Satya Patel on the state of VC, flexible investing frameworks & converting to evergreen | E1715

33:31Right? The IPO market is shut, feels like, for this year. And then you'll start to see it open up next year. And then the question is, how do these companies trade? And if they trade at historical multiples, then there's still going to be a lot of cleanup that has to happen in the private markets before companies are in a position to earn a return for investors. What happens if the private companies, these ones that have these incredible series Bs, C's and D's. The market opens up for IPOs, but the prices for those private rounds in 2021 are not supported, and the companies are still underwater four years later in 2024 and 2025, and they're still underwater, but they decide, hey, we're going to go public anyway.

34:19What happens to all that money? They just convert, those late rounds just convert, and they get one times back? Yeah, and they hope that they accrue value and grow in the public markets, right? Got it. Square is a perfect example of that, right? It went public at a price lower than its last private market valuation. And then as a public company until recently, it did really well. What a lot it had. Yeah. Yeah. And I think that's what people are going to hope for. There's no question in my mind. I'm 100 % sure that come 24, 25, there will be a lot of companies who still have not grown into their private market valuations from 21 and early 22.

35:00And so there will be companies that have to go public in order to generate some liquidity and get access to capital who will do it at prices lower than their prior round valuations. And those folks will not have a choice because the way the documents are done, they just get dragged along into the public market and they just take their one X and that's it. And maybe they have a coupon. Could it also result in chaos on those boards? Are you on any of those boards where it could get chaotic? What's it like? Yeah, I think there's going to be a big divergence in points of view around the investors from the very latest stage and those who invested at the middle stage and those who invested at the early, invested at the earliest stages, right?

35:38Like the economic incentives are completely different. And their points of view around liquidity in the short term versus the long term are completely different. So there is going to be a divergence in cap table battles around how to approach some of these decisions. But founders in general have a lot of control in these situations because of how these rounds have been structured in the last few years. And so they're going to have to pick sides in some of these battles. And it's going to lead to some hurt feelings and bad blood. Absolutely. And certainly bad behavior, which we're already starting to see.

36:17The bad behavior is crazy. I mean, I'm already having this in my portfolio. Like just predatory rounds, people jumping the fence, blocking things. It's just, it's gnarly and it's not fun. It makes being a seed stage investor a lot easier. Yeah, absolutely. In these situations. I think you appreciate this, Jason, but for a lot of investors, this is their first down cycle. Yeah. So they don't know how to behave. They're still trying to build their track records. They're still trying to make a partner at their firms and they're scared. Yeah. I mean, the bad behavior almost always roots itself in a lack of confidence in your career and the fear that your career is going to end because the returns are going to be so terrible.

36:56And this is where people, it's easy to make fun of venture capitalists. It's an incredible job in the world to anoint winners and losers and to write checks and get this 20 % carry on the upside. It's magical and it's easy to hate on it as well. But the truth is, if you're a first or second time fund manager through the cycle, it could be over for you. Yeah, absolutely. And listen, it's not bad behavior only on the parts of new investors. There are plenty of people who are at established firms who've been in this business for a long time who, for different reasons, can also act poorly. because they're fighting still for their share of the management company at their venture fund, or they have some kind of carry structure that has some deal-by-deal component.

37:48They are worried about an LP relationship that is on the rocks or unstable. There's all kinds of reasons that people can be scared or can lead them to bad behavior. and it isn't limited to people who are relatively new to this business. We're seeing it kind of up and down the cap table and across firms. Are you trying to build the next Uber or Robinhood? I hope so. Well, here are three important tips for you. First, make sure your data is protected. Obviously, remember, just because your data is in the cloud doesn't mean it's automatically backed up. Your data is your responsibility. You got to make sure it's backed up.

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39:53We don't know what to ask you if you want to get smaller and not take our money anymore. So yeah, it was disappointment. And for us, it was disappointing as well, honestly, because we only had 10 LPs. We had been institutional from the very beginning. And we've really enjoyed working with them. And they've been incredible supporters. So it was a hard conversation to have. We didn't surprise them. We've given them breadcrumbs over the course of time that it might go in this direction. But the good news is we've found ways to work with them since we, you know, sometimes because we're stage agnostic now in many ways, we can do later stage checks and pull together SPVs and we rely on our LPs for that.

40:33Have you done a couple of those so far? Yeah, we have. We've got a handful of those now. It is magical. Explain to the audience what's magical about the SPV process and what it does for you as a fund manager. Yeah. Or now, you know. Yeah, we never did it when we had LP capital. We didn't like the misalignment of incentives that it can create, especially when you take money from people who aren't your LPs in the core funds or not all your LPs in the funds can invest in SPVs. But the idea behind a special purpose vehicle is a fund specific to a single investment. And the beauty of that is your returns are then tied to just that one investment rather than tied to returning an entire fund, where generally speaking, you have to return all the capital in a fund before as an investor, you earn the economics through carry.

