Tomasz Tunguz and David Clark on how to invest in AI and Q1 2024 startup valuations | E1930

30:54We're not even in the, you know, Uber 100 million exit exits are hard. Valuations seem to be plentiful. It's it's kind of, you know, I don't know. Tomas, how do you think about it? How many shots on goal you can have in this fund? And what fund are you on? We're on fund one, we'll probably have 15 shots on goal. So we have a very concentrated portfolio. Wow. And, and we're, we're really focused on ownership. So I think we're there, we ran a bunch of simulation on historical venture data that kind of come up with our portfolio construction. When you said 15, 15, one five, the lowest I've ever heard when I wrote my book on angel investing.

31:37I asked, you know, everybody I could find how many angel investments you think you need in its early stage seed stage. Do you think you need to hit an outlier? And the most common answer was 30 or 40. So Yeah. Yeah. So that's what we're running. I think that there's two dominant strategies that kind of come out. One is a broad index with a later stage concentration vehicle. I think that's one model that comes out of the analysis. And the other is a highly concentrated fund where you have significant ownership of the companies. And you model what you think the exit valuation will be primarily for M &A.

32:12It's hard to bet on IPO. The IPO market's been closed for last years. What did you do before the fund? Were you doing just syndicates or seed deals? No, I was at Redpoint for about almost 15 years. Got it. And the managing director there for about eight. Yeah. That's a bunch of companies. When did you raise this fund? I raised it, we closed in March of 23. Oh, wow. It's a year ago. It's a hard time to close, huh? It was a tough fundraising environment. I remember this was when all of a sudden the stock market was tanking and rates were going up quite a lot. that most of the LP population was simply just trying to understand how much of my book is in public markets, how much of my book is in private markets, and the public markets have obviously corrected a ton.

32:56But the private valuations haven't been written down yet, so everybody thought that they were massively over-allocated. How big was the fund, and how many meetings did you have to do? We raised about$238 million, and we had a lot of meetings. hundreds that sounds like a 200 meeting yeah how many 12 months 18 months on the road a little less we were able to raise in just under like four four and a half months how was it during the silicon valley bank implosion were you caught up in that yeah good memory so the day we were supposed to have our first capital close was the day that as being imploded and so all of as you can imagine all the lps in the fund called and said we're not wiring because we have a Silicon Valley bank account.

33:42We don't know where our money is. We don't know if the website's not loading. Pretty scary. So then it took us... Actually, it was really hard to get a bank account. I know that sounds ridiculous, but we couldn't get a business bank account. The GCIF, the Global Strategic Investment Banks, they wouldn't take us. Like J.D. Morgan wouldn't take us. And Wells Fargo wouldn't take us because it turns out venture capital firms are terrible customers. We raise lots of money, but we don't actually maintain very large balances in our bank accounts. In and out. Capital calls, in and out. And so the big banks said we needed to have a billion in AUM before they would consider taking us as a customer.

34:24Crazy. And I called a friend of mine at one of the banks and he was able to get us a bank account. But it was six weeks later. And anyway, we were finally able to execute the capital call. But it was a wild time. David Clark, you you were talking before about how many funds were in market you may have seen a stat and it was kind of unbelievable to even think about but you know you've been in this for 30 20 30 30 years i think as a gp i mean is it are we how many venture firms are out there how many are hitting you up and what how sustainable is the number of firms right now yeah so i i just very quickly saw a that was on a post on LinkedIn that I saw that was referencing data from Prequin.

35:11And they said in January this year, I'm sure the number was 6 ,500 VC funds were looking to raise capital, which to me seems incredible. I didn't know there were 6 ,500 VC funds, though I think I've probably had cold emails from half of them since I was last on your podcast, Jake. I apologize. just so people know i'm not in the terrific 12 yet i'm still trying to convince david but you're you're very selective i mean it's just yeah crazy how many funds there are and then how many aren't even making it to their second fund the venture tourism is like a real thing i mean yeah and i think that's that's the big that's the big challenge that we've seen you know we've had the misfortune of being in the final funds that a manager has raised, and it's never ended well.

