The New Power Law & How I Built a $100B Portfolio | E2007

0:00I actually think this is one of the biggest mistake people when start this business as an engine investor or venture capital do. They're not thinking enough about sourcing. Founders have a lot of choices. How do you make sure you see the best founders before anybody else? So we've ramped up our incubation strategy and we're incubating now about a third of our fund. So what that does is it enables the sector specialists to take that network and take markets that they like and themes that they want to back. And they can incubate a company with a founder and an operator that's proven. You know, when you do actually specialize and you do focus, the customer is the one that benefits.

0:34This Week in Startups is brought to you by Fidelity Private Shares. Manage your cap table and data room, get faster, more accurate 409A valuation, and fully automate your next financing round. Visit fidelityprivateshares.com. Mention our podcast and receive 20 % off your first year paid subscription. .tech domains. Don't miss our Jam with JCal contest. To apply and get more details, go to jamwithjcal.tech. brought to you by.tech domains. And Oracle. Oracle Cloud Infrastructure, or OCI, is a single platform for your infrastructure, database, application development, and AI needs. Save up to 50 % on your cloud bill at oracle.com slash twist.

1:20I met our next speaker because we were both sort of in the orbit of Sequoia Capital. I had been a founder and he had sold the rug to one of the partners there. He went on to raise hundreds of millions of dollars for his funds and is one of the most thoughtful, hardworking individuals I've met at the seed stage. And I judge everybody, like, very, very harshly. Starting with myself, then my team, and then people I meet. And, you know, I just watched Pejman from the moment I met him when And Sequoia was recognizing his non-traditional path into venture. And then I just watched him do the work. Yeah, just people love Peshma.

2:08And I do too. He's just a great force of nature in the industry. So we welcome my friend Peshma. He's going to talk about his incredible success over the last decade. And his lessons. Thank you very much. Good morning, everyone. I actually was thinking to bring a gift for Jason for what he does and you can see it and I couldn't find out what to bring that is appropriate and my wife just came back from a trip to Iran and she brought this incredible cookies made in Iran that is going for tens of hundreds of years in Iran. And I thought what is more appropriate that Iranian Muslim immigrant me coming to America, being a venture capitalist, give this gift to an American boy raised in New York with parents from a background in Greek and Irish, that he truly dedicates his life, his family, everything to this ecosystem, helping founders, LPs, GPs, angel investors to really make a dent in the world.

3:10But at the end of the day, I think if we cannot come to this, that technology giving us the opportunity to make an impact, I think we have not done our job. But Jason has already done it. So Jason, this is for you. Thank you so much. My name is Paige Mannozad. I'm the co-founder and managing partner of Pear VC. We are a pre-seat and seat specialist. That's the only thing we do every day. We are a team of 26 people. My partner and I, we started the Pear in 2013. we raised$432 million two years ago in the worst time of the history. This is perhaps the biggest dedicated pre-seed and seed fund in the world by non - and multi-stage firm.

3:48Mara and I, we know each other for 23 years. I actually funded her husband's company the year 2000, her company in 2003, and I chased her for four years. Finally, I convinced her to start this fund with me in our first office with Coupa Cafe on University Avenue. You're kind of yin and yang. I'm a college dropout. She's a Stanford PhD. She started three companies, sold all three of them successfully. I actually, funny enough, I never worked for a tech company. She has 14 patents. I have zero patents, but I have a lot of scars on my body as an angel investor. I'll tell you the story. And this is a topic of the talk.

4:26I historically was very fortunate, lucky to be the earliest investor in the companies that worth over$100 billion. And depends on the public market, this goes up and down. This is the one that we at PAYR are very proud of it. If you look at every sector, we have been seed investors in really truly category-defining companies. And in each one of them, we were either the first checker among the first few investors in the company. And many of them didn't have a product when we invested. But my journey didn't start there. This is me when I was homeless in 1992 when I came from Iran. And this is I was sleeping in an attic above a yogurt shop.

5:03And I'll tell you the story. So I I grew up in Iran. I was 10 years old when the revolution happened and then 12 years old when the war happened. So my teenager life was just going to school, come home, do homework, go play soccer and then wait for Iraqi jets or missiles to bomb our city. So it was a tough teenager life. I was a very good student, but I was a better soccer player for I played professional soccer. Then I hosted Iran's most popular radio sports talk show. I went to university, a top university in Iran and I dropped and I decided to go to Germany where my parents lived before me.