41:26And so with a single investment fund, it's just that single company that determines whether you earn a return or not. And then the downside of that is every time you want to do an investment with an SPV, you have to raise capital again. So there's no pooled capital in advance that you can allocate. you have to herd a bunch of cats. We've done 270 SPVs now. I think I've done more than anybody. And I actually literally started an SPV company because I don't know if you heard, Assure Fund Management went out of business. Yes, I saw that. So I hired, and I'll announce it here for the first time, the top three tax people over there because it really is a tax issue at the core of this.

42:05Sure. And I hired the top three tax people from Assure, or what I thought were the top three, my team thought were. And we started spvsolutions.com. Year one is only our SPVs because we have a big group of these to manage. But maybe in year two, we'll let other people do it. But it's the absolute worst business to be in is managing other people's SPVs. But it's such a powerful thing because individuals get to decide, I want to invest in this or I don't. So for somebody who's an active investor, and then they get to decide how much they put in. And they can look at our investment from our fund as a proxy for that.

42:36And we typically do 250K, 500K. And people will say, oh, wait, you're putting 750K into this? You're putting only 100 into this? you're putting 250 does that mean you have a certain amount of conviction it's like pretty much yeah so congratulations you've figured it out when we put a little bit more money in that means i might be a little more greedy but i find spvs are like almost the purest form of being a capital allocator because i have to write a deal memo and then we have every founder do a webinar with our 11 000 syndicate members and man it's just i will have people come to me satya and say you wrote in your book or you said on this episode or of your podcast you know this is stuff you don't invest in and in the deal member you're doing this and you said this is the proper valuation method you've totally thrown that out the window and i'm like yep i have a curious i have a book of heuristics and i'm willing to throw some of them out when i get the vibe that i think that's right the one and we say that all the time it's important to have frameworks but it's important to know when to break the frameworks as a venture investor right yeah you know you're always playing by the framework you're likely going to miss some incredible opportunities explain one of your frameworks or do dueling mental model frameworks here you give one and i'll give one you give one i'll give one for a long time our one of ours has always been uh we don't invest in solo founders and there's a reason that people don't invest in solo founders but you break it sometimes so explain why you have this heuristic why you have this rule and then when you break it?

44:07The simple reason we have the heuristic is, one, it's incredibly hard to build a startup. We find it's much harder to do it when you're on your own and you don't have somebody sharing in the battle with you. Generally speaking, companies at the early stages need to be able to build a product, distribute a product, and build a team that distributes and builds a product. It's very hard to find one person who has all those skills. And then founders also have to be incredible storytellers. And part of their job is to eventually recruit people to their company or sell to customers, sell to investors.

44:50And if they can't get at least one other person bought in, then it feels like a harbinger of things to come. And so those are some of the reasons that we haven't invested or try not to invest in single founders, just solo founders. But we break that rule. Yeah. You have to break the rule when you have somebody who is iconoclastic, somebody who is transcendent. And I have many times broken the rule. And when I do, the reason I tell our team is this person better be exceptional at hiring and inspiring legendary people. because if they're a solo founder, they don't get the benefit of like, I'm the business head on the three headed, you know, monster and they're the tech and they're the design.

45:33And we all come together as this, you know, incredible thing. The other one is just backing builders. So even when you have multiple founders, we have a rule, we back builders. And I actually literally bought the domain and we back builders.com. And we really try to find people who know how to build product because at the early stage, what do you have to kind of figure it out? But then once in a while, we will find a team that's two people or even three, and there's no developer on it. But boy, they work together at Google, Envision, somewhere else. And yeah, they all worked in business development or marketing.

46:06And we just say, okay, screw it. We're going to break that rule. Yeah. We've done that too. I would think we're part of the skill set of building, as I said, the three legs of the stool of the company. One is building the product. Yeah. And so you want people who are technical or product people, but we've invested in non-technical teams. And especially in today's world, it's possible to get really far with a bunch of third-party products that you assemble to build an initial version of a product and get it tested in market. So if the founding team is really deep in an area and knows it cold and has a vision of the world that really resonates, but they're not technical or they're not product people, you can still get excited about something.

46:46And so similarly, we've broken that rule before as well. Okay. What's another one that you broke? What's another heuristic? I love these ones related to the founders. Yeah. I mean, probably one of our primary heuristics is we want to only invest in founders who've experienced the pain firsthand. So it's hard for us to invest in founders who are coming to a problem or a market area based on academic research or like having looked for a really good idea yes which by the way was bezos right like so yeah you know that bezos didn't suffer through not being able to buy books online he literally was like this seems like something you could actually send in the mail because it's not that big and it has a high profit margin like he literally did an analysis to find that exactly yeah i think he was trying to decide between ties and books right because ties were lighter and high value.