36:03So I think if you were an investor in that fund one and the manager is unlikely to raise a fund two, then that's a pretty precarious position for you to be in as an LP. And I think one of the things that you really need to get confidence in as an LP is, is that manager going to be around for the duration. Is this what they're going to dedicate the next 20 years of their life to? Because, you know, Tomas said it's taking, you know, 10, 12 years for companies to go public. It takes 15 to 20 years for a venture fund to be fully realized. So this is a long-term business and you absolutely have to have that confidence that the firm is going to be around to manage that out.

36:44I'm just reading from PitchBook here, Dave. More than 247 first-time managers who managers who close funds between 2019 and 2021 will not be able to raise sophomore funds according to pitch book estimates so there's going to be a lot of those uh funds and it has got to be a bummer if you were an lp in those because you took all that time to build that relationship and then the person can't sustain it for the next fund and i mean i guess it's good for the survivors but it does feel like this is going to be a survivor's game yeah no i think so i think that's absolutely right there's definitely too many people i mean tomas can you pronounce your how you pronounce tomas so i can make sure i'm doing it right with an sh at the end i knew i was doing it wrong and you my dyslexia is going crazy tomas with the sh on i'm curious you know when you're co-investing are you seeing because you're doing so few companies and are you seeing a lot of co-investors kind of go dark or disappear on the cap tables and how do you have you had that happen where board members are like yeah you know we're out of business and so do they stay on the boards and i'm wondering what happens to those 250 funds that pitch books identified yeah it's a good question i i mean we definitely see some board members change, but a lot of the times that's senior partners who are deciding it's their last fund and they're calling a career a career.

38:14I think in the case where a company raises fund one or a firm raises a fund one, has a board seat, and then isn't able to raise fund two, go do something else, they still have a response. I mean, they would have a view here, but they still have a responsibility to see out that portfolio or sell it and liquidate it. The strip sales and like the secondary part of the market where venture investors are selling their stakes to somebody else is still pretty small part. Everybody thought, I think in the last 18 months that there would be much, many more secondary sales than there have been. So, but if you raise a fund, you're committed to it.

38:50You sign a document. This is the limited partner agreement that says, I will continue to see out this fund as long as I, um, and all the positions, as long as I'm capable. And so, yeah, I haven't seen a ton of it, but I think, I think you're, you're, And I think the other dynamic there is a lot of those first time funds are probably they're not lead, they're typically not lead investors. And so they're not typically taking the board seat. And so there's just there's less supervision that they might have to oversee the portfolio and understand what's going on within the companies. All right, everybody, welcome back to the program.

39:22Stephen Estes is with us again. He's a principal at CLA, our professional services provider, they specialize in CPA, tax consulting, and wealth advisory, his areas of expertise, lie in VC-backed startups, VC funds, high-growth startups with complex tax issues in multi-state and international filings. Welcome back to the program, Stephen. Hey, thanks, Jason. Appreciate it. All right. Give us an overview of how CLA works with startups. What kinds of companies do you like to work with? Is there a specific zone where you like to engage with startups? One of the great things about CLA is that we're nimble enough to work with two startups, right?

39:57So whether that's a seed round or series A company, but then on the flip side, we're large enough that we really have the depth of expertise that's needed to help companies when they become multinational entities with a lot of tax complexity or audited financial statements, consolidated corporations, M &A, due diligence, whatever it is. So we can truly take them from incubator all the way to IPO and then really come alongside some of the founders with our wealth management platform also after the exit. So I think CLA is really unique in that regard. There's not a lot of firms out in the US that really operate with that sort of breadth and scale, helping companies that early stage and also being able to help partner with them as they become really large and complex.

40:40All right. You need a trusted advisor. Tax is accounting. You don't want to play games with this stuff. Get it right. Get a great partner like CLA. Go to CLAConnect.com slash tech and let them know. Your boy, Jake Alcensha. Once again, CLAConnect.com slash tech. Dave Clark, I got a front row seat to this because I started inviting, I asked my team, you know, we're doing this liquidity conference in Napa, we used to call it the Angel Summit. But since we became more of a fund and an angel and syndicate, we rebranded at this liquidity conference summit. And we had a list of like VCs who we refer our founders to.

