E18: Sam Lessin on What's Going to Happen to VC in 2024

0:00Venture capital on easy mode, or what looked like easy mode is over, right? But it was never there in the first place. The difference is when you think about what's going to happen to VC is VC became an asset management business, right? Which let it scale a ton more than it otherwise would have. It would let thousands of people work in it that otherwise would never have worked in VC. And it really actually kind of became like shitty banking, right? It was like easy banking of private companies. All those people are going away, right? But I'm fine. You're fine. If you're a serious investor, I think it like thinks about this stuff strategically and actually likes the fact that this isn't cookie cutter capitalism.

0:38Welcome back to Turpentine VC, a podcast where we discuss the art and science of building successful venture firms, VC to VC. For today's episode, we have a round two with Sam Lesson. Sam is a general partner at the early stage VC firm Slow Ventures, an essayist and also a podcast host. Our last episode with Sam released back in August on why the factory model of venture is dead was hugely popular in large part because of Sam's unorthodox takes and unfiltered delivery. Today, Sam returns to talk about why VC won't be the same in 2024, the future of capital intensive businesses, upcoming workforce shifts, and investment opportunities across crypto, reputation systems, and media.

1:19It's a great one. Here's our conversation.

1:26Cool, man. Well, excited to do another episode. Our first one was our most popular episode we've done aside from our first episode with Ben Horowitz. And I feel like, you know, I'll tease you by saying you're the VC doomer. Let's summarize the argument. Basically, what you say is this factory model of VC is over. Basically, this idea that you could, that all these companies are going going to be valued at way high, you know, multiples that are insane, that they can, you know, raise their seed, raise their A to then raise their B to then raise their C, et cetera, and then go public at an insane valuation and everyone can get liquidity all along the way.

2:07Yeah, it's over. Look, here's the deal. We, VC is always, the whole point of VC has always been high risk innovation capital. We don't know what the fuck's going to happen. There's a small number of people who are willing to put a relatively small number of dollars to work in a spectrum of capitalism, right? Trying to figure out things, what's going to be the next big thing. You usually lose your money. Sometimes you make a lot of money. That's a great business if you're smart and interested in it, et cetera. By the way, it's not the best way to make money, right? To be clear, like venture capital is great, but like if you want to make a ton of money, like scaled PE, banking, better businesses, right?

2:41Like you do it because you love it. You do it because you care about creation, all that, all those fun, nice things, right? Over the last 10 years, something changed dramatically in the model in terms of how people thought about it. And what basically happened was two things. One is with SaaS and a bunch of other things, with Andreessen's great marketing of software eats the world, we went from this idea that this was innovation capital, some things would work, some things wouldn't work, it was kind of a cottage industry, into no, no, no, no, no. In the next 10 years, we're going to mint in unbelievable numbers of 10,$20 billion companies, right new ones that are going to outcompete every legacy company right and there's gonna be the whole sea change and candidly the idea became hey we kind of know how to value and build these things so it was okay we know what the public market wants they want 10 to 20 billion dollar high growth you know things that looks a certain way then you kind of back into what a series d looks like in a series c and you know kind of work it back through the factory so you know what you're trying to produce at the end of the line and what happens is all these funds and all these people kind of self-organized into this industry that was all feeding this public market endpoint, right?

3:48Turns out that when la-la capitalism ends, right, with zero interest rate phenomenon shit, and we're back to how things actually work, and you think about the economics of all of this, it turns out the public market doesn't want that shit anymore. There's a bunch of reasons for it, right? Like, one is it turns out that the big tech platforms take a ton of the returns, right, in technology. There are moments of disruption we can get into. There have been moments of disruption. It's not like there's never disruption. But you look at mobile, you're like, who wins from mobile? It's mostly existing companies just win huge.

4:18It's not like new entrants. It's not constant disruption. So part of it's the big guys to get. Part of it is Chamath SPAC'd a bunch of crap. And so people are like, public markets don't want that anymore. And they got kind of burned by it. Part of it is that private equity, the private side of VC got so big, they've hoarded all the winners. So the good companies like Stripe, they're like, We're going to keep those. And we're only going to put out the crap. And so the public market is like, I don't want any more of your shit. And it's kind of rippled through the whole industry. And so what now happens is all the nice markets where you knew if you made a million dollars in ARR and looked like this in a SaaS business, this was your valuation.

