20VC: The Biggest Misconceptions & Hardest Truths About Seed Investing Today; Why The Best Founders Don't Need You, Why Uncapped SAFEs Are Good, Why Reserves Are Bad, Why Signalling is BS, Why Price Doesn't Matter with David Tisch & Terrence Rohan

27:30It's also we're not building the companies, right? Like the hardware is being done outside of this podcast and outside of Twitter. The hardware is being done by founders by their first 10 employees, by their ability to find customers, and traction, and users. Like it is so easy to sit here and put out as Terence properly said, content marketing to attract people to think that you are this magic maker of their success. I just don't buy that. Our job is to allow people that are outside of this room to go fulfill their dream. Some founder, has a dream. They have an idea. They have conviction and they go out and they go have an end of one opportunity to go build the thing that they are building to a level that again is unrealistic.

28:21If you are playing out the outcomes that are required for venture scale, they go do that with blood, sweat, and tears. And we sit here and we talk about how we knew it when we met it. And I just don't buy that. Well, I mean, we basically co -founded the company by being on this podcast. We came up with the idea. We were central to the product market fit. But I totally get you. And I agree with you on the centrality of luck. Say that again. Say you agree with me. I agree with you want a lot of things, don't you? But I agree with you on the centrality of the centrality of the lot. But some people are just a lot luckier than the others.

28:53I don't think it's luck, though. I think that's a misplaced work. If you don't see it, you can invest in it. And so I think the hard work as a seed investor is meeting with that opportunity set that has a chance to be those outlier companies 10, 15 years from the day you met them. And that is actually the skill. But if that's the case, the content marketing that you kind of denigrated just now. Yes, very valuable. That's why I'm here doing my own content marketing. You're going to take this, you're going to summarize this into a 30 -second TikTok. We're going to go viral and I'm going to get the next generational companies to come to me because we made a great TikTok.

29:34Yeah. Thank you for that. I'm using your distribution rails to my benefit. You see why I love him, Terence. But like absolutely, it is a very strategic tactic to make sure that you see. And I think it is a skill to make content that resonates. Terrence, you do some bangers of tweets. I love your Twitter. It is a skill to make content that resonates with thousands and thousands of founders. Agreed. When you think about C -Pick win, where are you weakest? C, if you just even step back, like, when David and I started, like, this ecosystem was so small, like the seed deals would almost pass through everyone's inbox, like, almost everyone was like, he almost had like 50 to 75 % coverage of any given deal.

30:18And he was like, oh, that person did it. And like year after year, just geographies expand, funds expand, relationship, this expansion, fragmentation, geographies, the whole thing. And then tech shifted from a vertical to a horizontal. So the types of businesses that venture an early -stage tech venture capitalists were funding fundamentally expanded at a huge level too. So to what Terence said, we had in 2010 through, again, probably 15 real -scaled coverage. The today is a fraction of that. It's a fraction of that. I think that's just like a market shift. I mean, there's of course people who have better coverage, but we're just dealing with a much larger, highly -fragmented market.

31:01and to David's point, a really efficient seed round too. So like this guy can be raising around and it's just done in days and it's just like, the Zoom is done, multi -stage fun, done is it? Boom. As opposed to like driving around the deals on the market for a couple of weeks, you're meeting him multiple times, you're thinking about it. Boom. Yeah. Get set on an angel list, you click, make a troll, it's over. David, how do you think about that? Given your statement earlier about liking long -term relationships, I'm very much again, with you on that and I find it very difficult when I'm forced to make a 10 year commitment predicated on one meeting and then maybe a second meeting a day or two later.

31:40I find it very, very challenging in a way that Series A allows you a little bit more luxury. How do you do that then given the preference for long -term relationships? So, see Pick With. You have to see it in order to pick it in order to win it. Seeing it, the earlier you see a founder, the better your relationship is when that transactional moment comes into play. And so if you can meet people before they're starting a company, before they're thinking about starting a company. If they're at a university, if they're working out a different company and thinking about starting one, that is the best time to meet them and to build a relationship that you can have conviction when they do show up for that transactional moment to say yes.

32:22I think that is the essence of seed investing. the hardest part is getting exposure to founders at a scale that allows you to see in a given year, in a given fun cycle, enough of those potential great opportunities. The pick, I don't know how to get better at picking when you don't find out the results of your picks for like five to ten years. How do you wake up tomorrow and do work to be better pickers? You can be prepared in markets. You can be prepared in the businesses and the types of businesses that you're trying to fund. So I come back to it of like, can you build relationships that you get excited enough about to say, yes, because somebody comes to you with their dream, presents it to you.

33:09You say, that is magical. You get this feeling of a human that shares with you what they're thinking about. And you're like, you are so sophisticated and deep and passionate about what you want to go build that I have to say yes. You've gotten me as excited as you are to go build this company. I'm in. Probocularly just to start a little bit. Like on the pick, I believe actually a group decision is the wrong way to make a seed investment. I really do believe that. If you look at even like the history of, as a quick aside, like the history of venture funds, modeled after law firms, partnership model group decisions.

33:48If you really dispassionally look at the decision science of what that optimizes for, it is for consensus, it is for safe. Often these companies at seed stage and I think the consensus and the group huddles like maybe that series B, that's super smart and super valuable but like day zero stuff, you really round the edges and you can miss a lot of great things because and I think a lot of this on the picking in my view is instinctual, intuitive, hard to explain. David meets a founder. He's like, there's something in his eyes. And you know what? And see it in best team. Sometimes that's actually the best reason, but articulating that to a group.