41:10So we just decided we'd email them. And they did it from my email address. All of a sudden, I get all of these responders. I'm no longer with this firm. I'm no longer with this firm. This person's no longer at this firm and i was like whoa that's a lot of people no longer with firms i don't know if either of the davids are seeing a lot of vcs like move to venture partners or move out as the because you know the the usually the management fees go from whatever two and a half down to two and a quarter to 1.51 it's just not going to be the money to pay these gps right Yeah, I think we've seen a small number of what I would call senior partners decide that now's the time for them to step to one side a little bit and don't want to be doing this for the next fund cycle.

42:04And if that's managed well and there's an organization behind them and a team behind them, then that's fine. I think one of the things that VC generally doesn't handle properly is succession. So to see some of the senior partners take a decision that they want to move sideways and still be involved in some capacity, but not be one of the main deal doers, I think makes sense. The other thing that we've seen is a little bit of attrition at the junior levels as well, where people actually realize that VC is not just about going and writing checks to your friends and being everyone's favorite person.

42:46It's about really grafting and working hard and oftentimes having to deliver bad news. um so you know i think i think that you know we are we are seeing you know some people that got into the industry as a as a first job or a second job over the last few years decide that actually this is not what they want to do long term um for their career it is definitely you have to have a certain personality type i find to do this job well you have to be super positive and optimistic and you know really be able to deal with challenges and at the same time like you're saying deliver bad news hey we're not doing the next round hey we're we're not we don't do bridge rounds or hey you know we need to talk about you know replacing you as ceo or firing your co-founder or whatever hard discussions are going on at the board level and just i find one of the when we hire researchers and analysts i have a program i call raas researcher analyst associate i don't hire associates anymore i only hire researchers get them to 500 uh first meetings then when i make them an analyst after a thousand meetings then they qualify as an associate which means you're doing four meetings a day three meetings a day you know call it 15 20 meetings a week you know you can get there in a year no problem um or two but just saying no to good companies waiting for a great one i find some people can't handle that it's just too and i have to sit them down and have like a talk with them hey our job is to meet with 200 companies and pick one like that means 199 and by the way you sorted through half of them you didn't even take the meetings so you sorted through 400 you met with 200 we invested in one that's like a hard that's hard personality that's like going on 400 dates to pick one person like to marry but that's probably a good idea you know yeah and there's a 90 chance that the one that you pick isn't going to work out as well yeah there's your reward congratulations you did 4 000 meetings to make 10 bets or 2 000 meetings to make 10 bets and one worked and the rest is sadness i'm literally this past year i cannot tell you how many companies i just had to talk with the founders about the wind down and man i feel like your whole reputation in this business is determined by how you uh do hospice care like i had to somebody was selling a company was going to be like very poor of returns for everybody and i just said listen you got you got a return let's you know do your time at this acquirer do a great job and let's focus on your next company in two years when you get your own out but man i don't know tamash what do you what is your take on the uh on the personality type and your own personality in relation to what works in venture yeah i i think there's probably two different archetypes one is like like you said an optimistic grinder right where you're just meeting lots and lots of companies, you have basically infinite patience because feedback cycles are decades.

46:00And then I think there's another type, which is a person who comes out of industry and has a really strong network. And as Dave said, like bets on all their friends and actually turned out to be pretty spectacular. So I think, I mean, there are many others, but those are sort of the two dominant types. Tomas when you started at Redpoint were you advised to take a bunch of meetings before you make a decision it took me two and a half years to make my first investment it was a really long time I candidly I had no idea what I was getting myself into I was a product manager at Google before and I had this didn't even know venture capital was a career before I came to California and just fell in love with the idea that you could learn about new technologies every day but But as we all know, there's a lot more to the business than that.