47:41And anyway, yeah, so that we have always said that we want people to experience the pain firsthand and really know the domain because they've lived in it. But we break that rule every once in a while because you come across a team that has done so much work to learn about an area and have some functional expertise that is relevant, but maybe not the domain expertise and have this incredible insight based on the work that they've done. And you have to write the check. they figured something out they have some secret that's right space they figured out and you know when you look at it airbnb had no right a couple of designers from risdy to come in and reboot hospitality and if you got five amazing people who were incredibly successful in the hotel business and put them together and gave them unlimited funding they could never have conceived of airbnb it would have been that's right just they would have never accepted it you know the other one i have is entry price matters and you know i'm like you know it's really important we have to have a reasonable entry price here and then it's like you know what this founder wants 15 million they want 20 million the product doesn't exist it's just in their head but they've done it before and they got the band back together oh it here's a million bucks there's a half million bucks yeah we got to be on this ride and you know i will throw out the entry price matters rule if it doesn't but you want to have that discipline about entry price which is why i took off 2020 and 21 i was spending a lot of time on the accelerator and our accelerator and selling secondary shares in 2020 and 2021 to be honest we have always believed that entry price and hence ownership matter especially when you have a fund it's all about the the cheapest price you're ever going to get is the first time you buy So price and ownership matter a lot.

49:31Airbnb leads us to a different example of a heuristic, which is we never think about market size. Right. Because if you had looked at Airbnb, you would have said, how many people want to stay on other people's couches? Yeah, that's like a 1 % market size. Right. And same with, I remember how many times I had the argument about Uber with different people who were like, well, the taxi industry is only so big. Right. Right. Right. So our view is we don't think about, is this market worth billions of dollars today? We think about, is this market large? Meaning, is the pain felt by a lot of people?

50:05Is the pain acute? Is it a hair on fire problem or kind of a top three problem for the people who are experiencing it? And is it valuable? Can you extract some economic rent for addressing that pain over the course of time? And we've always found - You know what I get to that one is frequency. How often do they have it, right? The pain? Yeah, that's a good proxy for it, right? And what we found is in our best companies, we've always underestimated the market size. Because the great founders are able to find a way to expand the market over the course of time. So as long as you start with something meaningful enough, people will find a way.

50:40And so that's a heuristic that we are thoughtful about, and you need to do the right assessment around whether the pain is large, acute, and valuable. um right but on occasion we'll break even that one markets but like how do we define huge here because the great founders induce a market to exist what was the market for podcasts before podcasts exist is like people trading like basement tapes of you know audio interviews i'm sure they were i'm sure there were underground interviews that you know people traded tapes of but you know again there was pirate radio i guess but how do you even size podcasting well podcasting is so long tail that now there's a podcast on every topic and it's kind of like NPR has a hundred shows or whatever.

51:27Okay. That was just on the long tail. I mean, there's a hundred thousand after that. How do you even conceive of the fact that, and you had a great investment anchor actually, where you benefited from, tell me a little bit about that one. And I think that one had to be a little bittersweet. yeah absolutely for me yeah absolutely explain no that's an example of a company that believed in uh the value of audio content particularly relatively short form audio content to start and they wanted to build the platform for the creation distribution and monetization of that content and they succeeded and they yeah they succeeded um They sold to Spotify, as you know.

52:11And our view is that could have been an enormous business. But the founders need to decide what they want the next phase of the company to be. And they decided they could have a bigger impact within the confines of Spotify. It's a great outcome for everyone. So no complaints at all. But one complaint. There's still one complaint. Because if you have a business that gets, you did a 15x on that probably. yeah more i think yeah yeah because you're the first investors yeah yeah you were in the 12 million dollar round it sold i heard for upwards of 200 i don't know if that number ever exactly came out um but at least 200 i think and so the pain of that is that well what if it 10x from there and instead of a 20x or a 30x whatever you have a two or 300x but the the thing about i'll say about that jason is like it was never going to 10x 20x 30x if the founders weren't going to will it to that as an independent company so they if they had decided that they were better off in the confines of another company and that was the right outcome for that company i think that is a very namaste way to be at peace with it i this is i think for me one of the toughest things that i have to learn to deal with which is you know sometimes founders take the quick win and i understand it i did it myself with weblogs inc when i sold it to aol and i needed to get that first win but back then you didn't have secondary and i gotta think anchor could have just sold the founders could have sold half their position and gone long especially at that time and built a competitor oh man it just would have made me crazy you know in our in our business it works both ways right like i'm sure you've heard that there are investors in snapchat who wanted And Snapchat to sell had a billion dollars.

