TWIST VC Roundtable: Startup Valuations, Secondary Markets & the YC Revenue Illusion | E2137

26:12And then now you've got ball control. You've said to the market, this is going to occur. It's going to occur July 4th. and the week after Thanksgiving, those are the two dates. You put in how many shares you own, how many you want to sell. We'll get back to you in two weeks after that as to if we can fill any of that demand. And now you don't have people going off and running amok on the street trying to find buyers. Right? You have ball control. You've told them. Now you've put it in the VCs and the LPs and their hands to say, oh, no, no, I want to go around the back door and I want to disrespect you.

26:46Jason, I have a question. What do you think is the size threshold for that? Like at what point, at what size of a company do you think it needs to be for them to take that institutional approach to liquidity? Is that something that like a Series B or C company needs to be thinking about because they're 10 years into their journey? Or like how do you, if you're advising founders, like that's obvious if you're ByteDance or if you're the Carlson brothers, but like what, at what point do you think that happens? I think it's a distraction, obviously. So I would set the parameter that employees who have been with the firm for four years can make requests.

27:25Investors who have been in the company for three years can make the request. So I would do it based on how long you've held your investment, that we're going to provide this for people who've been investors over X amount of time. And now you've narrowed the pool. People who are at the end aren't flipping and you get this sort of transient nature to it. And you're rewarding the people who are the early investors. So, oh, Paige and I did a seed round and Brad wants to double down with Altimeter. Great. We can participate. Oh, Brad buys a position and it's year two. And Brad's like, oh my God, this thing's 3X.

27:57I need liquidity. The founder can say, you know what, Brad, you just bought your shares. Can you just hold your horses here? You know, give us three years of your investment. So I like that strategy rather than the revenue or whatever. And it really is demand side. There's no demand. There's no demand. So, you know, but this is a new thing. My only piece of advice for the founders is have ball control, set your own rules, and then force your employees, force your management team, force the LP and VC community, force retail investors to stay within your rule set. and then you know if they want to step out of it great now they're no longer friendly with that founder and as a founder you should then just call them and you should say you'll never invest in another one of my companies if you go off the reservation you jump the fence you're out of the family you play by the rules and you're respectful you're in the family would you like to be outside the family or you want to be in the family all right page a founder calls you and tells you that what are you saying back um well i i guess like i would i'd be like all right yes sir yes ma 'am um yes ma 'am uh the also like the other thing of like staying inside the family is there are like qsbs holding requirements of five years so you wouldn't reap any of the capital gains benefits uh if you held for under five years so i think that would also be a consideration if you're like an individual investor and you're like hey like at 3x i want to get out but i might have some tax liabilities because I haven't held for that long.

29:26You can determine that. But I feel like most funds would hold through the QSBS holding period because it's like 10 million in the QSBS side. So I feel like there is sort of a lock-in due to that naturally built into the system. And QSBS is the Qualified Small Business Exemption, I believe? Yes. Yeah. And I think that's something that a lot of people gloss over as well in these discussions, but yeah, usually you have to hold a company shares for five years. So you almost have that built into the system. And you have to have been invested when it was under 50 million. So the supplies to seed funds in a major way is a major part of the seed event.

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31:26Like why should Page and JCal as seed investors, you know, get 10 million tax free? Because, you know, my mom who's a nurse has to pay taxes every year. And it's like, because we're taking bets that go to zero 90 % of the time. And if you don't give us that kind of tax advantage, we might just move further down the line and there'll be no angel investors, no seed funds. At least that's Paige and I's position. We're going to keep to that, that we would quit if you take it away. Paige and I and the rest of the seed investment union are quitting. Yeah, I think it would definitely be going to die.

31:55The innovation economy is dead. Dead. We're gone. Dead. Paige and I are retiring. She had 26, me had 54. We're done. And we're taking 100 seed funds. Post 50. 100 seed funds are retiring as well. stick to our policy then why don't we try to double the number why 10 million why not 20 what would that unlock for the early stage oh well remember you have to be 50 million under assets so there's like some reasonable math here that has to math out okay we can't own more than 10 percent of a company and you know in our best investments usually it's five you know page is doing 250k checks she's net net hitting five to two percent two to five percent on average and And getting diluted by 50%.