46:48And it took me a really long time to understand. And it was at a time when the firm was investing in many different things. I remember our first day, first company was a commercial LED company. The second company was a clean tech business. And the third was an on-prem software company. So the number of spaces we needed to cover or just get up to speed to have a strong point of view were much broader. And you can be right. this is the most frustrating thing i think about this career is you could be right about your thesis hey we know ai plus you know professional services legal tax whatever is going to be big hey we know mobile photos and sharing is going to be big and you pick color instead of instagram you pick some video site you know you pick sidecar instead of lyft instead of uber and that is i think could be soul crushing you know you figure out where the future is but you you place the wrong bet and you came so close to it somebody um i was watching uh gary vander chuck gary v and he said every now and then he opens up his email from brian chesky at airbnb and just stares at the fact that he didn't even reply you know and he just stares at it and when i introduced 21 people to uber i remember mark souster was in the room and he didn't he couldn't get there and he missed the investment and to this day mark and i are in a couple deals together he just shakes his head sometimes oh man how did i miss it it was a four and a half million dollar round of uber he missed and then there's other people you know i find another interesting thing about the psychology of all this you know you hit some giant win like some of the facebook investors it's very hard to get out of bed again no and betting on companies knowing there's a very unlikely chance you're going to hit another facebook you're just statistically you you hit one of the top five companies of all time you know they're they're they're it's in the fang it is the fang it's the first letter of the fang right um and you just you're not going to do it again that's got to be hard that's like i won a championship i'm never going to win another one can you imagine you're lebron and you're like there's no chance of me winning so i got to get up and suit up for basketball every day hard to do yeah even a typical salesperson like a really good salesperson will close one in five deals mediocre salesperson might close one in 10 or one in 20 and then adventure like we said right it's like one in 200 one in 400 yeah if you're listening to this and you're a young person don't take this job you gotta be on real it really is like a survivorship bias people look at the people who made it work and got to their second decade and they're like oh i want to be like them they just don't see all the people who did it for six months six years and quit and we're like i'm never going to get those years back you know i should have just started a company the world needs less venture capitalists less capital and more entrepreneurs and more talented people on the management teams for some reason this job got super popular over the last decade it shouldn't be as popular as it is i don't think i don't know what you think david's it's too many vcs too Yeah, I think it certainly feels like that.

50:00At the same time, you look at the sectors where technology is having a major impact now, and it's just the opportunity set is so much broader and so much deeper than it ever has been. And so, clearly, the amount of capital that the industry can sensibly consume is bigger than it was 10, 20 years ago. And the number of firms it can sustain is larger than it was 10, 20 years ago. But it certainly feels that over the last two or three years, we've kind of overshot the hour of where we should be. And so, I think it's inevitable that we'll see some kind of reversion to the mean over the next couple of years.

50:40I think there is an efficiency in the market. You shouldn't have 6 ,500 managers. And I think that's highly correlated with the fact that so many of them are not able to do another round. I do think we need at least as many VCs, we should just be investing much more earlier stage. A lot of the talent has now gone upstream. It used to be that the large funds did seed checks, now they do Series A checks. And as those multi-stage funds continue to grow, they're going to be concentrating their talent in the later stage. So I do think having a healthy early stage ecosystem from the emerging manager standpoint is very healthy, both for the ecosystem, but also for new startups.

51:23Think about all these companies. Jason, I know you helped calm when they were almost going to die. and if you hadn't been there if they didn't have the incremental seed investor they may not be the behemoth that they are today so i think having a lot of capital almost by definition having enough angels and early stage capital is something that's really positive for the ecosystem i think that's like tomash is like kind of proof that like a concentrated portfolio is like an easier thing to manage because you're picking people with a greater chance of success with more of the questions answered than at the level Gary Tan's doing or I'm doing or, you know, other folks.

52:09And then between us is probably pair VC or, you know, 500 startups or 500 global tech stars, whatever. And it really is hard at that early stage to deal with the number of companies going out of business so i've had to come up with a methodology or maybe even a philosophy a life philosophy of how i talk to the founders right and um i just tell them like listen if you lose 125k that we gave you for seven percent it's okay with me i just want you to promise me that when you do your next company we get to be the first investor and i have that conversation over and over again with them and you know what when raul did superhuman he came to me and said hey you know you did report of um you know you put 50k and we gave you back 250 or something and you had said hey let me know when you do your next one and he came back to dharmesh from hubspot and myself and we were the first two investors in superhuman and i think he says like dharmesh he tells dharmesh he was first and he tells me i'm first well he's pretty good about that but you know you you have to be built for it you have to be built for you know whatever the amount of you know zeros there are and man i can tell you as a high stakes poker player as well that's what's taught me a lot about this when you lose a hand that you're supposed to win you know you're a 70 80 favorite but the 20 comes in you have to get your brain chemistry used to this possibility i think it's why a lot of people when trump beat hillary clinton not to bring up trump twice in an episode of liquidity but when he beat them people were like got mad at 5 38 or whatever and they were like how did you get these statistics wrong and they're like no we told you it's a 36 chance of winning it's a one in three you just didn't believe us and you don't understand basic statistics so you i think you have to learn how to take losing uh and zeros um and and really like get comfortable with it and it's taken me a decade i have to say like i used to get very tweaked by losing.