54:01And Evan didn't. And he saw what it became. Yeah. And the investors benefited from that. Right? So you never know. You never know. I guess that's true. You invested in Mercury. Congratulations on that. Thank you. But you invested later. That was a late stage investment for you. Yeah, that was after we'd moved to our personal capital. what what um let's go back to our little dueling banjos here i have one yeah we will never invest in an accounting nightmare or messy cap tables unless we will so if this company is going really well and they gave 30 of their company to a dev shop that did a hundred thousand dollars worth of work like we normally will not engage that company unless i really love it and then i'll say let me talk to the dev shop and explain to them why they should take a hundred thousand dollars and five percent of the company so they don't screw up the cap table there's a small slice of this and getting the hundred k is better than it being unfundable so yeah that's one for you you fix the cap table before you get invested correct i use our bankroll and i say to the founder listen we can't in good conscience you know this cap table is so screwed up you guys have 40 of the company.

55:19You gave a seed investor 30%. You gave the dev shop 30%. You don't have control of your own company and you just got to 25K a month in revenue. There's no VC who's ever going to invest in this. We have to clean it up now. So I'll put in 500K. 250 can go to buy out these existing investors. They can still have skin in the game. They get an amazing return. And then you guys get back up to 70 % ownership. The investors own 25 % in this Fakaka maniac dev shop that you gave the company to gets 5%. Yeah. But I'm assuming if you aren't able to clean up the cap table in that way, you're not going to invest, right?

55:54Yeah, I totally agree. Messy cap tables, messy accounting. Just life's too short. I mean, I have these accounting situations where people are doing cash-based accounting for a subscription product where they sell two-year subscriptions. And I'm like, not only is this a problem because we don't know if the plane's at 30 ,000 feet or 3 ,000, it and we don't know if our speed is you know 600 miles an hour or 100 and this is dangerous to fly a plane like that we can have tax issues you can get hit with the tax bill that we don't expect and this could be a year of cleaning stuff up there are other heuristics that you look at we did tam we did the founders multi-co-founders we did cap tables what else when you go to invest you say you know we can't do that anymore we can never do that but then maybe we'll break the rule yeah like are there categories you'll never touch like i've had i've gotten my ass kicked in direct to consumer and hardware those are hard we know we've always said that too but we've made exceptions uh in those areas um and you know sometimes that works out all right you know cruise which we were early in i can't remember i think you were an investor right hardware started as a hardware aftermarket kit right um that turned out just fine that was a quick flip for you was it not yeah it was two years i think something like that it's not weird when that happens you invest in something two years later you just get this you know 5 10 20x yeah it's crazy crazy and you're sending money to your lps early and they're like what happened and you're like yeah you know how we told you it's 10 years yeah it's like we got lucky sometimes weird stuff i had this happen was a great podcasting app called swell just love the interface of it i put a quarter million or a half million dollars into it and i just was like oh this is the one like i love podcasts this is 10 years ago i don't know 9 10 years ago and then apple's like you know what podcasting is important we'll buy that company and i was like oh no no no no don't sell and they're like yeah we're doubling your money good news doubling your money like your situation right i was like that's that's the worst thing i could ever hear is double it's interesting i don't know if you've experienced this but our very best companies almost to a t have all almost gone out of business several times in each of their paths.

58:08100%. If you're not almost going out of business, you're not audacious enough in all likelihood to be an outlier. So Uber existential moments, Tesla existential moments, Airbnb, they had the crucible moment when the person trashed the apartment and they had it later in their life with COVID. I mean, these companies have so many existential moments that you have to deal with. in terms of psychology what have you learned about founder psychology have you started to have we're talking about our mental models things we'll never do the heuristics we like we like to think about thinking as investors but let's just go to archetypes of founders a lot of people want to believe there's one type of founder and i and i do have this archetype and this heuristic we're not going to invest in abrasive people who are just cantankerous and just brutal to deal with unless they're incredibly high-performing.

59:03And it's like high-performer, if you do the four quadrants, like high-performer, low-performer, easy to get along with, difficult to get along with. Don Valentine did this quadrant famously, and he was like, where do you think we make our money? And it's like high-performer, hard to get along with. It's almost always the case. What are the archetypes that you found and the ones you love working with and the ones that maybe founders can learn from that this type of founder fails often or more often. So another heuristic we have is that we'll never invest in a round that doesn't have a lead investor.

59:39Explain why. When we were a fund, we were often that lead or co-lead investor, and now we are less often. And the reason for that is we believe that if there's a responsible party as a lead investor, then we know that somebody is paying attention. And just as importantly, also know that there's somebody that the founder feels responsible to outside of the company. And if they're willing at the earliest stage when we typically invest to have that kind of obligation, responsibility, relationship, we think it says something about their perspective on company building, and on the time and energy it's going to take to build this company over the long term that is indicative of the kind of founder that we want to back and is likely to have the most success.