32:37So we're small ball. Don't worry about us. We're just sliding a little check. Don't worry about us. Well, no, I really, I care a lot about the small investors because data on emerging managers is pretty stark. I want to show everyone a chart here. Oh, let's show the chart. There's the segue. Look at that. He set a screen and he just, boom, dropped the ball. Rolling in on two wheels here. How about that for a segue? Here we go. Go, Chris Paul. All right. Here is a chart that Bloomberg called trouble for new VCs. They define emerging managers here as firms in their first three funds. And it shows if you're on the audio version, a rise in the amount of capital raised by these firms through 2021.

33:16And then what I would call a precipitous collapse to put some numbers on this emerging funds raised$64 billion in 2021. That fell to 17 billion in 2024. And through May 8th of this year, it was$4.7 billion. I think that is a collapse. And so Paige, just starting with you because you are the emerging-est manager here. What the hell has happened on the LP side and why is everyone struggling to raise a couple of nickels? It's always a joy as an emerging manager to wake up and see that chart. Why is it a joy? Because you survived? I'm joking. No, I'm joking. No, I would actually argue that you should feel joy because you did it.

33:57You have a fund. Yeah, that was like very exciting to make it through because when we raised our first fund, it was 2021, raised$5 million. Like I would say the fundraise was on all. We talked to like a lot of investors. We have like 120 LPs. But the second fund was like much more institutional. This like sales cycles for closing institutional investors is longer. But I think there's almost the same like time expansion happening that you're seeing in funding of companies. like the time to go to a series A has never been longer and each like milestone keeps expanding. So I almost think it's like that happening.

34:37But in emerging manager land where we had this like massive influx of capital in one year where it might have in other markets been spread out, the rise of family offices moving into the venture space can also have a dramatic impact because venture is like a tiny crumb of the overall private equity market. If family offices get super excited in one year about the massive returns they're seeing in venture and they're like let's all pile in and then uh you see like a large market drop in 22 23 and those were like very challenging fundraising years um those yeah those like sales cycles take longer the relationships that you're building um have to go deeper so i i think it's been like a very interesting ecosystem to navigate and i feel very lucky to close our second fund in such a challenging environment um yeah and then just like continuing to educate folks who are interested in like professionalizing their either like angel or syndicate investing into a um a fund uh and then last point on this is i think there's like there's also a dramatic opportunity cost like with this whole ai gold rush going on like you have a um you know if you're a super talented generalist who understands growth and distribution, like analyzing companies, why would you not go join an AI company that's like growing at a dramatic clip that could, yeah, change your life.

36:05It's like, because you love doing the work. So I think that's been the, one of the other things that I've been seeing. Megan, I want to get you in on this because you know the LP side best. So why have the purses begun to constrict around the necks of these emerging managers who are doing god's work by funding people with an idea yeah can you pull up the chart again absolutely i just want to point let's do it again let's i just want to flash it because i want to like have a kind of like squid game page it's like squid game it's like me you and like four other people are still in the game oh yeah that's right red light green light oh god oh god it is that tough though it's so so tough um i you know i compare emerging manager fundraising to like basically going to hollywood like it is that hard like there is so much exceptional talent out there and there is talent that's been around the industry that's it has an amazing track record and has big films under their belts and they're competing against the same roles that you are so like breaking in is that hard.

37:17And the reason I was referencing the chart again is because the last time you saw the same drop off in emerging manager fundraising activity was 09. It's a liquidity issue. Like that's not a surprise. Liquidity is the problem. That is why managers are not getting back. But there's a few other dynamics I want to mention. One, the primary funding base of emerging managers is endowments and foundations and family offices. Because if you're a large institutional investor, you're not going to write small enough checks unless you dedicate capital to emerging managers. Like you just can't get enough capital to work to make it move the needle in your program unless you have some strategic reason to be doing it.

38:01And who's been hit the hardest in liquidity shortfall? Endowments and foundations. And so So they are the ones that are with, and I'm sure you've talked about on the show, or there's been so much press about what's going on in the endowment community and their constraints. But the fact that they have very limited capital to be putting to work in new managers is part of the reason they're facing this constraint. Paige, something that Jason and I talked about on the Monday show was this data set from Andreessen Horowitz. This is the enterprise generative AI startup benchmarks that I really think blew a lot of minds.