54:10Even to this day, I get really upset about it sometimes. And it's really something I have to manage my own psychology, managing your own psychology and gambling, which is what we do, we're placing bets, let's be honest about what it is. You know, David's placing bets on GPs, GPs are placing bets on founders, founders are placing bets on markets and customers. We're all placing educated bets. And this is why poker is so popular amongst investors, and so important because you have to learn to lose and when you win when you're not supposed to win you get lucky or when you lose when you're supposed to win you get unlucky understanding this taking it to heart but then still being able to improve your process because that's all you have and you know dave when you were on the episode we talked about your terrific 12 and i think that's what it's right terrific 12 i dubbed him yeah yeah like your discipline that was what i took away from your discipline of adding these managers very slowly very thoughtfully and and like maybe you could unpack that here and just explain how you pick managers and how thoughtful you are about it because i do think the psychology of how you pick managers and saying no to them you know i don't think you're in tomasha's or my fund i don't know you could be in tomasha's i don't know maybe you picked him over me but you're not adding that many so i don't take it personal that you're not in my fund.

55:28Just like I don't think a founder can take it personal that I'm not in their startup. Right. We already said 199 we don't go into. Yeah, I think it's really interesting. And, you know, Tomas, what you were saying about the scenarios that you ran and, you know, where you ended up in terms of, you know, what you thought the best parts of the market to play in that, you know, the focused early stage or slightly broader kind of growth stage. In a way, we've sort of done something similar, not through running a series of models, but through actually investing over a 30-year period. And I think part of it as well is aligning with where we are as individuals and the level of risk and the level of uncertainty that we're happy to take and the types of risks and types of uncertainty that we're happy to take.

56:13Because I think one of the characteristics of venture is there's still a high degree of randomness. And the earlier you get, the higher that degree of randomness is in each individual decision that you take, whether that's as a GP or whether it's as an LP. And I think for us, we found a level where we're comfortable with the risks and it allows us to consistently produce the sort of returns we need to do in order to add value for our investors. And so I think finding that where psychologically you're comfortable, but where you're still able to perform at a high level is really important. And for us, it just comes down to, you know, we know venture is a power-low industry.

56:57We know it's the top 1 % of companies that deliver the majority of the exit value. And so, you know, we have a very simple screen, which is every time we look at a manager, we ask ourselves, you know, how many top 1 % companies have they backed? What was their role in doing those deals? Were they invited in? Were they a bystander? Were they actively leading that deal? Have they been able to do that multiple times? And the more times that we see them invest in those top 1 % companies, the more confidence we have that they'll be able to repeat that. And David, your model allows for a bad vintage from time to time or a sub-average, knowing that it's probabilistic in nature.

57:36Yeah, absolutely. You're always going to have good managers who, as you said before, they had the choice over company A, company B. They got the macro thesis right. They just chose the wrong company for whatever reason. And that's always going to happen. And so I think for us, understanding that just because you have a bad fund doesn't make you a bad manager is really important. Now, we want to make sure that the manager has really examined the reasons behind that bad fund. Was it just a case of choosing company A over company B? Or were there structural reasons behind the fact that that fund hasn't performed.

58:14In some instances, you do find there are underlying structural reasons, and then you want to have that conversation and make sure that they're addressing them. But even the very best firms go through periods where things don't always work. You look at some of the challenges that Sakai has faced over the last 18, 24 months. are they performing as well as they've performed historically? You could argue perhaps they're not, but would you argue that they've got the people there that are going to fix that? And would I bet on them to be in a much better position in 24 months' time? Absolutely. I think they absolutely will.

