say because I'm like a bad example for this because I just like don't get upset enough in general, like even in lattice context, it's just like not in my DNA.

40:58So that might just be like a me specific thing because to the point earlier, there are a lot of founders I've seen like be pretty tough on other founders and get pretty upset when something's not going the way that they would do it. So it might be case by case, but maybe Jason where I think you might be more correct is when you're negotiating with a dual threat CEO, let's say you're negotiating a term sheet or you're negotiating the actual docs, the series B docs, or something like that. Most of the terms don't matter. And sometimes when you're negotiating with a more traditional venture capitalist, they get hung up on these things that will have no outcome to their return.

41:34There is no scenario where, especially when the world is power law driven, like there's no scenario that any of these things will really ever matter to them, but they get so hung up on some of these things. And I think sometimes a founder led VC is going to be more accommodating not on the things that matter, like things like valuation, you know, all these other things that actually really do matter on just like the random stuff that nobody, you know, will never actually change the outcome. I think quite a lot of people have pissed off that in some cases founder led firms have dropped the ball on, but no, dropped the ball, but then hey, hey, we don't need board seats.

42:07And in some cases, there hasn't been governance where governance should have happened. That has been because of the relaxing of what we need, is what some people will criticize them. For founder -led funds, or just for life in general in 2021, or overly sliced cap tables? Well, I mean specifically more for light solar GPs, because you can't take board seats and have that governance level. If I'm out on a bunch of boards, but you're a much more concentrated portfolio adjacent, you, seven, ten per portfolio, so now. You think founder -led funds are worse on governance? I'm just not sure it's true.

42:40I definitely believe less diligence is done. There's more hip shooting going to Orren's point There's more pattern matching. There's less checking on stuff, but I doubt there's less oversight But maybe there is also I don't know how much oversight matters and yeah If it's really power -law driven the bad ones are bad and yeah Maybe you could have got a 1x and you get a 0 .5x or something out of this thing if you if you're really in it You might have gone from 0 .5 to 1 which is great But the most important thing is that you're investing in these you know 10 plus X things So this power lawn venture thing if you're an early stage investor.

43:12Here's what I've learned I've been doing it 10 years So I've had enough time. I haven't found I can see it early enough to take action You can see who the winners are there's time to see who the winners are right no question that edge of the the curve Right the inflection the exponential growth. It's beyond it's too late to either write a check or do anything And so this, it ties to how it involved to be like the 5x versus 1x, but I actually don't know if you can see it early enough to really have those impacts you described. All right, I 100 % agree with you. You said about why we spend time and the importance of spending time with the pack.

43:43Do you agree with the spend time with the winners, the other ones who return the portfolio? A lot of people worry about then the MPS, a lot of people worry about just loyalty quite rightly, so I think it's a commitment. How do you feel about that spend time with your winners, the other ones that return the fund? It's a little bit weird where like the winners don't really need you so spending time with them doesn't really change the outcome The losers don't really need you either because they're going to lose so it's actually kind of the people in the middle that probably need you the most It's a really suspending time with those like spend time with Airbnb or not I don't know they're probably just gonna be amazing and like I don't know There's anything that any one of us could have done to change that trajectory like they would have been amazing regardless But there are other companies where like you maybe could have really changed an outcome and got them from 200 million outcome to a billion outcome or something and really changed the trajectory This is what I figured out last year which is if the founders are truly still giving it a hundred percent for real I mean a real hundred per point zero percent I'll never be out for a variety of reasons I've never seen those ones actually fail if they're a hundred percent committed They have any customers and I actually think that eventually point five X and one X can be huge if the funds and carry mode Let's not be gleeful, like getting to from just a $50 million exit to a $200 million exit if you own 20 % of the fund, that's a lot of money.

44:58But as soon as it's less than a hundred, I decided I'm out. I'm either quietly out or I'm introducing you to my board partner, Harry. We all have dark days as founders, right? We know, right? And so it's never actually a hundred, but that's the line. What I grew through what you just said is profound, Jason, which is that if you ever see a scenario where a founder is putting more than 100 percent in, I have never seen that company do less than a one X ever. That company has always been successful. At some point, maybe the founders give up, at some point it's just too hard or it's too much of a grind and stuff like that, which I totally understand.

45:32But when they're at 100 % plus, it's going to work. We're going to do the bat. Say Jason, what is all bat for today? The bat is October, Halloween, 2024. Are the trifecta of the newest IPOs, ARM, Instacart and Clayvio, one of my all -time favorites, are all of them up from their trading price, because it's struggling now. Like, we're struggling when we're doing this today. So the bet is 10 grand, 5 grand, what do we want to do? I'm glad it's to take what side. So the bet is that that would be up or down. All of them. The whole trifecta has to be at least just unbroken above their IPO price. Well, I'm not a big betting person, but I would definitely bet you a burger.

46:08A burger? I will say no. I would say a chance that they're all up would be very, very low. I would say hell no, not all of them up. Should we go to grand? I'll say all three are up I got two grand on this one. Oh totally. I'll take that on two grand Yeah, where you coming or in did you do? I'll be your witness. I'm not smart enough to put a bet on this one game on my friend Listen, thank you so much for doing this chaps. I love this To grand in a burger to get right this has been fantastic. Say thank you so much chefs. Thanks. Talk to soon Harry I just so loved doing that and I always really want to hear your thoughts I want to make the show as good as possible for you.

46:43So let me know what you think on the round tables. If there are people specifically that you'd like for us to have on the round tables. If there are topics that you'd like for us to address on them. Also let me know what you think of our YouTube. You can find that at 20VC. I always love to hear your thoughts there. But before we leave you today, we have to talk about Canva. Canva is on a mission to empower the world to design. That is why they've introduced Magic Studio. Magic Studio brings together the best AI -powered tools for you and your team. to help you redefine the way you design. Magic design creates custom designs for you in seconds.

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