1:00:38So that's a heuristic that we've always had. I love that, by the way. And then to your 4x4, or Don Valentine's 4x4, our largest companies, Chime, Plaid, Gusto, Shield, Bowery Farming, I would say that all of those founders fall in the high intellect, high EQ box. None of them are in the cantankerous bucket. Now, it's hard to know, you know, if that's selection bias, or if it's something that has been a predictor of success for them, or what it is but we we we haven't had the experience that you've had um in terms of the cantankerous folks who've knocked it out of the park i've had both there are some people who are just incredible high eq want to make everybody feel great soft power individuals uh but man i kind of think when we look back on this founder friendly and i'm using air quotes right now moment in time there has never been a more duplicitous deceptive dishonest double dealing term in the history of our industry absolutely that what people say is founder friendly is just actually giving the worst support to a founder to say it's a lack of support it's a lack of support is what's defined as founder friendly no lead investor do a party round so nobody's in charge.

1:02:11So nobody cares that you're running out of money. Don't do board meetings. Don't give information rights. Don't share information with people who have more experience than you, who have backed you and have the bankroll to give you more money and create an adversarial relationship. And this did start a little bit inside of YC, where there was a sort of like, I know Paul Graham had bad experiences and those bad experiences are real. He had bad experiences with VCs. But for every bad experiences, I think there's a hundred other great experiences. And then to, I think it just, it kind of got away with itself, which was, if I can get 50 investors for 50K each, I'll do that.

1:02:47Why have somebody put in a million and then say we have to have four board meetings a year or have to write a monthly update? Jason, when we started Homebrew, we wrote early on a blog post around the value of boards at the seed stage. We said from the very beginning that if you take a check from Homebrew and we're the lead or co-lead investor, there will be a board created. It will likely be the board member. You can choose for somebody else from the investor syndicate, but there will be a board created. And so many people, founders less so, but investors told us, you'll never win an investment.

1:03:19Nobody's ever going to want to work with you. And 10 years later, not only do the results prove them wrong, but I think we feel vindicated by some of the things that have happened at these companies that have had no oversight over the last few years, right? Like where you're seeing fraud or misrepresentation or excessive spending without limit or bad hiring or whatever it is, right? Like, again, it comes back to that heuristic that we talked about, which is if a founder is unwilling to have a lead investor, let alone a board seat, but a lead investor at the seed stage, then we think that, yeah, that's an investment we're not likely to make.

1:04:02What is the, and you advocate four, six a year at that early seed stage? What advocate? One hour board meeting? Yeah. How many? Oh, yeah. Usually an hour, probably an hour and a half board meeting four times a year. So like literally the ask and the recommendation is 90 minutes times four. I'm not a math genius, but it's about six hours. And if you say it's going to take 10 hours to prepare for each board meeting, which I think would be a lot at this stage. I mean, we're talking about 46 hours, one week of the year is spent being thoughtful and considering what we've accomplished in the past three months, what we want to accomplish in the next three months and talking it out as adults in a room who have a vested interest in seeing this succeed and making sure that risk of ruin things like insurance and cap tables accounting hr are not forgotten because a lot of founders have never done that stuff before so think about all the unnecessary mortality in our space it's literally like infant mortality like we could just have an incubator here and just some basic rules of the road and i'm amazed i get into these seed stage board meetings we copied you we did the same exact thing hey if we own five or ten percent let's just four board meetings a year we tell them one hour to 90 minutes each same exact as you and it could just be product we could do product at one we can do hr at one we could just have a theme or you can do quickly product hr you know challenges whatever you want to do um and my god the amount of times that we have um saved a company from flipping the car it's countless it's countless yes i mean i think all the companies that we've worked with would tell you, even if they're hesitant going in, it proved to be valuable.

1:05:51Because all it is, is a 90-minute step back from the day-to-day of the business once every three months to focus on one or two strategic topics that you probably won't make time for otherwise because you're dealing with all the crap that you deal with in the day-to-day of the business and having a couple of other people to help provide perspective on those topics. Who wouldn't want that? it literally like if i said hey you could buy this service for ten thousand dollars a year the same if you had a hundred people and you said hey ten thousand dollars a year you could buy this quarterly you know coaching session um or you could have it for free like people would pay the ten thousand dollars for that so i mean it's it's hilarious to your point i think like all this uh rumor and anger and whatever it was got wrapped up around this notion of what a board and a board member is.

1:06:44And the work to dispel it is really hard. But I think it's becoming clear to a lot of people. And to your point, for every one bad example, there are so many good examples, which is why I was never a question for years around the creation of a board and the idea of having active investors. And then we got into party rounds. And then in the last 10 years, kind of boards with no board, you know, companies with no boards. Oh yeah, I mean, look at FTX. Who was on the board of FTX? I mean, who was on the compensation committee? Who was on the audit committee? Like compensation committee and audit committee, they come, I don't know what, series B, series C, 10,$20 million in revenue.