58:54So I think you have to recognize that the path of a venture firm isn't always like that. There are significant ups and downs, and it's how they navigate those challenging times that ultimately, I think, leads to the really sustainable franchises developing. I couldn't agree more. You know, it's really like thinking about how you make decisions, like really examining how you make decisions is like a very meta concept, Tomash. I'm curious how you examine your own betting and your own thinking about betting and your own thinking about portfolio management. Like how often do you examine it and think, am I doing the right thing?

59:39Is 15 the right number or should it be 25 or should it be 10 or should I, you know, how do you think about thinking and your getting your betting strategy and your portfolio strategy? Yeah. Well, we've evaluated the portfolio construction every time we raise a fund and update the priors. That's really important. And then in terms of the decision-making process, We run the firm with six different roadmaps. And one of those roadmaps is actually improving the investment process itself. So we capture structured votes. We have quantitative research on companies that we do. And then every quarter, because we're so concentrated, we need to update our reserves.

1:00:16So we run probabilistic scenarios for each of those companies to determine where we think future dollars will go. I think, you know, big driver, we maintain a lot in reserves. And so if we, a typical Series A firm might have a 60-40 initial dollars invested, 40 % reserve split. So it becomes really important to think about those reserves because it's basically half the fund. And there's a bunch of research out there coming from, out of Stanford on portfolio management. And it turns out you can actually move a fund from top quartile to top decile with active reserves management. So that's a really important part of how we think about driving great returns.

1:01:00So you're looking at those 15 and saying, of those 15, which 2 or 3, 10%, 20 % deserve the final 50 % of the dollars? Yeah, it will change as a function of what's happening within the underlying portfolio. But the idea is, we have to be actively managing those reserves, because that's what will drive because it's basically to have fun to follow up questions. How do you communicate that to the 15 founders and founding teams that they are or aren't in that group? Right? And then, have you done preemptive? Where you say, Hey, I know this is a winner. I think this is our Uber, I think this is our Coinbase, whatever it happens to be.

1:01:41And then say to them, like Sequoia did with WhatsApp, hey, would you like more money and preempt them from doing around? So you take that in either order? Yeah, so I've worked with a bunch of companies where we preempted one company, preempted the C, preempted the A, in fact, all more close to 60 to 70 % of investments we've made so far preemptions. Wow. Yeah. And that's because we do all that research, we prepare, and then we try to put ourselves in a position where we can invest before the company goes out to market. So you spend more time studying your existing portfolio than new deals? Is that no, no, no.

1:02:16The preemptions are in that new companies, rather than existing companies. So we're only a year in. So we're not yet in the position to be able to, to preempt a lot of the internal portfolio. But but the idea is the same. I have to build a big, big body of research. How do you think about communicating that to founders? Or do you communicate it to founders yet? Like, hey, we have reserves, but here's how you qualify for them. Yeah, we're really clear. We're really clear on milestones. We set up internal plans for those portfolio companies where we expect them to be. And as you said before, Jason, the way that you communicate and articulate the candor is your reputation in the industry.

1:02:56Yeah. David Clark, how do your terrific 12 think about reserves and think about communicating to their portfolio? Do you get that deep in the weeds with them? Yeah, certainly on the reserve side, I think the reserve equation has changed, I think, over the last 10 years as more of those firms have raised separate growth vehicles. And so to some extent, we've seen reserves in early stage funds reduce because they kind of see the growth funders as filling that niche. Why is that? And is that the right way to do it? Or should it just be in one fund for simplicity? Um, how did we get here? I'm curious.

1:03:40Yeah, I think we I think we got here because companies are staying private for longer. And I think there's a difference, a different return profile that can be built by investing in later stage businesses that can still deliver on aggregate, attractive risk adjusted returns. but it's a different risk return profile than what you would expect from early stage. I would say that if you look at the variability of outcomes for a growth fund, it's a much tighter band than you would get for an early stage fund. That's not to say the best performing fund we've invested in over the last 15 years has been a growth fund, which is doing 15x.

