E22: Phin Barnes on Unbundling VC

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28:43And so what we did was we actually did it bottoms up. Dan and I, neither of us have sort of an AUM aspiration. We don't really care about managing billions of dollars versus managing hundreds of millions. It's not the interesting part. It's not the motivation. I think for us, the motivation is we both believe deeply that this business model innovation creates opportunity. And so how do we maximize that opportunity for ourselves, our LPs, and everyone who works and owns the piece of the GP? And so we started with looking at the portfolio that SCV had put together. I think it was, if I'm remembering right, I think it's 46 companies total, maybe 47.

29:27And in looking at that, and some of those have been very successful, both companies and engagements, and some of them have been less successful engagements, things that have put stress on the organization, otherwise delivery a bit challenging. And in looking at that, this is when I was sort of thinking of myself as a consultant to Dan rather than a potential partner. So I could be very blunt. There was no pulling punches. And it just became very clear that the benefit of this product as it currently was built was bimodal. And at the very early stage, the ability to take a founder with a unique vision, technical co-founders who could go build the product and amplify their strengths with top engineers.

30:07And our engineering team is folks who have built their own companies. Those companies were acquired into web-scale businesses, and then they ran large pieces of infrastructure or products inside of those companies. And so they've seen the operations of technology built at all scale, and they understand how to do that. But pairing them with these founders, co-founders to amplify their strengths, help them find that product market fit faster through more effective iteration, a little bit of direction around how to think about the feedback coming back from the market, etc. Tremendously powerful. Marrying that with customer insight.

30:43So being able to then go talk to folks earlier than maybe you would have otherwise. Being able to frame those conversations to get the most out of them, to bring the data back to the company, to then apply the founder's judgment to how to interpret that, I think, is really important. really valuable. And then building teams obviously is a big piece of early days in a company. But I think in particular, building teams where the founder now has context and a reference point for what world-class looks like, it means that they can be much more discerning. And because our teams all work together, when our recruiters go to work, they're not only talking to the founder about their product roadmap and how that aligns with their hiring needs and then building out their candidate funnels and calibration, et cetera, they're also spending time with the engineering folks who are working with that founder.

31:28They're spending time with the product leads and designers are working with that founder. They're spending time with the sales folks that are working with that founder to understand much more deeply about the market, about the culture, about the way the founder leads, and then therefore identify folks that will be successful in that environment that's much more impactful. And so those are sort of the ways that we think about engaging early and the impact on sort of establishing that DNA of the company is really significant. Helping the founders to map and build the business that they want, being able to help them achieve that vision early and establish a durable DNA of that company that they can take forward to, you know, sort of the scale that they ultimately achieve.

32:07And then capital, I think, you know, obviously you augment those services with capital. You know, it's great to have recruiters, but if you can't pay your candidates, it doesn't matter. And so we have capital there and we can lead early stage rounds, anywhere from writing one to four or$5 million checks and leading those rounds in that deep partnership with founders. And then the other place where it was really impactful is actually post-product market fit. So founders work and work and work and find product market fit. Then the company starts to scale. And that product market fit oftentimes starts to pull the company apart or at least have it start fraying at the seams.

32:43And in those moments, what founders often need is support, not capital. Any company at that stage, particularly over the last 10 years, but I think in general in any market, the very best companies that are experiencing explosive growth, they have plenty of access to capital. They probably have a pretty large balance sheet. And the job of the founder is to turn that capital into enterprise value. And so we can come in at that stage with services first and engage across, sometimes it's recruiting where you need to hire your first head of sales. and then our go-to-market team can engage in that transition from founder-led sales to salespeople-led sales and how to set that up.

33:21And we can recruit that first set of sales. We've seen other executive hiring is a pretty obvious one. There's been places where founders want to be able to parallel process paying off technical debt, as well as continuing to add features and deliver against product. And we can step in with engineering support to get that done. And on day zero, scale their team such that they can now parallel process versus the six months it would take them or recruit and then therefore be able to parallel process, at which point they've fallen behind the market opportunity. And so we're able to do that, engage for services, build a relationship with the founder, understand the way they lead, understand their business, but also have them understand us and how we work, the way we think about building durable businesses and winning in the markets that they're in.