1:07:36there was a company with billions of dollars slashing around and by all means and all observations we'll find out it will come out in the lawsuit and the criminal trials no comp committee no audit committee i mean this is just a dereliction of duty at the highest level well it just goes to show that no matter how long you've been in this business like you can fall into making mistakes because you're trying to get involved with a particular founder or a particular company, right? Like there, there were obviously high quality investors in FTX,

1:08:12who FTX is an anomaly relative to how they probably do oversight and management of other companies they're involved with. But that's the world we were living in the last 10 years, right? In many ways, the price of winning was to commit a number of unnatural acts. And unfortunately, some of those unnatural acts are going to lead to pain. and suffering it literally is gonna it is the root of all this evil and we found and you could tell me of this track shores that when we told people hey we're on the board of the company and we've done six board meetings and when they did their diligence for the series a or b or whatever it was the next round and they were able to see the board decks or see the projections the companies in the seed stage were at a massive advantage had a massive advantage over the non board meeting ones because they felt more venture ready and they felt like they would be better stewards of capital.

1:09:07So what did you see? 100%. It was one of the arguments we made in that very first blog post is like, we think it'll be a signal to the next set of investors that this company is venture ready. It's great practice for the founders to be able to do kind of low pressure board meetings before the big check comes from a series A investor who's going to be on the board forever, probably. Right? So like just having that practice and that muscle memory around what a board meeting feels like is really beneficial to founders. But so there are lots of reasons why, in reality, there's value in having a board at the seed stage, and lots of reasons that are made up around why it's not a good idea.

1:09:51Yeah, we basically made it super simple, because we are high volume investors. We have the accelerator. We do seven companies in each one. We've done 28 of those. And then we started something founding university where we do 25K into companies that aren't even incorporated yet. So we'll give them the 25K to like incorporate and get going. We have a large number of names. And what we tell them is if we own over five or 10%, we've changed it over the years. We'll have a board observer seat or a board seat option. We'll have the option at that. And then when we've been trying to automate people giving us their revenue.

1:10:20So we asked them to do a monthly update. very short you know like literally one pager but if we don't get that we'll just say hey can you just give us cash on hand at the end of the month number of full-time employees how much revenue and how much spend and then we'll we'll do some math there um and when we did that we just said anybody who hits five hundred thousand dollars in yearly revenue so you hit that 40k a month mark ish we just say you know what we would like to elect to start these board meetings um and can we set four dates for next year and people like did i do something wrong am i in trouble is quite the opposite we've been watching you young jedi and the force is strong and at 500k in revenue pretty good idea to have a board like i think 3 million in funds raised or 500k in yearly revenue you should want to have a board you're you're a real concern now you're a real uh business hey let's talk about diversity yeah sure no no i was just gonna say we approached it also a little bit in terms of helping lead the horse to water.

1:11:24Because in addition to the board seat and the board meeting, what we said is, aside from the board meeting, we should have some regular cadence by which we talk about the actual stuff going on day-to-day in the business. And so we think that should be weekly or biweekly, but you tell us what's useful for you. And because we were having that very tactical conversation with people in advance of the first time we do a board meeting, by the time the board meeting comes around the first one it feels like a very natural conversation of go from like the day-to-day tactical and say hey like we're thinking about the long term of the business why don't we have a conversation about that and it turns out that's a board meeting right it just happens to be a working session that's a little bit longer than the regular touch base and focused on a different type of issue than the hair on fire problem that you're dealing with you know in any particular day or week and so uh by the time that the board meeting came around, everyone was like, oh, this feels like what I might do with people on my team inside the company.

1:12:24And now we're just happy to have an investor here. And it sold itself over the course of time. So we never had to convince anybody like now's the time for a board meeting, or we should do a board meeting. It was just the natural progression of things. And again, I'm definitely not going to argue we're the world's best board members or anything like that. But I think it's an important sign that I'm on a bunch of boards now. The other commitment we made to the company is when we made the investment at the C is like, we want a board seat, but we'll step off your board at the Series B. Because when you have a Series A and Series B investor on the board, you really don't want three VCs on your board.

1:13:02And we've been working with you long enough where we'll have a longstanding relationship with you. turns out it's a surprise to us you know more than half the boards i'm on now either in a formal board seat or as a board observer or post series b of course that you you did a good job but they want to keep you around why wouldn't you want to keep somebody who supported you early around it's good for the spirit of the company it's good to have you know somebody who knows the entire history i'm on two boards that became unicorns and both of them we were the lead seed investor and well one of them we were the lead seed investor density we put the first 400k in and the second one grin we incubated and in both those cases i've been on the board and i could have stepped off i guess and let the other series b investors series c investors you know and i get a free ride but i'm like i just want to be there with the founders when they ring the bell at the nasdaq you know i just yeah i think it just speaks to yeah it just speaks to like the vast majority board interactions are good and i think most founders with those board interactions find real value hey uh the industry wasn't i'll wrap on this um because you've been very generous with your time um screen door uh you started uh i guess uh this program to help maybe change the face of vc a little when you and i came into it let's face it it was a lot of stanford mbas harvard mbas wharton it was a pretty clubby yeah even just when we started yeah uh i think they look mostly like me and sometimes like you i think you would you're indian i take it yes yeah yeah it wasn't true uh so if you're indian like i think that was kind of the first uh underrepresented group to maybe be allowed into the the club typically white male space congratulations relations but black women hispanic women people of color generally man it's been it was pretty it's pretty sad no um you've uh tried to turn that around tell everybody about uh screen door partners.com uh is the domain name and screen door is the name of this effort tell everybody what you're trying to do here yeah um so to your point kind of where vc dollars go who makes vc decisions is still unfortunately largely unchanged from when the industry started and certainly doesn't reflect the population more generally.