34:27It's just seeing that X factor and so on is really hard. I don't know who you're provoking because I fully agree with you. We're a team of nine. Everyone on our team can say yes. Everyone on our team can say yes in an individual meeting. We don't vote. We don't try to find group thing. It has to operate in your gut. And if we meet this magical founder, she just left her job at a different company. She's coming out of university and my partner, Nimmie, Adam, or Greg meet them and they get excited or if Adina Claire on our team meet them or we have two Claire's, which is a probability on a nine person team.

35:05If Claire or we have two junior people on the team, if they meet somebody and they get to this level of conviction, I want to listen to that more than I need to sort of find a way to get group thinking internally. I think it happens at the edges. How often is it eight one, eight no one? We don't vote. We don't keep track. I'm just really intrigued by it generally. Is it positive sentiment? We don't operate our firm in a way that we actually try to extract that sentiment. The people who are spending time on that deal should make that decision. By people I mean one or two people that's great. It does not need to operate at a firm level.

35:49I think seed investing to turn its point cannot be about consensus or group think or safety. It has to be on the edges. Everyone on our team thinks about people differently. We think about spaces differently. We get excited about different things. And my job at Box Group and in our job at Box Group is to have people here who we believe can make great decisions. Terrence takes that model and in essence runs the same thing. He just does it. We're not going to talk about it because it's a secret. So I don't want to touch on it. But Terrence takes that decision making and distributes it to other people outside of the room, founders.

36:27We do that in the same room in some way, but we're still distributing the gut to the individuals at the firm who we think are all of us capable of making a decision. But just so I understand, you sit in a room, discuss the deals that we have. We don't have a room. I get you sit in a Zoom, whatever you want to call a mutual shared, whatever, virtual or physical location, because there are transferable learnings that one partner can pass on to another about a space. You will do that, they're correct. Find out. We talk about things. We don't vote and we don't look for consensus. Not everybody is equally ramped up onto each individual company such that their voice is valid.

37:12The easiest thing to do at seed is find a reason to say no. You name a company, you give me an idea, you give me a market, I can tell you the 32 reasons why it's not gonna work. That's not the job. The job is to squint and see the one reason it's going to work and say yes when it matters and the yes is so much more Important than the no the cost of omission at seed is so much more expensive than the cost of commission and If you say no to the wrong company you blow your returns if you say yes to the wrong company It's a rounding error in your model to jump in on this I think this idea of like conviction, it's very intuitive and it's probably empirically weak in a can crumble.

37:59You can crush it in in conceptually super easy. Today, I have its point. Here are 20 reasons why this won't work and there's super rational reasons. The market's low margin, blah blah blah all this stuff. You can crush any of those ideas so easily. These voting mechanisms or even these group meetings either explicitly through voting or implicitly through cultural norms often just crush those flames. I think there's some cheesy Johnny I quote about ideas. They're so fragile when they're early, but I do believe that about startups. They're super fragile, right? And so I think to do the job well is you actually want to celebrate empowered people to make those instinctual decisions, even if they are a little bit unreasonable.

38:43All the discussions then, not just doubt generators in the people making decisions. We structurally push our group to not allow that. We have vocabulary internally. We say like throwing a grenade. You're not allowed to throw a grenade on some deal. It doesn't help. If you come in and you just have this loud no, everybody who is excited about it, the level of pushback that you need to have to say, I hear that grenade and I reject it and I'm still a yes. I don't think that's where the best decisions get made. I think that's where group decisions get made. Especially if you have a firm where people have been around longer or if people are newer or if people are thinking about harder, newer, interesting spaces, this gets It's challenging, right?

39:34Like AI. Nobody knows the answer to AI, like how the market plays out, where the value gets created, what the best 10 -year -out companies look like, other than probably like Venote Kosovo. He probably knows the answer or someone like that. But we don't have perfect answers. We don't know the future. If you knew the future, you would be higher percentage correct than any seed investor is going to be. And so the more that you allow for negativity to creep into conversations amongst the firm, the less variance you will have in outcomes and the safer you will play and I don't think that that model works at seed.

40:16Do you really have to police that because natural human condition can sometimes be they wake up on the bad side of the bed, whatever, whatever. For some reason, they're negative. Do you have to police that because that's hard to continuously instill? I think it's way beyond that. And I think you bring up a good point, right? Like someone's individual mood on a specific day, the weather, the political climate, all of those factors go into gut. And if you cannot find zen, some focus, some operational place that you are making clear headed decisions from, you are likely gonna be on tilt to use a poker analogy, and bad decisions will happen.

40:57And so if I look at the firm, we have again, nine of us, I believe the job is to try as best as we can to all of us on a daily basis operate in some form of evenness. And I think that's really hard. But when I look at box group and I look at the evolution of what we've built here, staying consistent to where we play, to how we do the job. Those are really important holds to allow that equilibrium, that zen to happen. If we instead, every fun cycle, changed our strategy, changed how we operate, where we invest, like the style investing, you have no ability to actually get better and to try to find that zone of clarity to make investments from.

41:49Can I ask you, Tarn, speaking of the zone of clarity to make investments from, you obviously have a founder -led model in terms of the investors on the front lines, why do you think founders make better investors? So the otherwise models there is too. There is the founders making investments and there is myself making investments. The founders making the investments, I think it's a really simple, I mean, I mean, C -Pick Win. The C is off the charts. I mean, they're about to dinner. They're in their chats. like the amount of like founder community and camaraderie is just incredibly high and there is differentiation enough of their 100 % so they see and then they also win right so you could just take those two pieces of like let's just take picking outside pull it out for a second but just seeing and winning they are a standard deviation ahead of David and I and we just don't have to do they even need to win that because they're not competing are they sure I mean sometimes like the rounds are closed or there is like do I take this founders money or there are sometimes on the edges tight situations and you know founders of exceptional companies with exceptional reputations they see and win without exception and I would even argue that they're very very good at picking and I'll tell you why like most founders are just investing in people they know or in things they know and that I do think that they're either investing in their networks or they are being sought out by someone building an analogous company or that's somewhat in their domain.