34:04And then we can deepen that partnership with capital investments, sort of the$7 to$15 million investments into those later stage companies, either as an extension of the round that recently occurred, or we can wait until another round comes together and then we can earn our position on that cap table through the work we've done and be able to write a second check into that. We're not leading those rounds, but be able to participate in a meaningful way. And with our fund size, our belief is that those investments can drive meaningful returns to the fund just based on cash on cash multiple, not worrying about sort of ownership as a metric.

34:39Well said. Talk more about how you think about unbundling the GP in terms of either what you're doing to date or what you aim to do in the future or what exactly that might look like for Sorbeticory beyond what you've said so far. Yes, I think the again, it's customer led. So so there's we do believe these three pillars of operational excellence represent the three things you need in order to win as a company. I think right now, for example, in GoToMarket, we're starting to hear requests for marketing, positioning, product-led growth type support. And we don't currently have that. And so that might be something that we would think about adding.

35:19But again, it's in service of those founders. And I think the nice thing about our model is we can make a hire. We can find someone amazing. So we have the best recruiters in the world. So we can pull them in. And then we can see if they can do work in exchange for equity. And many of the folks that we recruit into these positions are active as advisors or angels. They're already being compensated with equity for their brain and their experience and their ability to engage with founders. And so we just institutionalize that. And so I think we'll follow the founders in terms of their needs. I don't think you'll see us buying like racks of GPUs and that sort of stuff.

35:54But I think we'll follow the founders around their operational needs and where we think we can access a unique network of people where we can build a team that founders couldn't otherwise access outside of those folks being their co-founders or, you know, sort of being pulled in in some massive advisory relationship and be able to bring that resource to bear for, you know, unbelievable founders who are making a choice to build their company in a different way than the traditional venture path. And I think that's the critical piece. A long time ago, I think Don Valentine had a thing that was like one of the qualifications for Sequoia Investing was the founder had to be proactive about looking for and open to their active involvement.

36:39Sequoia has active involvement in that company building. And I think we're saying the same thing, maybe in a little different flavor, but the idea that we want founders who are learn-it-alls, not know-it-alls. We want people who have a North Star, they have tremendous urgency to get there, and they will literally do anything to create an advantage for themselves. And that includes engaging with us and the folks on our team to add talent gravity to their business and recognizing that the nice thing about talent gravity is a flywheel. So one of our folks goes in, that uplevels the entire team or that function.

37:15Then when you're recruiting, the candidates are evaluating your team and they're evaluating your process and they're seeing world class. And when they see that, the quality of candidate you can acquire goes up. Those candidates have amazing networks. And now all of a sudden you've got this talent flywheel spinning and talent gravity. So I think that's the focus is letting it be founder-led and always leaning back on the business model we have and how it opens the door for product innovation and to serve founders in a very unique way that I think is more impactful and also allows us to operate pretty differently.

37:47Yeah, it's fascinating. One of your principles is this idea that where talent flows is an incredible signal. And if you can align dollars behind that, there's a sort of alpha there. Talk about what that means practically in terms of how you think about talent flows or getting an edge in understanding where those flows are happening. I think it's a really powerful piece of our model today. And it's something that I think will get stronger over time. And it's something we're leaning into pretty heavily. The first thing is to set context around our investment process. So we are not a firm that has a small number of investment partners and then a large number of operating partners.

38:29And there's a wall in between. And those two things don't mix. We are not that. We are called the general partnership for a reason. And everybody on our team is incredibly senior. Everybody on our team is founder-facing. In fact, everybody on our team is LP-facing. For our annual meeting, we had every single person on the team in the room. And as I was being asked questions, because I was at the front of the room, just because you can't have everybody at the front, I found that for the vast majority of the questions I was being asked by our limited partners in our first annual meeting, I would cold call members of our team and say, hey, you worked on this company.

39:02Why don't you share what you think? And so that's how senior they are as we put them in every room and they are leaders in their own right. And so those folks, they have amazing networks. And so they leverage those networks to identify companies. And so that's one piece of the talent flow is that they are in these networks and they understand them. These are folks who come from Coinbase and Robinhood and Stripe and so forth. And so we're in those networks. The second thing though, is they are actively engaged with founders in very different ways than other venture capitalists. So if you're a standard venture firm, your goal is to be top of mind when one founder asks another, who should I talk to?