38:40Now, for people watching this, this shows bottom median and top quartile results. Jason and I kind of thought that if we're just looking at companies that Andreessen has backed, or has gotten to the point to which they've gotten data during an investment conversation, we're talking about already the cream of the crop. But these numbers that we're seeing here, you know, enterprise, Gen A, companies going from zero to 5.3 million in the top quartile in a year is pretty bonkers. Well, I mean, like when I when I started investing in 2021, it might be like, OK, you need to maybe have like a million or a million and a half to raise an A.

39:11And now it's like, OK, you need like five and to be growing at like 20 percent month over month. Like the like metrics have gotten much more aggressive. And then I'm going to YC demo day later this afternoon. And they, I think most of the companies in the batch have been told to like, you have to hit like 200K in MRR in, I'm forgetting what it was, but they all have this like very specific like timeline on it. And I think if you, they're like a pretty good signal to look at for like how the market is moving with regards to the targets that they're setting. Paige, just jumping in, 200 ,000 ARR for a seed round?

39:51200K in MRR. well YCs I mean depending on like how you think about YC I kind of consider is like premium pre-seed I would say so it'd be like to get to either a seed or a because I do feel like a lot of the companies are getting um more capital efficient or they're being forced to because it's like okay it's no longer like good enough to be at five million in ARR at series A you also have to have like not raised a ton of cash to get to that point because they're looking at like burn rate. So it actually is becoming more like baby private equity with the venture optionality of like 50, 100x on these companies.

40:30Out of your 50, how many went to Y Combinator, would you say? I think six. Do you think you can actually do the portfolio math in your fund paying 30 million for a pre-seed company with 200k? I mean, we don't pay 30. Our average entry point on our fund today is 16 million and in fund one it was uh 15 million post so we we own like one percent in fund one and like roughly two percent in fund two and i would say i've been like pretty dogmatic and then we've made exceptions but like exceptional founders like in one case we like doubled um doubled our like average seed check size in a in a company that was more expensive that was led by like top vcs because i think that's the that's the big lesson megan is like You need to have a real portfolio strategy here, right?

41:21You have to have some bankroll management and entry price does matter. And if you're going to own 50 basis points versus 2%, and you're going to get diluted 50 % along the journey, that's 25 bps or 1%. The math just doesn't math. Every investment has to be a fund returner. and I have a couple of winners in fund three where we made small bets to kind of get to know the firm you know put in a 50k or 100k check and then it got away from us no way to invest and now we're sitting there with a you know 50x on 50k and it's great except now we have to explain to LPs why we suck at our job and we didn't put a bigger check and we had conviction or why we didn't put a second check in and it's like well they went from you know a 30 million dollar valuation to a 500 million and it's like yeah so i just if you were so much nuance to it it is and it's like people ask so many questions to your point too like that you have to explain every portfolio construction decision in the way that lp's diligence funds today it used to be they They were like, we like you.

42:35Great story. Okay, here's a check. Performance looks great. Performance looks good. And now it's like, our analysts were looking at these seven companies. And we did a search on them. And it looks like they were complete, utter disasters. Tell us, why did you back this? And I'm like, yeah, they totally absconded with the money. They didn't return our emails for a year. And they kept their laptops. And I'm like, welcome to the game, guys. oh yeah that founder was committing securities fraud yeah it's like this is the wild west out here on the margins like crazy stuff happens you know like you back somebody and they they disappoint you so it's it's hard but i just don't think the math at y combinator mats for seed funds which is why my best advice and this isn't don't aggregate this folks nothing against yc we don't really compete with them because we accept less than one percent they accept less than 1%.

43:30You know, there's just plenty of people, if you want to make 125K bet on them in an accelerator. The issue is, if the valuations are that overpriced, which you have to ask yourself, in one year when they come back to market to raise their next round, what will the valuation of those companies be? If they were valued, you know, if they're at 100K in ARR, I think is what the data was showing in that sample. Or was it 200? I'll pull that back up. I think it was 200. It was 100 or 200. Let's say it's 200. We'll give them a huge benefit, a 30 million. Okay. So, or let's say it's 300. So they're trading, no, let's do 150.

44:04So they're trading at 200 times revenue. Bizarre to even put that valuation on it, I know, but that's not how you're making the bet, but it's part of it. Okay. So they're trading at 200X. They go back to market. Okay. What do you think they're going to go back to market at after they've doubled their revenue? Okay. Now they're at 300. They're going to go back to market at a hundred times revenue again, 30 million. They're going to do an extension 99 times out of 100. They're not going to get an up round. So just stick around the basket, maintain the relationship, say, hey, we couldn't get there, but we want to be helpful to you.