1:15:33When we started Homebrew, we decided very early on that it was never going to be larger than the two of us. And so we didn't have the option of building a firm and changing the nature of the industry by hiring a bunch of people. and at the same time as we were building homebrew kind of as we matured uh we were being approached by new gps every single month every single week um and a lot of them came from underrepresented backgrounds maybe surprisingly um people trying to break into the industry uh and the number one thing we heard from them was well there's no shortage of advice for us but there's absolutely no money.

1:16:14Yeah. Thanks for the meeting. Yeah. Would have preferred a check. Exactly. Thanks for all the praise, but still need a check. That's right. And then Hunter and I are big believers that we're all standing on the shoulders of giants in technology, right? Like everything in technology was built on the backs of somebody else who came before us and a back of technology that came before us. And we've benefited from this virtuous cycle that's existed in technology and VC with LPs providing capital to VCs, VCs providing that capital to founders, founders hiring employees, those companies going on to be successful and that wealth and that knowledge feeding back into the ecosystem.

1:16:55But that virtuous cycle has only been accessible to small segments of the population, folks who primarily look like me and you. And so we took all these data points and we said, well, there seems like a real opportunity here to build a product. We come from product backgrounds, so we try to identify white space to build a product that maybe doesn't try to bring people into the existing virtuous cycle because that seems slow and difficult to scale, right? Like the big platforms hiring their one underrepresented partner and giving them a checkbook and proving themselves over the course of time, et cetera.

1:17:30That's a decade long wait in line. Yeah. It's a multi-decade wait in line. And we saw what happened. And at Kleiner Perkins with that, without pointing fault at anybody, they tried their best to try to diversify the firm. It didn't work out. And listen, there are lots of good efforts underway because that is an important change still. But we just want to try something different. We said, well, what if we tried to recreate the virtuous cycle? What if we tried to make it possible that the people who are in this virtuous cycle from day one are people who come from underrepresented backgrounds? And so we looked at that cycle and said, well, the right entry point or the right way to kickstart it might be to put underrepresented venture managers into business because they're empirically more likely to back underrepresented founders who are more likely to hire underrepresented employees.

1:18:21And if those companies become successful, then that success is going to yield more dollars and more advice for people who look like the other people in that virtuous cycle. Much more disruptive. So that's our theory of change with Screen Door is a lot more people can be impacted a lot more quickly if we as Screen Door, which is effectively a fund of funds, helps put underrepresented venture managers into business. So we try to find underrepresented managers who are raising their first funds, provide them with anchor institutional capital, combined with advice from GPs who are still practitioners, but who have been in their seat before, but are now on their third, fourth, fifth funds.

1:19:04So people like Charles Hudson at Precursor, Kanye Macabella at Kindred Ventures, Kirsten Green at 4Runner. These are people who are spending real time advising our managers and helping with the diligence of them. And we started that fund to funds a couple of years ago. We've backed 11 managers so far. We just hired a full-time managing director. We have big plans for what Screen Door can be over the course of time. but the high level objective is to be the leading LP for underrepresented managers in the venture business with the idea of changing not just the face of venture capital, but the face of technology by virtue of empowering underrepresented VCs.

1:19:46It's amazing. So every time you meet a new fund manager or a GP, somebody wants to break into this, you will do an SPV or something and pass the hat or just pass the hat amongst you and everybody just makes a commitment? No, no. We have raised funds from traditional institutions. So our Our LPs are Princeton, Harvard, Northwestern, Duke, Virginia, major endowments, a certain number of family foundations. For them, we're solving a real problem, too, because their institutions are so large that they can't write small checks. Most of these funds are smaller than$100 million as first-time funds. Yeah,$10,$20,$30 million funds.

1:20:27Yeah. It's hard for these institutes to evaluate managers who don't come from traditional backgrounds. The traditional path has been to apprentice at a big platform and spin out and start a fund. And these people don't come from those backgrounds for the most part and don't have traditional investment track records. And so they have given us capital to help them identify these and train these managers so that they can support them directly as their funds mature and become larger. um and so we're solving a problem we think for both sides of the market yeah it's really commendable i think it's exactly the right strategy um waiting in line is bull it takes too long uh you get marginalized inside of these firms from what i've seen often they're not given check writing ability and you know then you you're spending all this time and i hate to use the term but i feel like a lot of firms it's it's like token uh you know handouts where they'll put people into positions and call them a partner but they're not even meeting with founders or writing checks so i feel like this is the clear path and actually we are also lps i'm an lp in monique's cake ventures so it's great to see that you support her exactly yeah i mean And our view is that we are an economic vehicle with a societal mandate.