4:55You could trust that. Your employees could trust it. You knew how to raise money. The entire venture capital on easy mode or what looked like easy mode is over. But it was never there in the first place. The difference is when you think about like what's going to happen to VC is like VC like became an asset management business, right, which let it scale a ton more than it otherwise would have. We've let thousands of people work in it that otherwise would never have worked in VC. And it really actually kind of became like shitty banking, right? It was like easy banking of private companies. All those people are going away, right?

5:27But I'm fine. You're fine. If you're a serious investor, I think it like thinks about this stuff strategically and doesn't actually likes the fact that this isn't cookie cutter capitalism. Right. This is like a different style, which, by the way, again, I want to be really clear. You do great. I do great. Everyone's doing great. It is not the best way to make a dollar in the world in finance. Right. It's just the most interesting. Yeah. It's interesting. You know, Charlie Munger recently passed. And, you know, some people say that, you know, they, of course, made a ton of money, but some people say they bet on kind of anti-tech or they bet on things not changing.

6:03They bet on businesses that stay the same over decades. To your point of, you know, you can make a lot more money betting that things might stay the same rather than betting. They basically bet on living a long time and the idea of compound interest, which is great. Good for them. Like, you know, compound is beautiful. It's a beautiful thing. Totally. So, you know, VCs have had to become macro thinkers over the past year or two where perhaps they didn't previously. So describe the mechanism exactly of how low interest rates or VC on easy mode leads to massive public companies like, you know, the public markets valuing these companies at super high multiples.

6:44What is the exact connection between them? Well, I mean, there's a few things to it. And again, like these are not complicated points, right? This is hardly being a macroeconomist. This is just very simple supply and demand shit. It's like when interest rates are low, there's a lot of money looking for returns, right? And so where does that money go? It goes further and further out the risk curve. It looks for weirder and weirder shit in places to put money because they can't make money, right? When you're making lots of money on money, like why bother being risky, right? And so what does that push out the risk curve look like?

7:15It means that like there's tons of money like floating around, right? They can't figure out how to make more of itself. And so it goes to venture capitalists. They're like, oh, I know how to make more of it, right? And then, you know, even in the public market, there are plenty of investors who are like, look, I can't make money owning this, you know, equity, right? I'm willing to take a bet on something that's going to grow really quickly or is really small because, like, again, like what's the worst that happens is, like, I lose my money that wasn't making any money, right? So it just basically makes everyone more risk-seeking up and down the chain.

7:44It means there's just more money to go around, right? Because the other part of it, obviously, which is a little more obtuse but not really, is if you can borrow a bunch of money. If someone's like, hey, you can borrow money at 0%, you borrow a lot of money. Then there's a lot more money to go put into this shit. When someone's like, oh, it's going to cost you 10 % to borrow money, it's just rational. You borrow less money or you have to have more certainty before you're borrowing. We all know this. It's obvious. People knew it then. It's like we're playing with house money. right and like we were the beneficiaries of that in like dramatic form right um but um you know it's been interesting to see it all you know kind of reconcile as it has been and what's cool is like look there's carnage but like good companies are still good companies right like there's carnage on the margin and there's a lot of margin just as like in vc there'll be a lot of carnage among venture capitalists that weren't very good venture capitalists but like you know if you're good or doing a good job like you're fine right yeah i'm gonna botch these numbers but james courier was telling me something like when he started as an associate in 1995 um there were like 300 gps or something and now there's like 30 000 uh just to talk about sort of the you know orders of magnitude of uh you know expansion of yeah i mean i again i don't know and this is not this is by the way not to like shit on anyone even though it's kind of fun to do on a podcast Right.

9:12But it's like, here's the reality. You know, I don't my version of that is, you know, when I was first exposing this stuff, I was like in my mid 20s in New York. Right. New York had like two venture firms. Right. It was like USV existed. Data Works existed. RRE Ventures. Maybe there was five. Right. And I was weird because I had interned at a venture capital firm. Right. So I was like this young person. It was not a thing that happened. I went to an event recently in New York and there was like hundreds of young VCs. And I'm like, what are you guys like? Who are all these people? To be clear, very lovely people.