39:41I'm raising money. And if you can win that game, then you can win the market. And we want to win that game. Don't get me wrong. We want folks to... And we see this flywheel already with all the SCV companies. The companies where the relationship started with SCV, those relationships continued through the general partnership. And so we're seeing sort of 40 or 50 % of the things we see are coming from those founders and our team. But the other thing is founders will ask another founder, how did you recruit that person? How did you build that team? How did you make that technical decision or choose that stack versus this?

40:18Or how did you get in touch with that customer? How did you price your product? How did you pick the pricing mechanism? And in each one of those questions, the answer that should come back if we're doing our job is, well, I worked with the GP. We collaborated on this, and this is where we ended up. Here's the thoughts behind it, and the founder owns those decisions, but we've been supportive there. And so I think that the model also allows for that referral source to flow. And we're seeing that. And then very specifically on talent flow, we have a team of recruiters and they are talking to somewhere between 1 ,300 and 2 ,000 people every year.

40:54And they are doing that to help place people into the portfolio companies that we work with, where we have statements of work to help them build their teams. But oftentimes, those folks are not interested in a given job because they're starting a company or their manager starting a company and they just got recruited to that and they're going to go there. Or they are not interested because their company is doing so well, they're not leaving. Or they're going to another company they think is scaling quickly or super interesting. So we're getting all this signal on the market as to where folks who are incredibly talented, talented enough and experienced enough or successful enough that we target them as someone who could work within and help build one of the companies we've partnered with.

41:44But they have other interests and there's signal in those interests. And so we were able to look at that signal and to understand these are companies that are interesting right now. Every recruiter in the market has a small list of companies that if they find someone interesting and then they see that their current job is at Company X, maybe Anthropic OpenAI today or others, but they just don't bother to call them because they're not leaving. I remember this when Uber from 2013 to 2015. Nobody's leaving. Don't even call them. Just leave them alone. Maybe Notion over the last couple of years is in that boat.

42:19And you see that now with the way they're scaling. And so I think we can learn that signal from the market and then eventually figuring out ways to flow capital behind that signal. No specific aspiration for stage or anything else. But I think that idea of much more depth of understanding of not just who is flowing where, so it's not a LinkedIn count, but who from a quality perspective is in the top 1 % of people we've spoken to this year and where are they going? Right. And then allowing that wisdom of the crowd to drive the, the coarse grain filter on an investment perspective, I think is pretty fascinating, both from a thematic perspective, as well as from a, um, you know, from a specific company by company perspective.

43:01Yeah, that's well outlined. And when you say turn cost center to a profit center, what you mean is that you basically just get for that same price of hiring a recruiting team or talent team, you get special economics for it, mostly if not all via equity? Or what do you mean exactly? Yeah, so what I mean there is when I say turn a cost center to a revenue center, the way every other VC firm is structured, they have a fee and they have carry. There's profit sharing. and that annual fee is divided between all the salaries and benefits and offices and travel and everything you have to pay for. And so as a GP managing that business, you manage your services team as a cost center because every dollar you spend there is a dollar you're not spending on your house at the Yellowstone Club.

43:49And so you try to minimize that cost. What we've been able to do is to say, rather than pay for services out of fee, we can create services that are so good, founders will pay for them with equity. Therefore, the more service we provide, the more equity we earn. And therefore, it's an investment of the firm rather than a cost. Because the services drive revenue for us, meaning equity that we're acquiring. That's our job as venture capitalists is to convert LP currency, fiat currency dollars into startup equity and then the startup's job is to turn it back again into fiat currency, hopefully more of it.

44:27And what we're saying is we are going to do that and we are a standard venture firm in terms of our organization and legal structure. The key difference is we have two paths to acquire equity in startups. We can either invest capital directly in a company or we can invest capital into our service business. That service business can do work in exchange for equity. That equity can flow back to the firm. And so long as we're not giving away a dollar for 50 cents of equity, For our LPs, it's the same. It's a good deal for them. And then for us, it gives us differentiated access. So on our seed investments, not all of them have chosen to engage with services.

45:06I think it's about 75 % or 80 % have. So we're investing capital and services. And when we do that, services represents about 20 % of our ownership in those companies. And that is not ownership that's available to capital. These are rounds that are fully subscribed. Syndicates are set. We couldn't write a 20 % larger check and own 20 % more of that company. They're fully funded. But that founder wants deep engagement and support in how they build their company. They want to build it differently. And they want a faster path to turning that capital into enterprise value. And they will trade a small amount of equity in order to access the unique support that we have.