44:36We'd like to get to know you. And you check in with them. Hey, can we get coffee again? How is it going? And that's what we do. We just, if we meet somebody great, hey, let's stay in touch. I would say the other piece of this puzzle is that nobody ever talks about the bottom third of Y Combinator companies that don't clear markets. so all these statistics are so massaged i trust none of them i don't trust any of this data that we pull up here because the game i see on the field is selective um data sets what are the selective data sets i start like a white combinator slide you showed me the other day and it was all based on tvpi putting this one aside remember the tvpi one i think i'm like yeah this is from this is talking about data i thought i'd put it up this is from nicole wiskar of wiskar ventures And this shows YC's class of spring 2025 against a number of similar stage companies outside of the YC world.

45:31These are the ones she met with, just to be clear, not all. So you would think she would meet with the best ones because she's a good venture capitalist. And she has some thoroughness in who she meets with. And they would probably pick her. But this basically shows 5x leverage to invest in seed companies, pre-seed companies that don't go to YC. That actually tracks my lived experience. I don't know why I see such an interesting one because I do feel like a large amount of the valuation actually based in like the network of founders that they bring and like the talent that they're able to recruit as a function of like having the YC brand so I almost think it's like if you look at it on like a purely metrics based thing like yeah it might look different but I think that they have built such an incredible brand in the ecosystem like YC is like you could go like talk to someone in the midwest and they'd be like or like a family office in the midwest and they'd be like yeah like i know i see like i you know um and so i think that there there is like a global brand element that they've done like an incredible job building and then they also have like very strict guidelines around like each cohort so and they like move with a market like they establish like an additional cohort um so i don't like it's like if you look at it on just some metric spaces, yeah.

46:49Twice the price. It'll be different. One third the metrics or the traction. So, you know. Okay, but the other thing is they also started. They started later. So some of the seed companies that you might be looking at might have started like three, four years ago and might have raised capital. Like a lot of these Y Combinator companies are coming in only having raised YC and maybe like 100K in angel checks. And so like you're paying up for like their velocity as well. It's like they went through the YC program and like got to 200K in ARR in like a much faster time period than another company. So that's like also to your time value of money question.

47:25I think it's a good counter argument. And the other counter argument is, yes, they have a selection process that only accepts 1 % like Harvard. So if you're only selecting great founders, you do get less, I think, mistakes in the portfolio as it might be, like people who just aren't cut out to be a founder. So there is that. So you are paying for value. And then the question is, I think if you're a hardworking seed manager, your job is to find all the people who are the second, third, fourth percentile that didn't get in because they're no different than the first. That's your job as a seed fund is to find value.

47:59Warren Buffett's whole premise and his whole career is based on buying companies when they're not popular and you can get a good entry price. And then these businesses and these management teams just keep growing with them and you just want to own that business forever. You know, that's kind of the philosophy I've come to in my life with my own family office. I'm never selling a share of Robinhood. I'm never selling a share of Uber. The end. Like, why would we sell any shares in these companies if their management is extraordinary and the products are extraordinary? They'll be here in another 10 or 20 years.

48:29But I think as a scene manager, Megan, what I've come to is it's my job to find companies before they go to Y Combinator and the ones who are in that second third fourth and then be able to buy three companies for the price of one yc company and i'm willing to have seven people screening companies in my company who are researchers and analysts in order to find that those ones so that i can make rebats for one what do you think of my strategy rate my strategy as an lp might candidly brutally am i wrong am i right i give it an eight Okay, eight. I love it. Room for improvement, but solid. Yeah. No, I think that's a solid strategy.

49:11I'm devastated right now. Mine is on his own. Free me right now. On his own. Literally, she knows how to motivate me. Without having, you know, the chance to really distill it. I think, no, I'm just kidding. That's good. I like it. I think, look, I think that like the 1%, right? There is like, that's the selection rate. Like you said, there's a million. Yeah. There's other great founders out there and finding those that may not get in, but need to find the right home. I just figured out how to frame it and make it a nine. Megan, let me try one more time pitching this. Okay, do it. Okay, let's see.