43:13Founders are rarely chasing heat at YC Demode at some random thing and they're not playing that game. So I think you combine that unfair scene, that natural high -ocracy picking and that winning. They are very good investors. Building on what Terence said, his requirement is picking the right founders. So I agree that they win on seeing and they win on winning. If Terence picks bad pickers, the model falls on its face. But Terence picking great founders actually makes the model, as he said, a beyondest inner deviation, better than everyone else's model. And so I don't think all founders are inherently great pickers.

43:56And I don't think all founders are inherently great investors. I do think all founders see better than investors do. Do you agree with that, Terence? I agree with the C in the win on the pitch. I think most world class founders do naturally best in their own networks and in their own domains. And if they do that, it is high accuracy picking. And they're sure. There is a subset who are going to run around YC Devode and you know what, those folks should probably stop building and go raise a phone. Do you have errors of small turns? No. Provocatively. And maybe we might get a little bit of attention here.

44:32David, opportunity funds. But the unbalance, I don't think reserves and follow -ons, I think it actually hurts seed investing and it hurts seed investing in two ways. One is it depresses DPI, so on the financial side, how does it do that? You know, you have whatever, a dollar to invest primary dollar for follow -on, maybe even a dollar 50. So even if you look at on that on a dollar basis, you're almost more of a growth fund there. But in any way, that's on the side. So you're You're taking capital and you're trying to put it into Series A companies. There is adverse selection there that the best companies sometimes are really difficult to get in.

45:08That's not to say that you won't get in because you know a legal pro -rata and all that, but will you get her cuts? Absolutely. Just like everyone else is getting her cuts. So now less dollars are going into the right companies. Then you also have this weird compounding factor that just because it raises hot Series A, that might not be the right company into this idiosynocratic walk in seed. That sleeper that kind of went from seed rate is nothing serious a it also explodes at serious B Anyway, so so there's all these confounding factors that I think on balance if you just did a one check The would just increase your total DPI because Playing that parata game is very very very difficult a different game and it's rife with Lamont's That's one effect and the second effect though why you answer your question is just on a relationship factor It's very clean when you're just like, hey listen, here's my check.

45:57I mean, don't have to answer with the founder, whether you're investing or not investing and all those reasons, you're just super supportive. Do you think you can even pick the win? Is it such an out -of -the -sage? But I think that's the point. I think post -series B, these things become not only like, they become painfully obvious and it's picking is not the thing. It's just access, right? I mean, you just have to series B, it's super hard, right? And so you're really putting a tremendous amount of capital on this really, really art game and a game that if you're doing the job well, which like David articulated, it's a totally different game than whatever running cohort analysis or customer reviews and all this kind of jazz, which is a little bit more on the later stage.

46:37So I don't do it and I think it's a net benefit. I do think it is a hangover of there's some conventions that LPs want to hear. Some of them have good rationale. Some of them I think can be fairly questioned. But like the convention is have 30 to 50 shots on goal, have a reasonable reserve strategy, so be concentrated, have some reserves. Like you go to talk to that to an LP, they don't think. If you say, hey, listen, we're gonna do no reserves or maybe have larger portfolios, you're getting out of outside those norms and they're harder conversations. And because there are harder conversations, a lot of managers say, I'm just gonna have the simple conversation because that's how it's done.

47:13But if any of you empirically look at it, I think it's better. David, how do you feel? Our job is to make great decisions with every check that we write at each step of the way. And so is everything that Terence said inherently accurate to a good level, 100 percent? But it doesn't mean that you can't be great at follow -ons. It means you have to be great at follow -ons if you have capital that needs to do follow -ons. And so our job is not to say fundamentally we don't do this. And our job is to say structurally every time around comes together, we're saying yes. Our job is to, from a like LPs give us money to deploy into companies in a way that gets them the returns that they expect.

48:00And for our business, our job is to generate the best returns we can get. And so from our opportunity fund, our follow on fund, A, it slants early. We don't want to be growth investors. We want to be venture investors. And so we want to put money into the best opportunities that we can in a given fund cycle. If it means we're slower to deploy our follow -on fund in a given moment or we're quicker to deploy it, I think those are the variables that we can control. Our job is to get as much money as we can into the best opportunities. This model will work. If you establish that relationship at the founder at day zero, you can knock on the door at Series B and get a reasonable slice, 100%.

48:42So if you do your job well at A, and you establish that relationship, that trust, people never forget the people that bet on you early, and they will do that versus yet another growth like coming knocking. So it is harder, but if you do it well, it's not called that's work. I don't think anything makes this job easy. To me, it gets so muted in people looking at what venture capitalists do from the outside and assuming that there's this endless set of opportunities, there's this endless set of access that you can just get into this game, run to a turn set, the generic playbook of 30 to 50 companies, high ownership, reserves follow on, and you're suddenly going to be great and have magical returns.

49:28Just like the company side of it, there's a power law dynamic on the venture side of it. that needs to be accepted and understood. The best firms in venture have the highest probability of being the best firms in the future. Because brand matters, the quality of investors at that brand matter, and they're gonna see and win better than the challengers are. Given our agreement that the best companies or the highest kind of the companies are not always obvious, David, what have been some lessons for you in terms of most effective resource deployment on reserve allocations. I think our strategy on reserves is to try to put capital into companies right before the market realizes how good a company is.