45:44And that augments our ownership and takes it up by about 20%. same thing on the on the later stage and where we engage with services it unlocks otherwise lock cap tables these are founders who do not need capital if you have i have examples like collective is a company we work with i knew human i saw they were doing well i was interested in what they were building i reached out and he gave me the typical entrepreneur response which is great to hear from you i'm heads down building i was like okay i get it and then we looked at his website and he had open recs. He had open, open hiring needs on his website.

46:19And in particular, he needed some designers and product people and he needed some engineers. And so I wrote him back and I said, I get it and we don't need to engage, but we've actually, you know, we have this guy, Josh Hernandez on our team. He built out the product and design team at Robinhood. He's amazing. In his network, we have a couple of people that we've already spoken to that we know are interested in what you're doing from our previous conversations. We also know that they're currently loose in their job and we could probably put them in front of you and if you wanna hire them, great.

46:52And he wrote me back and said, can we go for a walk tomorrow? So we went for a walk, spent time talking about how we work. And as part of that, I shared the list of people that we could put him in touch with. And this is not a Google sheet with LinkedIn links that happen to be designers. And then he can do sort of good luck to him going out to get them. These are highly qualified people that we have relationships with. And we were then able to show him that list. And his response was this list. And then ultimately the people we put in front of him were better than anyone they had talked to in the last six or 12 months.

47:26And he ultimately made some hires. We built that relationship. And then we were able to participate with capital as well as an extension and expansion of the service relationship around product and engineering as they raised their large round that was announced. I think about like seven or eight months ago. But that was all driven by unique services that only we can offer because we do that work in exchange for equity. And what that means is that our view of revenue is not so much about profitability. It's about what is the most valuable asset in Silicon Valley. And the most valuable asset, maybe outside talent, is startup equity.

48:01And so we have another way to acquire that, making our services a revenue center rather than a cost center. And how do you think about pricing that in terms of equity? And maybe we could then segue into incubations and how you think about doing incubations. So the pricing is always unique. Every engagement is bespoke. And so just like a term sheet, you're working with the founder to figure out kind of the dilution that they're willing to take and the dollars they want to raise and your view of price, et cetera. That's on the traditional venture side. You're always having that negotiation. And on the services side, it's the same.

48:34We have a cost to deliver the service. We come to some shared belief with the founder as to the value that we're going to create if we were to deploy the service. And then somewhere in between those two things is the actual price, right? We can't capture all the value the founder thinks we're going to create because that wouldn't be good for the founder. We can't provide the service for lower than our cost because that would be bad for our LPs and we have fiduciary duty there. And so we've been able to navigate that middle. And it's not, you know, when I say a revenue center, I'm explicitly not saying a profit center.

49:06So this is not, you know, looking at spending, you know, the salary of one person and then charging 10 times that in equity. You know, we're receiving common advisory grants. They invest over time. We have to deliver. We have a cost to deliver. And we try to rationalize that conversion from our spend in dollars to our acquisition of equity in shares in the company. but it's not looking to take advantage or sort of, you know, hide the ball. We're pretty transparent with founders around this whole thing. Totally. Let's get to incubation. How do you think about incubation more broadly? And how do you think about it at the general partnership?

49:42It's a thing that a lot of firms are thinking about trying to do. Some are having success, some aren't. Let's reflect a little bit about that. Yes, I think incubation is compelling to a venture capitalist because you convince yourself it's proprietary deal flow, is what people would call it, right? This is a unique way to approach the market. You get differential pricing. But I think all of that is problematic because it leads to sort of adverse selection. When you see a venture firm that is owning 50 % or 60%, 70 % of the cap table, with rare exception, the folks coming in to operate those businesses I don't think are the best people in the world to operate those businesses.

50:20I also think there's a challenge in the incubation model where all the ideas come from the firm. I think it's sort of like, do you take the horse or do you take the field? And I think I'll generally take the field. And the very best ideas come from founders and they come from all over the place. And the very best people to lead businesses tend to be the person whose idea it was to start it because they have sort of unique insight that they can't necessarily articulate. and they certainly can't share or translate, transfer to somebody else to then go execute. I think it's very, very challenging.