5:38I got a great scholarship to play soccer in Germany, but four or five weeks into it, my brother pushed me to go to the U.S. Embassy and for no reason I went there and luckily I got a visa. So I came in 1992 with no plan. Typically you come to this country, you go to school or you come do something. But for me it was kind of crazy to live the life in Germany, come here. I only had$700 and I didn't speak one word English, but I actually, the biggest challenge was I was in love with the girl back home in Iran and I thought I'm going to lose her. So I called her every day from payphone and 1992, there was no WhatsApp, there was no internet phones.

6:17It was like three,$4 per minute. So I remember I got this bag of quarter every day going to payphone. So the money was gone. I bought a 1973 Chevy for five payments of 150 bucks. And I drove every day for an hour and a half and washed cars in San Jose, came back. So my first job in America was washing cars, but I rest assured you I was the best car washer the world has ever seen. My English improved. I ran out of money and I got this job and I begged the owner of the yogurt shop to let me sleep in an attic. This is truly an attic. Imagine you live above this, no windows, waking up every morning, 5 a.m.

6:54to 5 p.m. and then go to college, come back. It was emotionally hard because I could have taken a flight, go back to Germany, but something was telling me you can keep going. Something magic happened. One of the nights over there, I saw an advertising for the rug gallery in downtown Palo Alto. I called, they rejected me. I insisted that they should meet me. The next day I got the job and I started to sell Persian rugs right on University Avenue. And this is me. And again, I sold rugs like no one else. I remember one year, a couple of years in a row, I sold$2 million worth of rug. Most of our companies will die before they get the$2 million ARR.

7:34So, and...

7:42Most Persian rugs, you come, Jason comes and say, Paige, I bought a home in Hillsborough and I'm looking for a rug from my dining room. So Jason and I will look at rugs together and ultimately I bring 10, 20 rugs to Jason's home. When you go to Jason's home, obviously you start to talk for hour, hour and a half. Six, seven years into selling a lot of rugs, I realized all of my customers are top venture capitalists, founders, people who cannot meet them, even if you're a VC world or even in a tech world. But I had barbecue with them, with Doug Leone, John Doerr, Jason. I actually sold rugs to Nils.

8:16Nils is here, so you can be, many years ago in Portola Valley, 20 some years ago. And I was in awe. Obviously, there were wealthy people, but I always thought businesses is, you make this and you sell it. I never knew you can build massive companies, create jobs, create wealth based on knowledge. And I decided I want to be one of them. So I started to ask a lot of questions from people like Jason and Doug Leone and John Dora of the world. And then I thought this is an opportunity for me to be part of this amazing community. I knew it's like playing an NBA and I won't be LeBron James, but I can be the best agent in the league.

8:55So I convinced the owner of the Rock Gallery to partner with me and we started to invest in late 90s as a kind of engine investing. And we made terrible investments. We didn't know. What the heck we are doing. And when I kept going, I paid a lot of attention to great founders and I learned the business one by one. And I was very lucky to be an investor in some of the most iconic tech companies, including this one. This is me, Sir Michael Moritz. He's maybe one of the best venture capitalists of all time. And that's Arash Ferdowsi, the co-founder of Dropbox. This is, Dropbox was two people. This is an apartment.

9:33I took Mike Morris one morning Saturday and we made an investment, me and Sequoia and Dropbox on Monday night. So I have seen a lot of gifted people build massive companies, but I've seen a lot of gifted people fail. So I've seen companies in their apartment all the way to IPO. I can see you're, I'm more excited than the two co-founders here. So this is the Dropbox IPO. So, but I share this photo because of the possibility i think we all talk about the power of what you can build but this is the testament look at that kid arash was a college dropout at mit and they built this is a 10 billion ipo so they built a 10 billion dollars company it's pretty remarkable and obviously this is what what jason mentioned that even forbes wrote on me but listen i i learned one thing that I want to share with you that in venture capital business or angel investor, you just need to make one or two good decisions.