50:14Is that easy to do? No, but nothing's easy. And so all of these questions and answers, the goal is to take everything and make it a sound bite and take everything and make it a tactic or an easy to learn lesson. But it's not. It's this nuance. So a company, and not every story is that. Not every company takes a long time to figure itself out. Some companies start, and they just work. And they work from the beginning. And yes, there might be a hiccup later on. But the path from seed to D actually might be smooth. You should probably lean into that company if it's a great one. Equally, the company that raises a seed takes a long time to figure out how to get product market fit, how to get revenue, how to get traction, you want to sense that they are moving towards that great opportunity.

51:08And you want to sense it before an outsider realizes it or other insiders realize it. Do I have many examples of each of those cases? Yes, can I figure out what the next one looks like because of the history? No, I don't think you can. In our seed portfolio, we have about 150 companies. I truly don't believe in pattern recognition at scale. I think there's nuance pattern recognition. But I view each one of those companies as an individual relationship, as an individual journey, as an individual idea in many ways an individual market that they're operating in. and we have to understand the nuances of each of those factors of each investment we make and build each of those relationships at a quality level that scales.

51:59David, was your been your biggest reserve allocation mistake? And what did you learn from it? I think the hardest part in an early stage model is when to switch funds. How much of the fund should be deployed into initial dollars versus how much of the fund should be saved for reserves. As a fund manager our goal is to invest as much money as we can into companies versus into management fees. And so if you take a hundred million dollar fund just to make the math easy and you have a 2 % fee, 20 million of your hundred is management fees. And so if we only invest 80 of the 100 we don't have enough dollars at work.

52:37Our goal is to get 100 or 110 or 120 million dollars of that 100 into companies. Yet its seed recycling is gonna happen at an egregiously later date. How do you figure out how to get that extra 20, 30 million dollars back into investments? I think that's really tricky. And so that's one. Is that even possible really with M &A and liquidity markets being where they're at today? It's so much better. It needs to be if you want to have great returns. I agree, but I'm just like given liquidity markets, given IPO markets, given M &A markets, especially M &A markets. I mean, we're not getting the M &A's we used to five, seven, eight years ago that used to be able to recycle cash so much quicker.

53:19This is hard. It's all hard. And you have to figure out creative ways to do that. If that means you have 30 cents, 40 cents back on a dollar of a company that shuts down early, you deploy that. If you're spending your management fees in the back end of your fund, that's another way to do it But I think one is sort of figuring out how to get as much money of the fund into companies and at what point do you say We've deployed enough initial dollars that we should switch to sort of the next fund I think that that is really hard in a scaled model I think it's much easier when you say we're gonna fund 30 companies we're going to reserve one to one so the math is very straightforward.

54:01For us it's not as straightforward and I don't know the right answer. So when I think about reserves I would say over -reserving is the bigger mistake than under -reserving. You often say about being the favorite, the favorite, the favorite. Is it difficult if you're the favorite and you want to sell secondary? Is that not a bit of a tough conversation to have? We don't sell secondary. Terrence, do you and do you not think secondary will be an ever -increasing part of early stage manages providing liquidity back in a time when liquidity is really appreciated. As a general rule, no. No one secondaries.

54:35I do think you need to kind of hold to really make the fun math work. I think you just need to hold. I do believe secondaries. I mean, if you look at the charts of it, like what it's been doing, talk about something that's been compounding, like the secondary market has been slowly compounding. And just like the amount of LPs are willing to do it now. These various organizations that email you every day about this company, that company, their compounding, the VC funds becoming registered, right? And so now they can buy more, more common stock as a result. So I think if the MNA market does contract, we'll see if that's like really long term, but maybe I do believe the second areas are going to be a really robust option.

55:14And then yeah, the company is at $5, $10 billion valuation and you want to sell off some portion of it as a seed investor. I don't think from a relationship standpoint, I have done one or two secondaries over the years. It's like, I think if a company's at a certain level, selling off a tiny bit is fine. I think if you're wholesale as a seed investor, if you're wholesale taking the position off at like Series B, that's weird. Companies at 10 billion and you're taking off 20 % of your position. I don't think that is as odd for the relationship, but I generally don't do that for just the return profile.

55:49David, at a stage, like Tarant said, that $10 billion. Does it not just make sense to take 20, 30 % off, return a great amount of cash and still ride the upside? I genuinely love to understand why not. Does it make sense? Sure. I think if you believe that is the outcome size of that company and there isn't another 10X or 5X on the table, sure. But I think to Terence's point, the compounding at the end is so much more valuable than the compounding at the beginning. The path from 0 to 1 billion is impossible. The path from 1 billion to 5 billion is more predictable, and it's more easy to see at a given moment.

56:34But do we like fundamentally reject the idea of ever doing a secondary? No, but I don't believe our job is to figure out how to hack the system. Our job is to figure out how to back unique outlier, long -term, generational companies. And if you look at the time that it takes to build those companies, you have to stick with it sort of till the end. I remember I had Brian singing my own show from Founders Fund and he said we consistently underestimate the power of the next double and it's the move from 5 to 10 billion dollars. It doubles your seed return. That's the easiest map in the business. What else is really hard?

57:16If I'm the standing one's the right time to cross over into funds, what else is really hard? Keeping yourself relevant and I'm old, I need to understand what's coming and what's coming today is different than what was coming yesterday. And the spaces of technology impacts and software 8th of the world. is hardware eating the world, is software and hardware together eating the world, is AI eating the world. Like how do we compete in AI against experts? How do we compete in science? How do you compete in all of the spaces that we as a firm spend time in? How do we understand what we should be excited about and what we shouldn't?