50:53And so our model is actually suited to allow folks who are incredibly talented company builders to have the time and space to engage with companies in the portfolio and to support them, but do that in a time-limited way and to say, this is an engagement. It lasts nine months, 12 months, 15 months. And then when I'm done with that, I'm going to be able to pick my head up and think about what I want to do next. And oftentimes they decide they want to engage in another statement of work. But sometimes they've either learned something, they've experienced something through that work that exposes an opportunity that they want to take advantage of.

51:32And then we give them the time and space to do that. And so the first example of this was a company called Turbine One that was incubated. It was actually two builders from the general partnership team. They had an insight around AutoML at the edge and how to do that in military applications. And so they worked on that inside the firm for 9 or 12 months. Then they were able to spin that out and raise outside capital. Our friends at XYZ, Ross Fabini, helped with that. And then they've gone on to the beginnings of what could be real success and product market fit. Behind them, we have another builder, Sasha Aiken is his name.

52:11He was the founding CTO of Redfin. He was the first person when, you know, we have this engineering meeting every week. It's amazing. And they're talking about sort of the things that are interesting to them, what has them curious and from a technical perspective. And obviously, LLMs and sort of the whole wave that we've seen in AI has been a big area of focus and curiosity for the engineers. And Sasha was the first person that sort of raised the question. When chat GPT first came out in that meeting, I'll never forget, he said, right, but what happens when you insert a probabilistic reasoning engine into a deterministic code base at scale and in production?

52:47Like, how do people deal with that? Like, how do engineers deal with that? How do customers deal with that? How do managers deal with that? Like, what happens when, you know, you don't know what will come out the other side, even if you know the inputs? It creates a challenge. and and so he thought that observability would become increasingly important and so he started working on something in the observability space we had another uh technical person who got very interested in the open source side of of the models and i think you know our general view is that open source is is fascinating in the space and you know as a vc maybe it's a little self-serving because we sort of missed the opportunity to invest in in open ai we weren't you know we a fund when we could have invested there or Anthropic, et cetera.

53:32So it's sort of self-serving to look at open source outside of the ability to deploy your model in some unique way. But I think we had folks thinking that as product leaders and engineers, you'll want to swap your models out and have the option to not be locked into a given model. But there's a lot of second, third-door effects on your data pipelines and how you manage all this infrastructure. And so they went off to build a company doing that. And they've since raised outside capital. And then we have two other builders currently who are just at the very early stages of exploring ideas. And where their choice is, do you want to engage in another statement of work or do you want to take some time and think about building your company?

54:15You know, when we do that, we support them with services. We can support them with capital. We do that in a market rate way. And so the services contracts tend to be potentially larger than typical. but it's not 50%. Our ownership tends to get to our core level of ownership, which is sort of in the teens, maybe in some cases high teens, but right in there and support the company deeply. But as an investor and as a service provider, not as some version of an absentee co-founder. That makes sense. How do you think about ownership in terms of how venture firms should think about if you incubate an idea, you help the startup, uh, you to get off the ground, what's the, what's the right ownership level or special ownership level that one should get an exchange?

55:01Yeah, I don't, I don't think there should be one because the best founders, if you say I should get special ownership because I'm, you know, somehow supporting you in a unique way, or it was my idea, God forbid, um, the, the founders should just go somewhere else, right? They, they, it's an open or they should go and talk to other people. It's a very efficient market. And so I think the very best founders would take the idea, particularly it was theirs, right? And in our case, it's always their idea. And they would take that and they would just go somewhere else. And for us, the market terms that we can get, making it a core ownership position, I think is where we want to be.

55:40It allows us to support that company throughout its life, you know, with Prorata and so forth. But also we benefit tremendously from these folks focusing on new ideas, being very open and sharing that with us day to day, week to week, because it informs the way we think about other entrepreneurs that we're meeting. So, for example, one of the ideas that folks were playing with internally had to do with site reliability engineering and what you could do around incident response in site reliability, leveraging AI. And they took a pretty deep dive into that. That's very interesting to understand some of the sharp edges and places you cut yourself as an engineer when you start trying to do that.

56:18And then along the way, I think probably four or five months after that idea had been sort of floating around and we were thinking about it, we met a founder who's working on something like that, but around security incident response rather than site reliability incident response. There's a bunch of benefits to that and ways that it reduces some of the sharp edges that we had found in site reliability. and we got very interested in that and ended up partnering with that founder and you know he's at the very beginning stages of building but it's an amazing opportunity and one that I don't think we would have won it was highly competitive we wouldn't have won the right to partner with that founder if we hadn't shown up with a prepared mind that we earned over the five or six months of thinking about this potential incubation idea and I think our mindset around how we partner with folks being consistent at that very early stage all the way up to the the sort of series B companies, I think also allows us to have a single ethos in the market.