49:47All right. Our job is to out-hustle the other seed funds, and we want to make three bets for every one for the lazy funds that just go to Demo Day and just pick whatever, you know, the great team at Y Combinator is pre-sorted. And here's the truth, Megan. It's an uncomfortable truth for Y Combinator, but the best founders do not take the Y Combinator deal. The best founders say, I can do better. And so when you see the 1 % that get accepted to Y Combinator in our lived experience, that's the 6th percentile. The top 5 % did not go to Y Combinator. The majority of unicorns that you see that have gone public did not go to Y Combinator.

50:25And those are the ones we're focused on. And then we focus on 7, 8, 9, 10, that percentile. So if you look at the top 10 % of startups, top 5 % don't go to Y Combinator. The bottom 5 % after the sixth percentile that Y Combinator gets, they're of equal value, but you get, they're of equal quality, but you get to invest in free for everyone. So that's really our portfolio strategy is Y Combinator is awesome, but you can't overpay for startups or else you break your portfolio construction. I'm sure Gary Tam won't have any thoughts about that whatsoever. No, no, wait, no. Megan was supposed to score it.

50:58You didn't let her score it, Alex. I'm seeing you away from my score. Okay, I give it a nine. And let me tell you why you got a point deduction. One, I like data. You had more data there. Oh, good. But you got a point deduction for calling them bets. Oh, I know. I was literally in her talk. Our investments, and you know, we don't call them bets. Our investments, because we like to help them grow. We're not looking for just, you know, to make a quick hit here. We really want to learn from these investments. Each investment is a chance for our team to get better at the craft. Add value. And add value.

51:31Yeah. Oh, good. Oh, good punch. We're learning, Paige. Look at this. We're getting free mentorship from Megan. That's great. It's always, yeah. Yeah. Jokes aside, it's always about the founding team. It's like the teams and bringing them in as part of your community. And hopefully, I mean, yeah, following like a similar playbook to YC and like building an incredible like community and brand around the firm. I feel like that. Yeah. Great. And then. Yeah. And then all your companies will be able to raise it at 30 posts right after the accelerator. I'm actually curious if we're talking about seed prices being too high for seed stage fund economics when that's not really the game on the field.

52:07There was an interesting conversation about this and Bill Gurley weighed in discussing how seed valuations are going up. I'll just read this tweet. Omega VC with 5 to 10 billion annual funds is really searching for only one thing, a company they can pile over a billion dollars into with a potential to 5x 10x on that 1 billion with this seed fund is inconsequential money used to increase the odds of main objective you are collateral damage and so i wonder because going back to what megan said about you know you can put money into any funds you want mega funds are getting larger as smaller funds get crunched i wonder if seed pricing is more reflective today megan of just what the andresans want versus what's good for the launches of the world?

52:47I think the dynamics of fund size cannot be ignored. And I think that it does have an impact all the way, like from the top to the bottom of the ecosystem, I do. And look, I think that's a wise but generalized statement. And I'm sure there's, and I haven't fully thought through it to say like why it's seed fund money still makes sense and why it's not just collateral damage but the idea that you have these very very large pools of capital that want to deploy a billion dollars or at least 500 million dollars or a billion dollars and don't have the same return thresholds that they that funds used to have before is really having some like a major impact on the industry yeah jason we've talked about this ad nauseum on the show just about how these mega funds just have a different expectation for returns and you guys have to work a little harder uh for your irr i just love bill gurley after dark you know bill gurley after benchmark is just great he just after dark yeah bill gurley after dark he's he's got it he's had a couple of ranch waters he's he's he's lost a couple of big pots in the poker game and he's ready to speak truth to power but it's the truth if you have one of these mega funds, you are going to make$1 billion back.

54:07Everything you do that's - Investment. I'm sorry, investment. Thank you. You're looking for a billion dollar investment that can 5 to 10x to return the fund. You need a fund returner. A C-check where you own 10%, the chances of it becoming... If it is just a way for them to get the option to be on your board or be in a board observer and have information rights so that they can preempt that billion dollar check. So when you have Paige as an investor or me as an investor, we're with you all the way. When you get dilution, it really matters to us because we're not putting a billion dollars in at a 3 billion or 4 billion or 5 billion dollar valuation.