10:33This is not a restaurant business that you have to serve every day. You have to be patient. You have to stick to that. And if you can continuously doing it, you're a genius investor. Okay, founders, are you overwhelmed by cap table management? And are you up to your neck in all of this due diligence you have to do? Well, shouldn't managing your investors be easy? that's where Fidelity private shares can help because dealing with equity is confusing and fundraising shouldn't have to be your full-time job and you got to have a solution provider that you can rely on with Fidelity private shares you're going to easily be able to manage your cap table in your data room you're going to get faster and more accurate 409a valuations you're going to be able to do sophisticated scenario modeling which I'm telling you a lot of founders don't focus on and they should you want to know what that pro forma cap table looks like and you know do some scenarios hey if we get bought for a hundred million a billion what happens and you're going to want to automate your next funding round you want it to go smoothly and you want to come across as professional all on one collaborative platform with awesome support fidelity even has an amazing startup community for access to exclusive events for founders and vcs so experience the difference that fidelity can make by visiting fidelityprivateshares.com Mention our podcast and you will receive 20 % off your first year paid subscription.

11:58This is Bill Gurley. When he tweets or he talks, the whole venture capital community pauses and listens to him. Name one of his companies. Uber. What else? Here you go.

12:14No, no, no. I think everybody comes short, even the venture capital community. So one of the best investors of all time, he made a lot of great investments, but he made one really good decision and he made history. And so whatever you do, be patient, consistent, stick to your strategy. I look around and one of the best fund ever is Kleiner Perkins fund in Genentech invested. Even that fund has only one company. I don't know the exact return, but it was a massive return. It was one of the best performing fund of all time is the fund that Kleiner Perkins had. I want to give you another example. Look at Netflix.

12:53So this is kind of the portfolio construction of what we do, but Netflix does the same thing. It's a comedy movie, blockbuster, suspension drama. In your fund, you might have biotech companies, SaaS companies, same thing. They have 18 ,000 titles in the platform and they won 23 Oscars, but only three movies. Just think about it, 18 ,000 titles, three movies. So the venture capital business is no difference. The hit comes not often, but it will come. There are few companies that the power law, These are all the startups. These were my winners, not all of them. There are a few. PowerLaw is important, but you need to have a role class strategy in sourcing, picking, winning, helping in portfolio construction.

13:44Before I talk about how we do some of the examples of sourcing, I want to talk about Jason. Look at what he does day in, day out. Everything he does, it's at the end coming to the sourcing. So he believes in breath sourcing with everything he does. And I actually think this is one of the biggest mistakes people when start this business as an angel investor or venture capital do. They're not thinking enough about sourcing. Founders have a lot of choices. How do you make sure you see the best founders before anybody else? That's what Jason does. He sees things on pre-idea before everything does here.

14:19So if you want to be a long lasting angel investor or venture capitalist, you really have to think about your sourcing strategy. If you're at Sequoia, maybe not because everybody knocks your door. But if you are not there, you need to think about that. How do you find founders before anybody else and have a strategy that you love to do it and you can scale it. I'll give you some examples of what we do at PAIR. One of the programs that we built three years ago called Female Founder Circle. Every year, we select top 100 female engineers in the country. These are people who are just to start to thinking about starting a company.

14:55they are either at the big tech companies and academia it's a free program twice a year for 15 weeks we put our heart and soul into helping these this woman we have workshops speaker series that you know social gatherings and you look at the results sequoia kleiner anderson horowitz and there are over 127 companies came out of it but it takes a lot of effort to build these things it doesn't happen on its own the other one is we have a program at universities at top five universities We have a garage program, which is a social club for hackers. We have a pair of fellowship. We train students to become venture capitalists.

15:32And we have a pair of competition. We invest in around 30 to 40 companies every year for the business stand competition. But anyway, these are all sourcing that what we do. And the result is staggering. We have invested in over 150 companies. 50 % of our companies actually started by students. And some of them, you can see they're multi-billion dollar companies now. This is the hard part. And I think if you realize, Jason, that how do you pick, it's hard to explain it. It comes with experience, obviously, but you can learn it. You can ask the right question. You can pay a lot of attention to outliers.