1:04:25They hit something. What did they hit? They must have hit something. That's like hitting a Royal Flush or something, right? yeah yeah yeah they they hit probably the um the most valuable private company um in the world today stripe they hit stripe okay got it uh not necessarily in the u.s oh okay wait so wait wait who's the uh oh adyen would be adyen then yeah contemporary maybe is that the top two privates I don't know, David, you would know. The other David. I think Saudi Aramco, but I'm guessing they didn't invest into that one. Yeah, no, I don't think they got into LVMH or Saudi Aramco. No, no.

1:05:07So, you know, I think going back to the reserves question, you know, for us, it's, you know, being able to deploy that capital sensibly is really important. And when we look at our data, what we find is the best managers can actually reduce their exposure to the loss-making companies and increase their exposure to the 5x, 10x fund-returning companies. And if you're able to do that successfully, then you are having an impact on the initial bets that you made. So I do think being able to manage your reserve strategy effectively is one of the areas of being a really successful VC that perhaps doesn't get spoken about as much.

1:05:48And I know I've had conversations with a number of emerging managers and seed funds who don't want to do any reserves at all and see it as diluting the initial check. And, you know, interesting, Tomash, that you were talking about some research that you've seen there that can push funds into the top decile if they do it properly. That's certainly the sense that we've had when we look back at the data from the 500 plus VC firms we've invested in. Is there a magic number, David? Have you segmented by reserve strategy and TVPI? No, no, we haven't got that level of granularity. Well, what's your intuition tell you?

1:06:28I think certainly, yeah, I mean, certainly, you know, we've seen, you know, something around a 50-50, 40-60, 60-40, that sort of thing is historically what we've seen. I think there are firms that have done well more recently where, you know, they've been 70-30, even 80-20, but where they have that growth vehicle. and the growth vehicle just to be clear you know the growth vehicle will do the best companies from the early stage funds but it will also do net new companies as well so it's not necessarily just looking at at making those follow-on investments yeah i'm going 50 50 you know when i looked at my first fund which was you know 5x on paper we've turned 1x already and we had robin hood superhuman calm and density in there density.io and three out of those four we knew were definitive winners and we didn't have reserves to double down on them we didn't just consider it wasn't considered you're just like you get 10 million dollar fund you make 100 100k bets or something in that range and now i'm just like you know what 50 million dollar fund 25 million into you know 100k 250k bets get whatever number of names that is and you know 200 names and then the last 25 million into the top 5 of that and then we've had to communicate that we are not we don't do bridge rounds we don't do our pro rata unless it's in the top five percent of our portfolio performers and we'll just tell founders like listen you're you're not the one in 20 you're here's where you stack rank and in for for us to be involved we would just need to see a little bit more and it's a competition for those dollars so i just tell people it's a very small amount a very small number of people are going to get those reserves and it's a competition for them that's it you know not everybody gets a max contract in the nba either not everybody gets the 40 million dollar supermax contract a year uh in the nba so and that's okay it doesn't mean you're not going to be successful but man i find that a lot of vc firms are not clear with their portfolio companies how they do reserves and i've seen this really send founders into a tizzy perhaps rightfully so perhaps you know perhaps all is fair in investing but you know they just think oh well this vc fought for this deal and then when things get hard the vc is going to do their bridge round and they're like yeah i mean i remember chamoff from social capital just had a rule we don't do bridge round we only do price rounds so if you do a bridge round that's fine we're just not participating in it but when you get a price round and somebody's leading it then we'll consider our pro rata and i thought that was like very crisp and clean language he gave to some of our portfolio companies let's move on to our lightning round where we'll dive into the top three investments from each of our guests.

1:09:13Tamash, you're up. Yeah, there's three companies I'd love to mention. One is a company called MotherDuck, which is a next-generation database company founded by the tech lead from Google BigQuery. Got involved in the seed and NDA. And that big open-source traction, completely different architecture in one of the biggest software markets, which is the analytical database space. And really, offices are full of rubber ducks, So if anyone ever gets a chance to go visit. Fun branding. Yeah, they've done a really nice job. The second company I'll mention is a business called Omni. And I was lucky enough to be on the board of a company called Looker that Google bought for about$2.6 billion.