9:46I bet some of them are really good. But like there's just a lot of people who's running around town with checkbooks. Right. And like, you know, if you think there's infinity good companies to found and infinity good entrepreneurs and like every company in the world is going to be disrupted in every industry, there's a new tech 20 billion. fine. But like, that is not the way the world works. Like at any given moment, there's going to be at the, like the tech platform level, a tiny number of important companies. And then what I do think is interesting is there's a ton of really interesting stuff going on, you know, in the small business world and things like that, things I'm actually really into and been investing in.

10:21Um, but it's certainly not people who are sitting there doing market maps of software companies and then trying to jam checks into them. Yeah. We'll, we'll, we'll get into the, the, the sort of franchises and creators stuff in a bit, but just to put an emphasis on the, on the point, okay, so public markets aren't valuing these businesses any, any more in the same way that they were. But also you mentioned, Hey, this isn't as disruptive an era as people, as people imagine. And a lot of gains are going to Microsoft or meta, you know, where you used to work. People love disruption, disruption, disruption, disruption.

10:54Look, here's the reality. Like there have been major moments of disruption in history, like PC, major fucking disruption you get apple and microsoft three trillion dollar companies right like internet disruption like fundamentally changed who the winners and losers would be and what the value of different competencies was you get you know you get obviously uh amazon you get google you get facebook meta like you get that kind of generation of companies by the way it turns out the pc guys everyone's like they've been disrupted like no they haven't they just got bigger right like and now you then you had everything mobile is like is it like uber is clearly a mobile company that's like a hundred billion dollar company that's cool it took a lot of money to build right um you know but it's not that big snap twitter what's that yet snap snap snap like snap is like barely a company right like twitter is like fine but like you're not like iconic tech platforms like they might be iconic consumer brands but as businesses but they're not a hundred billion dollar company let alone yeah not even close right like snap is like small right like you know it's like i i briefly own snap stock because i got when it was private because i i i lost i had momentary doubts of my over overly concentrated meta position i was like i need some diversity and like i don't know i sold it like pre-ipo and like i think it's still below its ipo price right like so like it's not that there aren't things but like and that's fine if you're the founder of snap great but like as an investor unless you're in the seed that's a tough deal right like um so i just think it's like you know these things it's not that you don't get new cool tech platforms but you're not necessarily like blowing it out where there's going to be another major platform every you know every x years you know like vr may or may not happen the winners will be the big guys like ai it is so obvious that the big companies are the big winners, right?

12:50Like anyone who doesn't, I've been saying this for a long time, but like if you don't believe it now, like you must live under a rock, right? No new$100 billion companies in AI, not even let alone trillion? I mean, it depends how much inflation we see. Look, I mean, I think OpenAI might be the one exception that sneaks through. I'm not sure it does. I mean, the reality is even still, it is still a small startup. It's kind of quasi Microsoft now. And the reality is, is like, you know, you know, you watch Gemini come out, you look at all these things, everyone's got their image creator, it's all pretty commodity.

13:24So it is possible, right? But like, there's not going to be another three, right? Like, it's like the table is set at the high end. And it is interesting to think like OpenAI presumably couldn't have happened without Microsoft. And it's possible that it wouldn't have happened if Microsoft wasn't concerned about antitrust stuff. It is interesting how, you know, much how these opportunities are enabled by these incumbents not wanting to seem threatened by, you know, by litigators. Well, that's a whole other story, right? That's several different podcasts about what you can and can't acquire, how that changes things and dynamics in the startup world.

14:00But yeah, man, it's like, look, AI is sweet. VR is potentially sweet. These are all big company opportunities, not small company opportunities. So what's the next disruptive sort of platform or window? It's crypto, man. It's been crypto all along. It's always been crypto. It's like this is the holiday special. It was you all along. It's crypto. And like even crypto, you know, where we've done a lot of that and we've I think been been so far right in some pretty cool places. look, here's the reality. Crypto is fundamentally disruptive to the way banking infrastructure works today. It is a different way to think about markets.