16:06Really read between lines. When you are in the meeting, just don't ask about the product, like ask about personality and you really get to know them and develop a taste for the founders you want to work with. And obviously winning comes with your superpower. or why founders should raise money from you. And it takes time, but sometimes being the first believer in a company as an engine investor or a founder, you win real against Sequoia and me. You just need to believe this is it. And founders really love the first believer in their company. So, but spend a lot of time thinking about why founders should raise money from you and what are the kind of entrepreneurs you want to work with.

16:48But I tell you, hustle goes a long way. founders really love investors who go extra mile for them i give you an example i learned a company was founded by the first founding engineer for doordash and first gm and i was late into it i tried to get to this to the round and the founder said it's late this was the middle of the covid remember when you were buying groceries that you have to wipe the grocery bags. This was at that time. And this is the company that actually does kind of a cloud kitchen, extremely successful. They raised tens of million dollars today. They are just growing really fast.

17:28And they were just opened one location in Lafayette. And I told myself, I need to go to work in that kitchen to tell the founders and how much I want to be in this. My wife says, if you leave home, don't come back because you might get COVID. But I did it. This is the video of a day. I drove for an hour and a half. I worked the entire day in the kitchen. And at night, I convinced the founders to take my money. Local kitchen storage. You can see these are the ingredients provided by different brands. So this is the store. For example, the chicken fried from one of the brands. They basically bring three or four brands under one roof.

18:12and you can go buy food from different sources, different restaurants. This is the co-founder was in awe that I was there. So anyway, just go extra mile for your founders if you want to win. That helping part, you can do a variety of different things, but do something is authentic. That's something you can scale and something you can win. You can be great at sales. You can be great at networking or you can be great at marketing. A few things I want to talk about, Pear. Actually, three years ago, we hired the head of global talent of Instacart who took Instacart from 300 to 3 ,000 people. He hired three other recruiters.

18:50We have four senior recruiters in-house on our payroll and we hire people for free. So we just put this blog that last 16 months, we hired most engineers for our companies. When I say companies, these are not DoorDash. This is team of two or three. And actually we opened the biggest venture capital office in the country, it's a 30 ,000 square foot office in San Francisco. it's free a lot of workshops speaker series founders can work out of their our portfolio or if you have any suggestions if jason says page one i like this founder a lot we give him a home with no string attached we just did a hackathon with open ai 792 people applied so just incredible value added to the whole ecosystem jason asked me to talk about portfolio construction what i want to leave you here that our portfolio construction is very different than jason very different than YC, very different than Sequoia.

19:40So this does not mean you should follow it. Just pick something that works for you. This is working for us. We invest around 20 to 30 pre-seed companies that we write$20 ,000 to$2 million for 7 % to 15 % of the company. We actually created an accelerator. Every pre-seed company that we invest has to go to that program because if you invest 30 times a year, it's very hard to scale our help. But if you batch them together, you can do two times a year sales workshop rather than 30 times. We invest in 10 to 15 companies at one and a half to$5 million for 10 to 20%. Our investment period is three to three and a half years.

20:19This fund will invest in around 100 companies and we're close to 60 % of our fund is reserve and I'll talk about that. But here are some of the lessons I learned. Proviata matters for us. I think if you're a winner, you should go double down and be able to do it. Everybody says, just go, LP will tell you, go own 20%. But that era is gone. I think that era was in 70s and 80s that you had to start with 40 % ownership and the public companies was just$200 million. But if the public company is like 10, 20, 50, 100 billion dollars, you just don't need to own 20 % at the beginning. And actually, if you look at even Sequoia Seed has changed strategy.

21:02they are okay to own 10 % and double down on it. But this is working for us. I think if you see outliers, even if you have a mandate to own 10 to 20%, you can own less. I just picked these numbers. It could be 2 % or 1 % or half a percent for you. And obviously your strategy has to relate to your fund size. I think our strategy has changed. Our fund one was 50 million, fund two was 75, 160 and 432. Although the focus is always pre-seed and seed, but the portfolio construction has changed since fund one. Wow, this Jam with JCal contest has been a blast. So far, I've had the opportunity to meet with four great founders from companies like CorePod, Ulama, Uptrends AI, and the Roam app, all because they all use.tech domains.