1:09:53And they were building BI tools. This is a part of the core team from Looker who's going about it a second time and taking some of the control mechanisms from Looker and the administration and balancing with the flexibility of Tableau. So it was involved in the seed and the A and just involved in the next round too. And then the third one, just real quick, is a business called Arbitrum, which is a Web3 company founded by a team from Princeton that wrote many of the core papers underneath crypto and reasonably worth about$20 billion. And they process more transactions in both count and dollars than Ethereum.

1:10:32He's another actually on top of Ethereum. Fantastic. really interesting choices i notice you know really seasoned teams there huh really yeah you're right actually that's that's a theme across these three very seasoned yeah you know we'll uh i'll give you some fun ones here so we you know we've made some of these 25k bets um in our founder university and we like to make these small bets on odd weird ideas and knowing that maybe they'll make it to the next stage again um this one newcomer is is pretty funny guy obsessed with video games teaching language in uh video games i don't think i have the sound on here but you can see as you play this game you you know it's like uh duolingo except you're playing a game and it you instead of doing uh you know choices in your native language you you learn how to say farmer in spanish or you know uh greek or whatever you're you're doing it in and uh you know people seem to love it.

1:11:31And it's getting some nice traction. This one I thought was very interesting, called recall browser extension. Everything you browse, you know, reminded me of delicious or other bookmarking tools. And as you bookmark, things are interesting in whether it's a PDF or document that was sent to you in your email or a web page or a YouTube video, a podcast, puts it into your knowledge repository, and then you can start asking questions of it. more you use it more knowledge so it's like your personal llm and we'll see where they take it but you can take any of these pages that you meet and the one feature i said was can i just automatically turn this on they'd be like it'd be very expensive and i was like yeah you make a version for whales where it's 500 bucks a year every web page i do is indexed um and then pod engine you know i'm obsessed with podcasts um you know trying to track all the discussions going on really hard to do, right?

1:12:27And you know, that we've had some interesting conversations here about very granular topics. And so if your company was mentioned, or a topic, you know, getting that intelligence out of podcasts summarized and into your email box or into a boardroom meeting, very hard to do. And so this pod engine is basically indexing the world's podcasts, and letting you track things and search them. And so this is something where people will pay a lot of money for this. And so we're very excited about those three. And they're fun and interesting. Consumer's hard. But when you do hit on consumer, some of my biggest hits, Romhood, Com, and Uber, obviously, Thumbtack, a lot of consumers in there.

1:13:10And David, I know you don't share manager names, but you had a couple of recent investments. Yeah. So we're just about to close on a couple of funds from a pretty large brand name firm. So that's covering early stage in growth. And we've been investors with them since 2012. I think we started with Fund 3 with those guys. The last ones we've actually closed on was at the end of last year. Again, that was an early stage in a growth fund. So I think it was Fund 8 was the early stage. Fund 5 was the growth one from another established manager. This manager was, they were one of the early investors in one of the big social media companies in the kind of 2000s, have done some really interesting sort of hardware deals that have ended up as fund returners.

1:13:55And again, we first did them at Fund3 and have been investors there since 2010. And then the one before that was an early stage fund from one of the top three or four global BC brands. um and funnily enough we were with them from fund three but that was back in 1994 um so that's a 30-year relationship we've uh we've had with those guys so sorry i can't mention specific names but david how does someone become your 13th fund i'm going for 15th i don't want to be 13th or 14th i'm going for 15th fund five i'll see you in two years with some good data we are yeah we we we are Well, there's a couple that we're looking at adding.

1:14:38And I think it just goes back to what I was saying earlier. It's about wanting to make sure that we're seeing firms that have got that history of being able to identify those top 1 % companies, access them, win the deals, add value, and be able to structure exits around it. And also, we do think that venture is a team sport. And so we like to see a depth in the team. and where there are some fantastic solo GPs, individual VCs out there. But I think, again, from our kind of risk profile, we like to see that we want to back a team. And so we're looking at the sort of depth of the team. There can be strong individuals within that team.

1:15:22That's fine. But I think we want to get comfortable that there's a group of people there that are working well together, that are feeding off each other and whether the sum of the parts is greater than the individual bits. That's great information. What a great episode. Get us out of here, David. It's been another fascinating episode with two brilliant guests on the Liquidity Podcast for Tomas Tongas, David Clark, Jason Calacanis. This is your host, David Weisberg. Thanks for listening.