58:02And how do we get into the next network? I think the next network of great founders exist somewhere and our job is to find that network and be relevant in it. And so every day the panic that we have is are we seeing things and are we understanding them. If you don't understand them you're probably not looking in the right places to see them and if you see them and you don't understand them you're gonna miss them. And so it's this very complicated start every day from scratch in this business. I think the one thing that does matter and help is that network compounds and brand compounds. When I look back, founders that we backed 15 years ago, five years ago, two years ago, if we build that great relationship with them and they're willing to send us their friend who's starting a company, those things matter.

58:56Do you worry that our supply of great founders is impacted by the ability of AI to reduce costs in a number of different ways, meaning that they don't need to see drown that they used to. No. If there's one round, and I think this is like an interesting topic, like how funding dynamics and whether you need BC, but I think if there's one round that is will be essential forever, it is that first round. It is that like I need money to get going. Sure, there's gonna be founders who are, this is their second show and they can sell fun fine, but like as a persistent basis, like the one around you need is the one to get going.

59:30And then sure, you AI and other tooling, I mean, I've seen this across my own portfolio. These companies can become and get scale. They can become hyper capital efficient, hyper profitable and venture capital is kind of really optional to them. And I think that's actually like beautiful. I think that's actually like where you actually want to get. And it's often how I guide my own founders is like, I think it's the right way to look at venture is like raise initial capital. And if you get to the point where venture capital is optional and you can dip in and deba out. That's the ultimate. You choose your own destiny, you control dilution, you can control your board, you can grow when you want to grow, you take on more and then you don't necessarily need to take it every step of the way.

1:00:13And if AI will do anything, I think it'll just make companies that much more capital -efficient seeds not going anywhere. And I think that's also why some of the multi -stage funds continue just to look upstream because I think that's partially understood. I want to move into a quickfire round. While we're on the seed will always be the most important round. I think that's a good transition to a quickfire. You both have been given much advice in your investing career. What's the best investment advice that's stuck with you most? Investors invest. Our job is to say yes, not to say no. And our job is to communicate that decision to a founder in a transparent and quick way.

1:00:50And our job isn't to waste people's time and our job isn't to mislead people. And I think as I've looked at this business for years, there's people that come and go that are just wasting founders time. Our job is to not waste their time. And our job is to give them money and get out of their way until they ask you to do something, at which point you should try to do it as best as you can and as quick as you can with as little friction as you can. And so my job as an investor is to invest and it's to give people money and do what they ask me to do Another bit of advice that also sticks in my head is founders that are gonna be the most successful need to do the least Which is also true and it doesn't form you know the way that I invest I do think if there's anything that you can sort for at least in myself Is I do truly try to kind of underwrite and pick really special people whether they build something amazing who knows but at least in my belief that they are sometimes, you know, special.

1:01:46What's your biggest advice to manage is outraising today? The cold water plunge, just the shock to the system for any seed manager, is that we live in this our front office job is so fast and it's like deals get done very, very, very quick like and you're just used to this like introduction to meeting, being with a day's decisions, and you think like that's the world that capital moves, but there's this whole other world, which is the LP world. And they're patient and you get an introduction and their first meeting might not be for three months and you just gotta just like, this is gonna take a really long time.

1:02:24There's a different sort of protocol and culture around this. And it's going to be hard. It's not hard in terms of like intellectually hard. You're just gonna get hundreds and hundreds of nose and you just have to slowly crank the turn and it's just realized that fundraising, especially fun ones can take time. And you have to be patient, 12 to 18 months is fine. People not meeting with you for a couple of months is fine. People taking months if not, sometimes a half a year to reach a decision. So I mean, fine, it's normal. I think that's like the hardest thing to understand if you're a hungry angel investor.

1:02:58It was only dealt with like the front office, like the back office just moves in a totally different pace. For a new fund manager, my advice is have a reason in an vision. Why are you doing this? Why are you starting a fund and where's it going? Because if one one is the vision, define that. If one one is not the vision, define that. And so you don't just do this because it's easy to do because it's not easy to do and the timeline for ROI on this business is egregious and so have a reason and have a vision. What was the worst know that you've said? What know do you regret the most? It's going to be something in the past year that we said no to, that we know better to have said no to.

1:03:42That must be a specific company, right? You still don't know, like these things could even be a 10 to 20 billion dollar and still flame out. Like you don't know, and until it's end. The thing that I get most upset of is if I'm just not true to like the style of investing that I do, that sometimes you might get caught up in like around or you're not investing in a way that's true to yourself. Like that, I really beat myself up. If I play the game, the way that I believe you play the game and I miss, fine. But sometimes, I mean, you're just not being true to your principles, that's when I beat myself up a little bit.

1:04:18I answered this with a specific answer on a stage once and the founders got furious that I named a name and I thought it was a compliment. I thought it was like, I screwed this up, what a mistake and the founders were pissed. I don't want to just avoid that because I don't want to not bother somebody. It's that to what Terence said, like the nose that look bad today might not be wrong tomorrow. So I literally try to wake up every day and find myself in that zone of clarity to get these depicts right. And we screwed up something in the past year. And I don't know which one it was and how many. And those are the ones that haunt me.

1:04:56You can be an LP in a seed fund, a series A, and a growth. Which one's the? I think there's a power law dynamic adventure that is very hard to break. And I think the best firms will continue to be the best firms until they are suddenly not, mostly on internal errors and unforced errors. And it's not that challengers don't emerge. I think there's some great firms that have started in the past 10 years to challenge the establishment, but I do believe that the best firms remain the best for a long time. So why don't I give you a hint here, David? I'll say adjacent for the seed, which is Nico Wittenborn.