57:12And so founders kind of know what they're getting when they engage with us. And it, it creates a choice of how they want to build rather than a comparison between, between venture funds. That is well described. I want to zoom out to something we talked about earlier, which is this idea of, you know, unbundling the GP and thinking about scale because people think about it in different ways, right? You mentioned, you know, go to market and talent. Some people hire great practitioners there who can help the startups directly. Some will focus on broader networks. I think at first round, you guys experimented with a customer network where you could help introduce your startups to customers.

57:49Of course, what's challenging about customers is that startups have different customers. And so unless you're you know, A16Z, it's hard to build sort of, you know, a briefing center that can, you know, sort of take in customers for every single possible segment. So you have to tend to go down specific verticals. But with talent, talent is much more fungible across different startups. But even then, you know, you could invest in recruiters, but you could also invest, hey, we're going to go deep on the universities, you know, like Neo has done, or, you know, some dorm room fund that you guys did at first round or other things, or we're going to go through this other sort of like, uh, talent ecosystem, maybe it's alumni at different companies, like, like, like you mentioned.

58:30Um, I mean, over the past decade, plus you've tried a lot of these different iterations of, um, building ecosystems and also having practitioners, whether it's on the go-to-market side, whether it's on the talent side, on the deal flow side, like, you know, the, your angel track program that you pioneered at first round, where have you found kind of like the best bang for your buck or what's worth doing and what's not worth doing right we've run all these experiments you did a lot of them first round other venture firms have run them reflect on uh on what we've learned a bit yeah i think i think the um the the approach where the the victory is somehow scale i think is is challenged in general across these things.

59:16Because back to what we said at the beginning, startups are idiosyncratic and they're dynamic. They change all the time. And so I think to really figure out how to serve founders, you have to start with the one-to-one relationship, understand them deeply, and then look for ways that you can leverage either your existing networks or existing resources to create a bespoke product just for them. And you need to align your business model to allow you to do that. But I think outside of that, it's very challenging to be sort of like brand advertising, like outdoor. You bought a billboard, maybe you saw some Lyft, maybe you didn't, but you don't know.

59:54And it's not sort of that targeted, very specific thing. And from a customer perspective, no one ever got their best meal at an all-you-can-eat buffet. And so I think the idea that you need to be one-to-one is kind of my macro learning. I think you can build repeatable ways to add to the ecosystem and to participate in communities and to help individual people either access knowledge or understanding they didn't otherwise have, help them build network that's valuable. And then from that, you can hope that when they are doing something where there could be economic value to you as a venture firm, that they come back to you.

1:00:37But I think that for the most part, it's just very hard to keep track of. And people try to do things like you turn, you know, a program that supports angel investors into a scout program because then you have this financial piece. And, you know, but I would argue that even the firms that run their scout programs the best have no idea the prospects of the companies within those scout funds. I just don't think, I don't believe that you can possibly keep track. And that it's just as likely that you make your great investment in a scout company as it is that you make your great investment in a non-scout company.

1:01:09You probably have equal information, et cetera. And so I think a lot of it was hoping for clear paths to attribution, right, if you use the advertising analogy. But the lift often was either because the market was just rising overall, and so everyone thought they were doing better. And so if we're all doing better and we're investing in all these programs, we should keep investing in programs because we're doing better. And so you had this cycle, but actually it was just the market, right? And it's like, yeah, interest rates were zero, and there was lots of money. and startups are getting funded and everyone felt great.

1:01:41But in fact, and we're seeing this a little bit now, this sort of back to basics, like what really mattered then, what mattered way back when Don Valentine was sort of founding Modern Venture. And I think what matters even more going forward in a challenging environment is quality of founders, quality of service such that it amplifies those strengths, therefore quality of companies, and building long-term compounding durable businesses. And you don't do that and you don't access those people by seeing them once at a dinner with 20 other people. It's just not how it works. Totally. One thing I suggested the other day on Twitter that I think I'm going to build is a book face for non-YC companies.