54:49We made that 125K bet, that 250K bet, we're probably not making another one. So we're with you making sure, hey, you sure you want to dilute that much? You sure you want to add that person to your board? You sure you want to burn through your capital and chase like 4x growth this year instead of maybe being more thoughtful and going for two and a half X and really getting your product market fit and your product team dialed in? So our investment in your company is more aligned with you. Their investment is aligned with an 18-month period between when they drop that billion dollar check in that 500 million dollar check in and you going public or getting bought it's a much different game it's mezzanine financing jason the only edit i'd say to that is that i think the very large funds of five to ten billion dollar funds that are at the growth stage are not looking for fund returners like i don't actually think they're underwriting deals for five to ten x because i think that they are expect it's a different portfolio behavior than venture where you have a very high percentage capital loss.

55:55I actually think they're underwriting for zero capital loss. But you have a 2 to 3x. They're underwriting for 2 to 3x outcomes. So it's just a little bit of a different dynamic. Yeah, that makes sense. So maybe three or four of those 4xers make the fund? Yeah. Like you, you kind of, it's a more consistent driven return buildup. Then you have one, the rest lose money and one returns the fine. And maybe they hold into the public markets for an extra year or two after it goes public. Yeah. All right. I want to talk a little bit about revenue quality, moving a bit away from just kind of the intraventure dynamics, because we've seen companies like Glean, Synthesia, Together AI, Cursor, Lovable, and others scaling to 50, 100, 200 million in ARR.

56:44And whenever I see these headlines, I also see people from the venture world casting mild doubt on the quality of the revenue. People are worried that things are being conflated into ARR numbers or that ARR is not going to be actually recurring, that it's going to dissipate. I'm curious from your portfolios, are you seeing revenue quality issues amongst AI predicated startups or are those only in other funds? And Paige, I want to start with you on this one. Oh, wow. That's exciting. I mean, so in terms of revenue quality, I think that one of the things I'm seeing is like as our founders got to raise their next round is that this is like a topic of conversation when they're raising their seed if we back them at pre-seed or their A.

57:32And so I'm having a conversation with them like far before the raising is like this is what investors downstream are expecting. And it's like part of the reason I moved to San Francisco last year is like more deeply understand the downstream capital dynamics is like revenue quality really matters. I think like there can be mistakes or over representations in reporting that are quite common if you don't have the background of like startup accounting which like if you're an engineer or like you did something else before like you might not know it so I think um some of it is like a factor of educating early stage founders on like here like reporting ARR should be like an annual recurring contract um if you're a marketplace it should be reported as like this is your GMV and then you'll have like your um like your like net profit based on that and not reporting like the GMV of the marketplace's run rate.

58:29I think that's like a very common thing that I've seen in companies we've evaluated. So I think that like more education on startup accounting is needed earlier stage as the metrics change to raise a seed or series A. I mean, by series A, you'll know, but like, I think seed is getting more series A on the metrics that they're looking for. So seed is the new series. A precedes the new seed. Angel is the new precede. And I don't know what we're going to do next, but there'll be like nano investments at some point. We call it, um, we call it year zero startups. It's my big focus now, uh, as we invest in earlier stage startups.

59:07And, uh, we found that half the applications for funding, as Paige mentioned, uh, with her strategy of building community come to us before they're incorporated with an idea, perhaps a prototype, and a team member, but looking for a third. We had all this energy and we told them, oh, listen to the podcast and let us know after you incorporate. But then all of a sudden, those founders could get away from us, right? They could find another investor who believes in them and wants to write that check. And then, you know, now we're chasing. And so we said, well, how could we be of maximum value to them?

59:42And so we took a two-day event we were doing to help support founders called Founder University and we made it into a 12-week program. And I put all 11 investment team members on this. We are in our 10th cohort. We have a curriculum. We've invested millions of dollars in this. And 3 ,000 or 4 ,000 people apply. We pick the top 300 teams. We invest in the top 10 % of those. And we get to watch them work for 12 weeks. And boy, has that changed how we invest. And we will give people their first 25K check to form their company. That was another innovation we found. people couldn't get their first check first check's the hardest so we're like okay you just check a box every week would you like the 25k check would you like the 125k check and it just changed everything for us and on revenue quality the fact that we're even having that discussion now is just so encouraging because a lot of investing but 10 years ago did not have revenue quality as a term as a discussion point it was just what's the revenue how's it growing that's it.