1:05:38I would say benchmark for the A, and I would say thrive or sequer for growth. You're picking favorites. It's content, David. I am a collaborative seed investor. We work with everyone. We have no favorites, and internally we don't view anybody as other than equal. No, I think you can name buckets in each of those categories that are of quality. And on a given deal, they're all relatively equal. And I think we like working with a lot of people at each stage. I think the second tier VCs are uninteresting. And I think the third tier VCs are harmful. But I think the best ex firms at each stage are good enough to not need to overly rank them.

1:06:26Terrence, can you help? But I think the second and third TV show. No, I think the more interesting point as opposed to naming names is, I think brand is a very interested, like not well discussed, not well understood, but probably the most potent currency in venture. And I think it takes a really, really long time to build it. And then I think once you have it, I think it's very, very durable, but it can slowly to grade and directly relevant to seeded besting. I remember doing this. I was like, curious, like, why are founders choosing multi -stage funds versus a great just pure play seed fund?

1:06:59And the best answer I actually got was the most consistent answer was around brand. And it's like, hey, listen, if Sequoia does or whatever, if some top tier fund does it, and I need to then hire, that brand means something to that engineer, and in terms of validating it. And it really like, so brand is, and I think that's why multi -stage funds can play at the seed stage. But, if their brand degrades or even dilutes or is blessed ambiguous, then you have this tension which gets into this other thing around like signaling and all that. But they trade off their brand. It's not well studied, it's not well understood.

1:07:35But I do think it's like the most important factor or one of the most important things in terms of like playing this game well because it determines what you see and how well I'll give you a fun sound bite though. I don't believe in signaling. I think it's a fake word, and I don't think it exists in this market. I am going to disagree on that one. There we go. We found our disagreement. I know. We've been agreeing too much. So the... All right. Companies doing incredible. There's no signal. Companies doing crap. There is no signal. Crumpenny is doing... Okay. There can be signaling in that. Kinda.

1:08:07And Dresan doesn't pick up the phone to a Sequoia lead series A and be like, hey, Sequoia, what do you guys think about this deal that were maybe going to pre -empt the B4. So a stale deal, a deal that's been in market, that's went to market to try to raise and fail to raise, has a ton of issues. If you wanna label that as signaling issues, that's just a misplaced word. Signaling is often defined as the multi -stage fund does the seed and doesn't do the series A. No one expects the multi -stage fund to do all their series A's if they bought enough in the seed. I actually think that's the perfect stage where signaling is irrelevant and not a factor.

1:08:48Benchmark does a seed or they incubate something. Index isn't calling benchmarking me like, how is that seed doing that you did? And the founders not like benchmark passed on RA, are you willing to do it? It's this lack of perfect information that everybody's operating on. Everybody wants to move quicker than their competitive set to get ahead of what they have convicted themselves to believe is a deal they want to do. Nobody's calling each other. Signaling doesn't exist. No one's calling each other, but they do know if you have money from a multi -stage fund, the posture of that fund, especially if that fund has got a great brand, can determine the general deal velocity, the general deal heat.

1:09:33Okay, so now if you said no you back a company and it's like hey listen I took money from whatever Sequoia and the founders like yeah and they're wanting to like preempt me again That deal is going to get done in days, but they might not want it to preempt them That's a bluff. That's like a sound a founder sound by it That's I think good founders on balance tell the truth I really did sure but again That's your example A of good company, Sequoia leads to see they want to pre -empt the A that's in the top Deathsile or quartile bucket. The bottom half, let's call out as irrelevant, too. It's that second quartile.

1:10:14Again, I don't think there's perfect information. I just don't think anybody's anybody knows what the existing investors think until a deal is stale. Until the deal has been fully in market it fully went out to raise around and it's obvious that the existing investors are not saying yes. That is when signaling happens, but that's a failed fundraise or a challenged fundraise, which one part of that is some version of signaling, but that's well after the actual signaling is sort of relevant. It was my job to write C -checks from a multi -stage fund for a while, and I'll tell you the thing that was very important when our company has went out, and I really believed in Dixit's incredible job at this.

1:10:58And I really took a point of doing this as well, is arming them with a very clear answer on what the internal posture is. Because the question is undoubtedly asked when they're in those pitches room, because there's a pitch who the investors are, boom, there's a great multi -stage fun. Great, what's Sequoia doing? What's the question comes? I think that stopped five plus maybe longer ago, because I think the market moves quicker, and I think that everybody is panicked that somebody's gonna get to the deal ahead of them and they're not gonna get that perfect information. I definitely think that question is still lost.

1:11:35I'm sorry, my question then to you, Terrence, is how did you arm them? Because that's a difficult one to answer. Honestly, and factually, right? And really, as best you can also, like getting firm numbers and saying like, yes, this is what we're going to do. And that was unbalanced like really good, right? and that's the best that you can do, but there can be tricky situations there for sure. Taren, do you agree with me, Taren? The question is still guys lost. The question, I believe, 100 % the question gets asked. I mean, just like the question is, what are your insiders doing? If a firm wants to do a deal, they're not asking that question, they're doing the deal.

1:12:10If a firm wants to do a deal, they are going to move. If you have a multi -stage firm on your cap table that can lead your next round, and a new multi -stage firm shows up to explore your next round, Very rarely are they like will you get the answer from the other firm before we make a decision? Because if you do that, you will lose the deal. And so there is a speed and aggressiveness factor that has changed the way the market operates in these follow -on rounds that I think has removed that, again, outside of a company being in market for too long at which point all these factors play out. I wish it goes back to my original point.