1:21:48And we intend to deliver outsized returns via these managers and demonstrate to people like there's a untapped, unrealized economic opportunity here. And we want others to follow suit, hopefully. Yeah. I also think like these managers, because this opportunity is so hard fought, like I feel in a certain way, it was very hard for me to break into this. that I just feel and might be my own imposter syndrome, even at this era, I feel like I got to work twice as hard because I didn't go to Stanford or whatever. I mean, now I do have a lot of those folks want to come work for me. So that's kind of rewarding.

1:22:25What do you think of the whole Silicon Valley Bank thing and sort of what's happened since then? Probably the biggest self-inflicted wound that any institution has ever delivered to itself. Unbelievable, right? I mean, the stuff that's come out since, we're sitting here and now they're saying like they knew the risk they were taking there were alarm bells going off at the end of the washington post story yesterday but apparently this was kind of a known problem inside the firm and they were aggressively trying to just make returns to make the stock pop and i think we'll find out in the post-mortem that i also but i think it was a communication misstep as as much as a risk misstep right the risk is real like that happened in the past but like they and they got to a certain point but if they had done the private placement or the public fund in in private right now said when it was already done yes um and communicated strength uh to the market um you know in theory could have prevented a run because a run is just a lack of confidence, right?

1:23:30Right. But you can't blame anybody who has payroll to hit on Monday from saying, you know what, I've got a million dollars or$2 million here and my payroll is$300 or whatever. I got no choice. And it's a shame because there's a reason people worked with SVB that are not about it being like the clubby Silicon Valley Bank, right? We were Silicon Valley Bank customers as a fund. uh we've had to move our banking uh temporarily to uh another institution we've subsequently moved a bank back to silicon valley bank um and the other bank silicon valley bridge bank yeah right uh what is it going to be what is it going to be now is it is the silicon valley brand going to still exist no it's been acquired by uh yeah the other bank and so there is their brand now but The thing I'm trying to figure out is, are they going to keep that high touch culture or are they just acquiring it and they're just like, hey, well, here's our standard offering remains to be seen.

1:24:29I don't know. But like simple things like our temporarily new bank. They can't do batch wire processing. Which as a fund, if you're trying to make a distribution to your LPs, as an example, makes it impossible. Right. Yeah. Here's a huge list of wires we need to get done, get to work. And then on a more personal note, my first mortgage was through Silicon Valley Bank because nobody understood the value of equity or understood a K1 and didn't have a W2. Right. They were the only ones who could underwrite that risk. Right. Right. So both from a personal standpoint and professional standpoint, there are lots of reasons to work with SVB.

1:25:12And it's going to be a major gap in the market if nobody can fill those shoes or they can't continue to operate the way they operate. Yeah. My first two mortgages came from Silicon Valley Bank for my office space and then for my first house. I still have one of those. I still have the office space one, although I'm selling the office space because San Francisco. Yeah, we still live in the house that we bought with Silicon Valley Bank mortgage. I'm getting barbecued online on Twitter. people took a clip of me saying how delightful it was to work with them and i'm like uh yeah they came over they popped bottles of wine that's a liability i have with them not the other way around i'm i'm not short the stock along the stock i have like the tiniest of mortgages but that's their liability not mine and they did such a wonderful job of like you're saying assessing a vc's net worth and future revenue streams and saying okay yeah it's reasonable that this vc their revenue is spiky k1s come in uber distribution oh robin hood distribution oh no distribution for two years oh huge distribution this year like it's a different lifestyle and they uh they were and this was early in my bc career when all my value was in google stock right yeah like they understood how to look at google stock and no other bank would even consider it no they would just be like what how do we do that yeah it's uh sad to see it happen and completely unnecessary.

1:26:30Great to have you on the program. I will see you next year. I'm booking it for next year. If you make it, you make it. If it takes me another two or three years, that's okay too, but we'll do a portfolio review next time. I don't want to keep you on that. Thanks for giving me the opportunity. Always fun to chat with you, Jason. It's great to chat and thank you for sharing all this information. If you want to have one of the great legendary investors now in their second decade with their own money, their own skin in the game, I give no higher recommendation than the team at Homebrew. They are in it for the right reasons they don't need to work they're already done well for themselves they do it because you love it you have a passion for startups and company that's how we want to spend our days and that's as great as it gets you know when you have an investor who is that passionate uh it means they're focused on your success so uh you want to pick your investors wisely and one of the wisest decisions you can make i mean this sincerely is homebrew great job thanks i really appreciate it all right we'll see everybody next time on this week in starvis bye bye Thank you.