1:00:45There was no, are you hacking the revenue? And again, I don't want to make this a pile on for YC, but founders are clever. And what YC did better than anybody was figure out how to create this really aggressive marketplace where everybody felt like they were going to get left behind in maximum FOMO. How do you create maximum FOMO? Two ways was how YCombine got to it. They told everybody, you cannot raise money or meet with investors until the last week. That was like their best and kind of strong advice. They didn't ban people from doing it, but most people complied with that instruction. Why?

1:01:22You want to get everybody in the room. You want to create a marketplace. And all of the language around this is consensus in the industry. Get everybody into a three-week process. Get everybody stoked. Make it competitive. And then close fast. That's actually really good advice. But then people were like, well, how do I differentiate? I can't just scream for one minute during demo day. I think it got down to like a one minute presentation. So it was kind of like meaningless. It's meaningless. Let's call it what it is. It's meaningless. Like it's just one minute of performance art where you go up there and scream, like you're going to change the world and your TAM is a trillion dollars.

1:01:57It's meaningless. So what they did was they created the handshake protocol, which is another high pressure sales stack it and combined it with a chart. And when we slowed down the process, we would just say to every founder, which is why we kind of opted out of it, the whole process, we just say, well, we take like, you know, three, four, five, six weeks to make a decision. If you're on a three, four, five, six day, that's not for us, but we'll talk to you the next round. And some founders were like, okay, we'll talk to you next round. Majority of them were like, oh, no, no. Well, you can take as much time as you need, JCal.

1:02:27We want you on the cap table. When we looked at their charts, we found a disturbing trend. When we asked, how did you source these 10 customers? Five of them were other YC companies. Two of them were friends of the founder. So that high pressure led to unnatural acts. And the unnatural act was to make a 12-week chart that didn't have quality revenue. Where did you source the first 10 customers? We asked them, who are your first 10 customers? They say, oh, we can't share that with you. Okay. They're like, okay, so you want to invest? No, we can't invest without knowing who those 10 are. Then we say, okay, these are the 10 first customers.

1:03:05What's their usage like? How many of them used it in the last 10 days, the last five days, today? We want to see the actual usage of those. Okay, and now give us where you sourced them from. And boy, did that change. All of a sudden, people started panicking when we asked for that simple information. That seems like very basic diligence. It's very basic diligence that a dentist has no idea about. So if you invite a bunch of dentists, they're like, oh my God, this is Airbnb. They told us you invested in Airbnb. This is Airbnb. The problem is, you know, when you, and this is in all companies, we just, we found too many of these for it not to be an explicit trend.

1:03:40And we asked people, how did you come up with this strategy? This is the Y Combinator strategy. Sell to other Y Combinator companies. Now, in some cases, startups are the best customer because startups will take a chance on that. That is actually really good advice. but then the gamesmanship that happened was you buy my product i buy yours can i get five people to buy mine and people kind of created these little round robins that i don't want to say it's unethical but it's unethical hey thoughts i'm gonna throw bombs i don't care am i i'm already rich. I'm already on my fourth fund. If I can't raise another fund, I can just use my own money.

1:04:23I don't care. I'm going to be Bill Gurley after dark. I know, but I want to give Paige a chance here to stand up and get - Paige, you want to incinerate your career and relationships, go. Oh, thank you so much for that kind introduction. No worries. I'm so happy to be here today. I mean, I don't know. I feel like my belief is they have built a strong branding community. I think it has gotten to the point where there are people who see it as like a shiny badge that they want to like check off and might not be going into it for the right reasons, but have like the chops and the mission and the product to like get in.

1:04:58And I think that's a reality of like whenever a brand or community gets big, you're going to have those actors in the system. But I think there's still like incredible talent. I would say the way that I meet most of the YC companies that we invest in is like the first one we invested in is Beacons. It's one of the first investments I made, like a LinkedIn bio tool, grew super fast or like one of the leading greater tools startups. And then they introduced us to like a few more YC companies. So I feel like for me, it was more like finding a founder who I really loved working with. And then they would refer me to other YC founders.