14:37There's no easy way for the existing system to just subsume it and adopt it, right? Like if it happens at scale and as it becomes meaningful, it changes things. That's what disruption looks like. Now, here's the reality. Is crypto going from being a great idea to being super mainstream? You know, it's been fast and slow like bitcoin awareness pretty fast bitcoin ownership pretty fast a lot of the kind of stuff on top of that kind of annoyingly slow and going from theory to reality and what's happened in the interim all these big companies even jp morgan chase will talk at one how one side of their mouth is this shit sucks we hate it other sides they're absolutely working on it and building it and subsuming it and so the interesting thing the crypto is like there's a race between new things that are more powerful and free of kind of that legacy becoming dominant versus smart big companies being like, we also should just adopt the best parts of this or adopt enough of it to make changing not worthwhile, right?

15:33So like, that's like, I do think it's crypto, but I do think there's a path in which even crypto will certainly have its place in the world at some raw level, but like will be less disruptive to JP Morgan than you would have thought it was going to be five years ago or 10 years ago. Hey, we'll continue our interview in a moment after a word from our sponsors. Real quick, what's the easiest choice you can make? Taking the window instead of the middle seat. Outsourcing business tasks that you absolutely hate. What about selling with Shopify? Shopify is the global commerce platform that helps you sell at every stage of your business.

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16:47And Shopify helps you sell more with less effort thanks to Shopify Magic, your AI-powered all-star. With Shopify Magic, whip up captivating content that converts from blog posts to product descriptions. Generate instant FAQ answers. Pick the perfect email send time. Plus, Shopify Magic is free for every Shopify seller. Businesses that grow, grow with Shopify. Sign up for a$1 per month trial period at shopify.com slash moment of zen go to shopify.com slash moment of zen now to grow your business no matter what stage you're in shopify.com slash moment of zen so let's say we're doing another one of our podcast bangers like a decade from now or 15 years from now 20 years almost certainly will exactly you've gotten to the point where you're just on my calendar as podcast i'm like sure i you know like yeah yeah exactly let's say that there's a hundred billion dollar company in crypto let alone you know multi hundred billion dollars like what would that look like or where would that be more likely to emerge like imagine well look my speed that solana is already a more than a fourth of the way there i mean i think like look to me to get to a hundred billion dollars a lot of fucking money right like that's not a small amount of money just to be clear yeah yes mass there's only very few so it's an extremely high bar but i think when you think about like that that is a platform scale business right that's not like I built something cool that I own, right?

18:09And I think when you think about what those have to look like, they do have to have broad value. They do have to be understandable. You're not going to find platform businesses that a human being can't articulate what they do, right? I think it's generally true. You can find$10 billion businesses in some niche esoteric thing that has a way of making money. But when you're at real scale, you kind of need to be in the Maslow hierarchy of things humans can understand, right? Not just like bank shoddy, weird proxy blah, blahs, right? So it has to be understandable. It has to be touchable. It has to have lots of opportunities.

18:45It has to enable a lot of other businesses, right? And be like an ecosystem, I think, to be at that scale. So yeah, I mean, like, look, again, I've, this is no secret. Like, I have my bets on the table. Like, I think Solana is incredibly well positioned to play that role, right as an ecosystem and as like an l1 um will there be other things sure like why not right but like that's like when you ask like what's the easy answer it's going to be like the platform level stuff yeah let's get into also how um this new era changes sort of uh norms around what investing looks like and and one of the things you mentioned is hey um founders should invest as if it might possibly be their last round they shouldn't just assume that they can just you know keep keep raising.

19:28What does that look like practically in terms of how they think about liquidity and talk about the new normal there? Look, I mean, from my perspective, the most easy to digest or simple version I would call out on this is just like, look, you know, see, I'm a seed investor. That's what I do, right? People come and pitch me things that don't exist or barely exist for a few million dollars. That's all I can give them. And for years, the pitch was always, we're going to do X, Y, and Z, and then we're going to have these numbers and we're like, yes, and those numbers allow you to raise a series A.