1:12:51At the top of it, the market doesn't matter, bottom end of the market doesn't matter. It's when the companies do know, okay, it can create complications. I don't think the word signaling is the factor there as much as it's like somebody needs to decide that they wanna underwrite this next round. And whether that's an insider or an outsider, I don't think those two things play as tightly together as the word signaling alludes do. Dave, are there any other BS elements that you think could predicate that you'd like to debunk? I don't think outside of the top five to 25 VCs individuals that VCs can magically impact a company.

1:13:32Most of those investors join your board at Series A or B, those five to 25, whatever the number is. And the rest of the investment sort of world is a commodity and probably a negative. I think founders view too often the person that is willing to lead the deal as Potentially good versus potentially neutral or bad There is just like a handful of people that are magical and everyone else is totally fine and is just money Do you agree with that, yeah? I agree with that. I would even say as far as like I think it's it's very applicable even at seed I would even go for stuff further at seed I actually believe like the best investors like for a company to truly be incredible they have to come from the founder it really does it's it's like a real creative process like analogy of them and kind of playing around recently it's like you're a patron they're an artist they got to paint that picture you're not opining on the creative process at all and they have got to really really do that and if you're a good patron you're supplying the money supporting them and all that and this idea that the VC, this notion of like coaches, and there's all these really nice metaphors, but I think it's actually too intrusive.

1:14:43And I think the really best ones, you gotta let the founder pay him. I don't believe in coaching. There you go. So even if you like unpacked coach, it's like selecting players of the team, calling plays. I don't believe in the word coaching or mentors. I believe in relationships. And I don't think that you can take these hierarchical words and apply them to relationships. Do you know what I think you can have a mentor, someone who has been there and done it before and you have a relationship where they import a higher degree of wisdom because of their experience than you do to them. It's a friend.

1:15:15I think the best what versions of those relationships are back and forth and not one side. Do I believe in coaches at a scale? I think that word coach can be friend, shrink, a variety of versions of that. Like, do I think that coaching is helped CEOs get better? Yes, but if that needs to happen pre -series A to Terence's point, I don't think that's going to help. Leadership, figuring out how to impact and inspire great culture, those things can be helped from the outside. And I'm not dismissing that industry fully, but I think the idea that the success of a company is dependent upon outsiders is nonsense.

1:15:55The success of a company is dependent upon employees one through 10, 10 through 100, and the founders. That is what will make or break a company. The investors, the outsiders, the advisors, the mentors, the coaches. That part of a company building is an amplification of what's naturally being built in truth. Do you think investors can make a company? No. So I had Brian Hattigan the CEO of HubSpot on the show and he said that it was a absolute needle mover having sequir that the level of talent they were able to get, the customers they were able to get. But HubSpot was right before that outside impact.

1:16:37And again, you're talking about the single best or one of the five best investors in the world at this asset. Again, back to where I said there's a handful of people inside of a handful of firms that can move needles. Outside of that, I don't think that the outsiders have this magical impact. And later on, they can move bigger needles than earlier on. The seed creation of a company has to come from a founder. There's like random examples of incubations that you can try to apply value to the investor, but that was a founder. It was still a founder inside of that incubation that actually was the reason it worked.

1:17:18Do you think the brand of Sequoia or any of top top top funds is so strong that it actually impacts their loss ratio and what I mean by that is yes because yeah because the firm brand is so strong there are so many capital sources that will do it and quite often companies just need cash to find PMF to find customers to find a land impact. I agree with that. Yes what else do I want to debunk? Parents and any debunking for you my friend? If you go back to the power line venture most VC funds will fail. I hope ours doesn't, but most will. I operate every day under the panic that the investment we make tomorrow is the ability for our firm to continue to succeed in the future.

1:18:01If we aren't willing to understand our vulnerability in the power law dynamics adventure, we're in trouble. And I think this is the exact mentality you need to win and stay relevant in the game. Like, you know, over the years, like, I've had these interactions with super famous investors and the level of, like, intensity that they swarm around things and the hunger. So I do think you need this. I think that's what it requires to be great, absolutely. What's the biggest misalignment between VCs and founders? I think it really gets around these conventions of, like, what the VCs sell to the LPs and what the founders want to buy.

1:18:38And so what the VCs sell to the LPs is, like, hey, we're gonna buy. 20 % of the company, we're gonna have board seats, we're gonna have like, they sell a very specific product, and that doesn't always like fit what the founders wants to buy. I think that the biggest misalignment is most VCs aren't good. All VCs aren't created equal. If you take money from a not great VC, there's gonna be this enormous misalignment. Is it a misalignment if they're not great? They just sit down and shut up, there's what most do. Give up a board seat and then control, and then boom, you're out on the ground. They like do all this stuff, and you're like, just get out of the way.

1:19:15The company's either gonna work or not work, and you are not the reason for either of those two things. If anything, you're the reason it's not gonna work. But that's a bad VC. That's like, no, no, great. The no great is the average, which just does fuck all of them goes to Tahoe. Nope, they like think they have answers. They're like, I spent 42 minutes this morning reading an article that I'm gonna forward to you, that you're obsessed and deep in this industry for the past seven years. Did you see this and please respond to me with what you think? It's like, thanks for your help. Is it helpful to send portfolio companies new competitors that are right?

1:19:49On TechCrunch? Yes, on Tech. You should read TechCrunch all day and then just forward out the articles to the companies that are relevant to that article. No, it's super valuable. It could be in a channel that you've seen, it could be someone that told you about a company. Is it valuable or not? I actually think it is valuable. Yes, I don't think it's valuable. First of all, I think founders have such an awareness of the market. Like, you might get to them like 12 hours, maybe a few days before, but they're, they're going to see it, right? So I would just, I would take your question and reposition it.