1:05:34And then I didn't really have to deal with any of the competitive dynamics. So it's just like, he's just an awesome investor we love having her on the cap table like you should take your money so then it was it was no longer so i've always found like if there are more competitive dynamics it always helps to have someone in their network refer me it's always like the strength of the introduction and like vice versa if if a founder like one of our portfolio founders uh yesterday was like i have this founder i will like i'm like dragging her by the arms like all my investors offices like she is the one like you need to bet on this founder like that will make me like very incentivized to um yeah to like take a deeper look so i i think it's like the same in like competitive situations you have to have like a really strong founder reference um and then do your due diligence all right guys we could literally talk all day because there's so much going on but we do have to make sure page makes the demo day on time so what we're going to do to wrap up today Wait, your badge doesn't work, Paige.

1:06:34Wait, your badge didn't open the door. Wait, sorry. Just stand like 10 feet away from me when I start throwing those bombs. So one question for each of you. We're going to go in order of my screen, which means, Jason, we're going to start. For you, just quickly, what is a contrarian place or market where you are currently looking for startups and founders today? Oh my God, what a spicy question. Contrarian place. um i think ai enabled services like athena are you know one of these areas where investors say oh that's a services business it does you know it's not venture scale just like they told me oh uber's in the real world airbnb's in the real world tesla's in the real world spacex in the world those are not venture scale businesses when i hear it's not a venture scale business and the founder says i i think there's a way for it to be a venture scale business here's how i I think it gets really big.

1:07:25Then I pay attention. And, you know, sometimes it turns out to be CPG and it's a dead end. It's a road to nowhere. Other times, you know, they do figure it out. Hardware as a service like density.io. We're not investors in Whoop, but I would put Whoop in that category where the hardware just enables a SaaS subscription that's very high. Eight Sleep, I think, is like kind of like a healthcare product more. And we're investors in Eight Sleep. I think it's a healthcare product. So, you know, hardware as a service would be one that I think we figured out early. And then this new one, which is, okay, you're abstracting some human services, maybe picking the developers as Micro One does with AI and providing AI human services.

1:08:09These could be very interesting. And most people would say that's not venture scale. And when I hear that's not venture scale, but I see it growing quickly, that cognitive dissonance makes me go, say more. All right. Thank you, Jason. Paige, over to you. What is a breakout portfolio company that you have that you think deserves more attention? Oh, one I'm really excited about is a company called Intromotive. So one of our big theses is backing incredible technical storytellers. And the founder, Tim Lucini, was a engineer at Boeing based in St. Louis. They have like an incredible team of 50 engineers building electrified autonomous trains.

1:08:54And it's just like, it's so cool. like i watch their videos and their investor updates and i'm just like i can't believe this is my job um that's a company that i am what's the url excited about intramotive.com i think let me m-o-t-e-v.com intra m-o-t-e-v.com i just asked for an intro yeah just like so incredible so i'm excited hopefully to get to go out and visit them yeah I mean like how sick is that so uh we've invested heavily in applied AI um consumer wellness and longevity and then the third space I'm spending more time in is deep tech I spent like three years at Northrop Grumman in college and side mechanical engineering and computer science so that's an area of like deep passion of mine um and then yeah my dad was like a it worked at a contract manufacturing company that built MVPs of like Formlabs and EcoATM and MinuteKey all these like cloud enabled kiosks.

1:09:54So I'm really interested in the intersection of hardware and software as it relates to like what happens when he gets like human AI symbiosis. And then on the other side of that, like how does that affect like us as humans living like healthier and longer lives? So it's kind of like the dual enterprise consumer lens I take. All right. Thank you very much. And then to close this off, Megan, last word goes to you. I was thinking, what could I ask her that would drive her slightly nuts. And I figured this is the most annoying question I could possibly come up with. So does the stock market close this year above or below current levels?

1:10:28Prognosticate. Above. Above, obviously. Not annoying. Really? Not annoying. Easy, easy. Above. Easy. No, at Altimeter, we're super constructive on the outlook for the back half of the year. I think we think we're through the worst of the volatility. Of course, there will still be some volatility. the what one LP called the tariff tantrum took us all on a big ride but we are very positive particularly in tech as we look forward all right well thank you Megan thank you Paige thank you Jason this has been Twist we're back on Friday good job Alex thank you all Alex very impressed it turns out I've been doing this since I had hair but thank you all very much for coming I appreciate it Twist is back on Friday with the live news at noon Texas time 1 p.m.

1:11:16Eastern and we'll see you then. Bye. Thanks, guys.