19:59And it's like, I need a million dollars of ARR and like retention to look like blah, blah. And like people come in now and pitch that. And I'm like, my eyes glaze over. I'm like, I don't know. No one knows what the market is and where it's going to be. And like, what is the fundamental value story? You're going to spend my money, which is really, let's be honest, my LP's money, people that I know I report to. And at the end of it, ideally, you have a viable, good business right that like every dollar after that is optional it doesn't mean you don't take money it means you don't have to take money it's like you see an opportunity to grow faster great raise some money like you don't don't dilute me right and like so i'm always like well how much money you need to build a good business i don't care about this next round right and that actually might be more money it might be they're like well i thought i needed two million dollars to get to a million dollars in arr but i'm like but i don't care if you get to a million dollars in arr no one does right i'm like what do you need to be a good business and like well i need four it's like great Let's come up with a deal that makes sense to get you there.

20:56Right. But I don't want to, you know, I need the thing I'm trying to produce. And I think as a founder, something about producing is like, how much money do you need to produce a thing that is like, obviously valuable and good that's going to be able to ideally self-sustaining. Right. And then you figure out how to scale it from there. Right. I think there's this old meme that like, you know, to be derogatory investors be like, well, that's a lifestyle business. That's not a real business, a lifestyle business. and like there's such bullshit it's like the idea that like you can't build a good business on the way to building a great business i just i just really disagree with right and so you know i don't i think um i think it's like very bad old thinking and i think it's much better for entrepreneurs to be like how like you know these spaces are spaces are big i'm excited i'm excited to get up every day and do the job right like i'm not building this as a business school case i'm dealing because I want it or I believe in it, right?

21:50Then you kind of bolt on like, well, how big can I get, right? Not the other way around. Totally. And we talked about in terms of what not to invest in, we mentioned AI being a bit of a mirage or red herring in your view. But you also mentioned capital intensive businesses, right? There was our very smart friends, you know, building things like Oscar and forward and healthcare or open door, we work in real estate and just examples of capital intensive businesses that maybe made sense in a prior era or didn't. Well, they may look, I actually think so, you know, a good capital intensive business can make a lot of sense for people who have tons of money and get paid to deploy that money.

22:34Right. Like if you have, it's hard to deploy a lot of money. So if you have billions of dollars to spend, right? You can't go and buy like the nice things in the store that you have to buy everything. And so ideally you can like expensive things are good for you, right? If you're like, I can put in a billion dollars and get two bags, that's a billion dollars in cash return. It sounds great. Right. So like, I think there was a, there was this momentum to convince founders to do things that like were actually quite good if you have a ton of money, right. As investments, but like diluted the shit out of founders, right?

23:08Like wasn't a great strategy and ended up wasting a lot of money. And so again, like I think there's, there is such thing as being so frugal, right? And like so cash constrained in your approach that you don't do obviously good things. You don't invest when you invest. You do need the money to invest. But like, again, remember, like everything you spend time on or build, you're either spending like investor capital, which is dilutive to you, right? You're spending effectively your equity in some form, which is dilutive to you. Or ideally, you're spending customers' money, which is great, right?

23:38Because that can just regenerate on its own, right? As long as it's obviously margin positive, right? So you want to get to the non-dilutive financing part of life as quickly as possible. Yeah, that makes a lot of sense. The other thing that you mentioned that people need to keep into account is sort of cultural changes that have emerged since COVID. Why don't you unpack some of these changes and how it impacts them? Look, I think that Silicon Valley is dominated by cult thinking and cults in all sorts of ways. Those cults are obvious ones, and then they're less obvious ones. People talk about impact or changing the world.