1:20:19Is it important for founders to understand the competitive landscape of what they're working in? Yes. Is it your job to like be the first informer of some random two person startup? No. But being in the markets around, we know when a company gets funded well before tech crunch does that mean. We can say to all founders just to let you know in that to really interesting people starting something in your space I just wanted to let you know. Yeah, yeah very A symmetrical knowledge of this of like hey listen this one raised or this one raised this much and that's like not general knowledge But it's known because of what you do that's helpful or this company's doing well or here's why I believe they're doing well Those things are valuable yeah, yeah, that's but but like you don't think forwarding tech crunch articles I think you've been dating.

1:21:06I don't even know if TechCrunch, I don't even know. I haven't read that. Don't me mean to Yahoo. Apollo owns Yahoo. You can't piss off Apollo. They can acquire you and then you're a joke. Do you take cold and bound? Yes. Have you ever had a... And the amount of deals that we've... So like back to what have we screwed up? If I looked back at the quality deals that showed up in our inbox, if we missed in that... And sometimes we see it a year later and it comes through a warm source and we're like, oh my god, it was sitting there. like this is an interesting deal or like this was sitting in our cold box and we screwed it up, that's happened.

1:21:41And more often than I would assume. How do you feel when investors say, well, your job is to hustle in many respects as nonchalant or founder. You should have the ability to hustle into a warm intro. Many say. Not not a bad, but a great, cold email is a formal hustle. Absolutely. One that's like human snaps to attention, personable, boom, that 100 % is a form of Very different than the copy and paste blast. Yeah, like deer's low -at. Yeah, yeah. Do you like a deck? Yes. I don't care. Very much. I think a deck or a product is a way that a founder can articulate the thing in their head. It takes the idea and puts some picture around it and I think it's really valuable to understand thinking.

1:22:25I'm much more of a bet around the person in the general space, but they do need to like like, Kimbe, an authentic, original vision. Were you doing on capsafe? Yes. I put certain provisions around them that they, if they don't raise at a certain point, that it would like convert at something at some point, but I generally do it. We will do an on capsafe. We will catalyze an on capsafe. Yeah, I don't think my job is to have stupid rules. I think my job is to invest in the best companies in whatever mechanism possible. and the probability of the best company is that the point when we are investing and the price we are investing on is the best and lowest point in that company's trajectory.

1:23:09Final one, why does the seed market in 10 years guys? If we do this in 2034, we still gonna be talking about signaling multi -stage funds. What's the discussion then? It's this but like more of it. Maybe there's some like, I don't, I was like maybe there's some like robotic, whatever API stuff, maybe in 10 years, but I think it's just everything that we see, but just more of it. I never understand that with AI. People with a fear of AI, because my AI is predicated around patent recognition and data. And the whole point of what we do is the anomalies. Yeah, maybe you can apply, but sure, you apply.

1:23:43They take a look at your Twitter, your LinkedIn, what you did, where you did, and they spit out a score, and you get 500K or not. Maybe. I think 10 years from now, the bigger firms are bigger. There are, in many ways, less big firms. I'm not convinced that that dramatically impacts the way that the seed market looks in that a 10 or 50 or a hundred million dollar fund betting on the right company can be an amazing financial return and until there are no seed rounds which I don't think is the future. I think the seed market will still be up for randomness and it doesn't mean that randomness is easy or randomness is predictable, but I do think that the seed market looks pretty similar and that the multi -stage firms are permanently part of them.

1:24:34To build on that and to bring it back to just a kind of pull it full circle. I think the core of seed investing is what David and I talked about is this relationship and betting on people early. That's not going anywhere. How you might have some differentiation, any differentiation I also believe is just basically a market efficiency, inefficiency, and if it gets, if it's attractive enough, it will get filled. So yeah, there might be some like differentiation around that here and there. If there's enough kind of edge there, other people do it, and then it just becomes less of an edge. But the core of what we do is this very human, very personal thing.

1:25:09But I don't, I don't think that's going to be replaced by AI in terms of like the core thing. If anything, I think being the human in the room is going to be more important and just really, you know, I think the space I have conviction that there will never be efficiency in is the seed market because starting something is not efficient. Starting something is messy, it's ugly, it takes blood, sweat, tears, it takes vision, hunger, dreams, and if you are a founder with a thought, a dream that you wake up with, getting going is the only thing you think about, not the efficiency of the financing market to allow that to happen.

1:25:49And so I truly look at the future with optimism and I don't think people are gonna stop dreaming and I don't think ideas are gonna stop coming. David, I worry that we actually agreed a little bit too much in this show. Let's do around too. Let's do around too. Paperview, baby. Terrence, if you don't know, we actually are best buddies. We just do it for the views. It's basically like the boxing. The boxing promos where they like get up and fight in the way in. Seriously guys, I've loved doing this. Thank you both so much for being so brilliant. David, thank you for putting up with me for a third time, geez.

1:26:20Well done, hopefully my interview's got a little bit better. You didn't remember one of them. It was unmemorable. Terrence, I love having you on for the first time, but seriously, you guys, it's been fantastic. Thank you for having us. It was fun, a lot of fun. My word, I have to say, I had so much fun doing that. I want to say, she's thank you, David and Terrence, for being such good sports there. If you want to see the full episode in video, you can check it out on YouTube. by searching for 20VC, I always loved to see you there. But before we leave you today, Hyve is the market place for private stock.

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