21:47And we have room for one more. Do you want to come on the pod and tell me what you're building? Well, you only need two things to enter. You got to be a founder with under$2 million in funding, and you got to have one of those awesome.tech domains. So head to jamwithjcal.tech and tell me what you're building. And if you win, I will invite you onto This Week in Startups, and you'll get to share your vision with me and the world. I'm working with.tech domains because killer startups use them. You know, 1x.tech, rabbit.tech, so many others. And guess what? We use it too. That's right. .tech powers our Founder Friday program.

22:20So tell me about your awesome.tech domain and startup. Apply for the Jam with Jcal contest today at jamwithjcal.tech. We're picking the final winner soon. I've talked about that your strategy should be related to your fund size. So we started with 2.5 % at DoorDash. But you can't assume every company you invest is$50 billion and therefore 2 % is okay when you have a$432 million fund. So we really need to have ownership today. Does that mean that we don't invest in the company, we own 4 % or 5 %? Yes, we do, but we cannot consistently invest and own 2-3 % because not every company is going to go to$50 million.

23:00If you had the same return today, let's say at DoorDash, it will not return the fund today for us, but return fund one multiple times. This is the last thing I want to talk about it, that if you look at Sequoia Benchmark Y Combinator, there are three different firms with three different strategy, exceptional performance, but are very different. Sequoia does seed IPO and beyond. Benchmark is only$400 million fund and only does Series A. And Y Combinator has this massive factory of the company. So do something that you want to become the best in the world. And that strategy is something, it's related to your expertise and your background and you can scale it and you continue to doing it.

23:45Thank you so much.

23:50Amazing. Even with the pro rata, you were taking a fraction of the 2.5 % there. It was just a second bet, right? You own 2.5%, 2.5 % of the 600 million, or maybe you were diluted to 1 % would have been 6 million. So just even getting a fraction of your pro rata in there, just placing that second and third bet. the second and third bet in doordash i'm guessing were the two of the best bets of your life yes when you do see and in sequoia does series a everybody does parada yeah but if you go to um if you go to 600 million dollars valuation at the time that people questioning food delivery and you invest 1.4 million from your first time fund it takes a lot of courage but we had a very good relationship with the founding team and with Alfred Lynn, who was in that part of Sequoia.

24:41So we always had this relationship with the board and with the founders throughout the life of the company. That's why we didn't sell any shares. I think most of the seed investors sold. Most of the institution kept, but everybody sold except us. And I think it takes effort and it takes war to get to know the team. And I think gut feeling and making a decision. But yes, I think that was a tough decision. You know,$600 million at that time was very difficult valuation, but when we exited, it's kind of a no-brainer. And there are other circumstances where the company is wildly overvalued, the performance doesn't match the valuation, and you have an opportunity to sell in secondary, and you do have to consider it, yes?

25:24Yes, of course we consider it. It's a tough decision you make. But, you know, Mara and I, we decided you all go in and this will be the opportunity of our lifetime. In the DoorDash example, but I'm assuming in other situations you have sold in secondary. Yes, we have sold. I actually think we have sold companies at$120 million valuation. Not many, but we felt the company is not making good progress. The investors are not top-notch and it's a good time to get out. So I think one of our companies, I don't name it, fund one, we get like five and a half X and we sold it. But rarely happens. Right, yeah.

25:57It's something I think about a lot, especially when you know we have these zerb like environments now you and i have lived through a couple of these and we started our careers roughly the same time what do you think about this moment in time if you were to compare it to you know the let's go back to the dropbox days or the early uber days early robin hood days you know that 2009 2008 period 2010 so many great companies there were so few companies overall and it took a while to close around then we had this insane moment in time and then contrast it to the game on the field right now when you when you get back into the office tomorrow and you start meeting with companies what's it like qualitatively I think it's the greatest time in the history to invest and you know the AI revolution is for real so it's hype but I think the power of building companies is extraordinary more than before we believe at Pair that product building cycle is going to be shorter and is going to be shorter with the power of AI so you don't need like three four engineers to build a prototype therefore companies get faster feedback from customer and as a result companies will die faster but if you make it and you have through product market fit with the really healthy growth i actually believe the next wave of public company is going to be five to seven years not 10 to 15 and you want to be in one or two of them okay so let me unpack that that's a really provocative statement and one i'm really enjoying considering right now um we too are seeing on the field two or three people, product velocity, accomplishing what took five or six people, but three years ago.