24:23It's like, oh, don't show up for a paycheck. Change the world. right and like i think what happened in covid i do think it's a really a code phenomenon two things one is like it's kind of like if you keep doing something the same way every single day you don't question it the second you get like shaken you're like oh my god like whoa like was that what i wanted to be doing two is like people have this space to experiment and all sorts of different ways to live and like what the good life is and like what they want to spend time on and how they want to behave and interact and like that and so everyone's like oh we can't get people back to the office like yeah because people don't want to go to your office right like and like the number of companies that can really be mission driven they like you actually are doing something really important it's small it's not zero but like guess what most things like don't really matter for the world right like like your sas workflow tool is a sas workflow tool right like you're and like i think there's a lot of people who thought part of this eloquent value thing is like you buy into importance of everything and be like nah you know like i think there's a good business here right i want to live my life differently and so i don't think i look i think it's actually quite healthy in a lot of ways like i don't think this is like a negative thing but i think people just like covid opened people's eyes to a lot more options and then i think the other thing is like it shook up the chessboard so much in terms of winners and losers that everyone's like oh this game can be kind of stupid so like you know if you think about it like you want day one of covid for whatever you're in a type of company you have a million dollars of stock options you know two years in that million dollar stock options for some people is 10 you just like randomly got super rich like you happen to work at zoom right for other people like they're like that company's definitely valuable but like it just got side swiped by coveting out of business like once you go through that enough times it's not that you don't want to work it's not that you don't care about these things etc but like that's such a week like all of a sudden like oh i don't just put one foot in front of the other right like there are other factors in life life has randomness to it, things like that.

26:17I mean, it just changes how people want to live and what they want to focus on. Right. So for me, I think one of the big manifestations of that is I do think you're seeing a lot of people are like, look, I want to do good work. I want to have impact in my community. I have a very hard time like convincing myself of the cult, this SaaS tool matters story that gets me to go work at the SaaS tool company and work a billion hours a day. Right. And if talent flows in different directions, like different good stuff gets built, you know? Yeah. It is interesting. Just one side note. VCs make money investing where other VCs aren't, you know, or where it's not obvious because then price isn't bid up.

26:57VCs are supposed to be contrarians. Why are all of them sheep? Or not all of them, you know. Well, because they're not, most VCs aren't real VCs. They're just asset managers. You say most VCs make money on contrarian invest. No, most VCs actually don't make money. Most VCs just collect fees, right? And like put things on paper that look nice that are private marks. And especially that's true of non-GPs, right? Like so, you know, non-GPs, so I don't know. So I think the reality is I think the first thing to understand is like, yeah, most VCs, it's not that they're not trying. Again, like I don't want to, there are exceptions to every rule.

27:30There are smart people, blah, blah, blah. But like, you know, that 30 ,000 GPs or whatever, like most of them aren't making money. and the way they're getting paid is just for managing zero interest rate money for a few more years. They're not actually like making anyone money. Right now, where to be? Then the question is like, how do you make money? Right? Like there's so many different ways to be a VC, right? Like there's no question that if you have a big checkbook and like your version of VC is like Hollywood, Wall Street VC, where you want to go and like elbow out the other people and like, you know i don't know like agent style like get in there and get the marginally better deal and then you're right enough like there's a way to operate that is profitable and like there's a way to do it i mean it's certainly not how i do it right like i you know i'm at the extreme other end of the spectrum and then like look i feel my oats right now like i'm like kind of 10 years ish into being a professional quote-unquote vc i'd done a bunch of angel deals before that but like the first place I like took a paycheck from as a VC, let's call it a decade at slow about that is like, I've now had enough wins at the combination of being very different and then being right enough that feeling my oats, I can be like, ah, like that's the way to do it.

28:45But like, look, I might not have another good deal ever. Right. In which case, you know, I'll be like, ah, like I wasted a lot of money. Hopefully I still have made a lot more money than I lost, but still, you know, like it's, it's, uh, it's very contextual. Yeah, it is. I wish I had that luxury in the sense of when I look at the things that that have done well for me, it's hard to find a constant theme. Some of them were hot deals. Some of them were deals that no one wanted to do. Some of them were first time founders. Some of them were repeat entrepreneurs. I, in my personal, in my personal experience, both as an individual investor, but then as a professional VC, you can make a little bit of money in the consensus stuff, right?

29:24I've made a little bit of money. Like you do fine. You know, you put in your 25K seed check, you get a little bit more out, right? Like it's a buddy, buddy deal. Fine. But like the only way to make real money is to be betting, not even big, just differently. Right. The thing that I have not figured out in my VC career, and maybe I will never figure it out or maybe I will, is the things that I'm really proud of, they have enormous multiples on them, right? But they're not huge checks because it goes super early and I can have some conviction. But I'm not – I don't know. Learning how to go big and early versus just early I think is tough.