1:02:25I think I'm relishing in my sort of neutrality right now as in not being at a venture firm to try to launch things that maybe if a venture firm launched, it would seem too biased or not everyone would join it. but more things for the ecosystem, right? Like, like products. No, that's right. I think, I think there are, there are, there are many things that innovators with resource could build for the ecosystem and they should. Right. And I think it's, I think it's great. Like we, we hosted an event around open AI as developer day, and we had close to a hundred people in our office, got to meet some people that we didn't know before and got to reconnect with a bunch of people that we already knew.

1:03:04There's probably a bunch of followup that comes out of that. So you're creating sort of an opportunity for those random collisions that lead to sort of good luck, right? You're creating your own luck. But I don't think you can sort of say, okay, programmatically, we are going to identify the top, you know, 30 people in AI and then get to know them by having some program. I just don't, I think it's very challenging to do that. Yeah, totally. What did, zooming out a bit, what advice do you have for people like me who've, or somewhat similar to position you, where you were, a few years ago, having spent many years at a firm or a career in venture and now saying, hey, I want to start a new fund or I want to be part of...

1:03:45But given where the market is in 2024 or as we approach early 2024 and given just how crowded venture firms are, it's daunting. And so what advice do you have or what frameworks should people be thinking about as they think about, hey, what does it mean to start a fund that matters in this era? I think you have to be very clear about your aspirations and how you define success and over what period of time. That's the first thing. And I would say it's someone starting a company or someone starting a firm, joining a firm, anyone making a career transition. And so, you know, for me, it was to have a shot and who knows if we'll get there, but, but, you know, to have a shot at building a durable and meaningful institution in this industry that I love.

1:04:38I think that that shot was worth taking, regardless of how hard it would be. So I think that was the first thing. um you know i i look forward to being able to have the conversation with you in 10 years that you had with chad you know where you say oh yeah we spent the first 10 years trying to be relevant now we're spending the next 10 trying to win and you know maybe i want to be relevant in five years and win in the next five but it's the same idea of like you're putting one foot in front of the other brick by brick is how you build build the thing and you need to focus on on each each moment rather than you know sort of you don't do this because you want to make x amount of money or you want to invest in X type of companies.

1:05:13It's just not the way, the way the motivation works. I was, I think that's first. And then the second thing is figuring out what you bring to the market. That's unique because I think that in this environment, the I'm smart, I have a good network, give me money and I'll make you money is just over. Like that's not, that's not going to work. Um, I think the, the models that have worked in the past, I think also are challenged. Like I think the, the factory of venture capital is, you know, that, that assembly line. Like, I think the problem with that is every, every company gets the same product.

1:05:47Like it's the Henry Ford thing. Like, you know, they can have whatever color they want as long as it's black. Like that doesn't work when founders have more choice and when the playbook versions of advice and guidance are readily available. Right. Um, I would love for you to launch book face for everybody else. Right. Because it erodes these like proprietary silos that people have. And I think that's excellent. Like founders should have more resource. They should have more information. And so I think as someone thinking about building a venture capital firm, you have to figure out what are you doing that's truly unique and different, both because it's more interesting to work on things that are dislocations in a given market and where you can find leverage in that.

1:06:30But also from an LP perspective, if they want access to the NASDAQ, like they can get it if they want access to the firm that is multi-stage massive scaler like you know maybe they can't get into the very very top one but they can get into the next five because those are all having to raise a ton of money and and through that they're going to get exposure at some stage to all the top companies because the job of those firms is a coverage model like they have to get into every meaningful business that's what they have to do and so as an LP, I can get that exposure. So then it's like, okay, why do I need exposure to what you do?

1:07:09Like, how are you different? How are you giving me differentiation in my portfolio, diversity in my portfolio of venture capital firms? And venture now as an established, you know, asset class, and it's not as big as private equity or LBOs or whatever. It's a small one, but it is an established institutional asset class. I think you can start as an LP, you start thinking about diversification within the asset class. And so now it's like, all right, I have my play at this style of investing. I have my index fund and the folks who put a hundred companies in a portfolio. I'm going to make my bet there.

1:07:48And there's folks who do that really well. Like, you know, the box group's amazing and they, you know, they do that. But then I'm also going to want some unique exposure and point of view. And I want companies that are going to offer me financial exposure to a more limited number of companies. They're going to own more of those companies, more concentrated portfolio. Or otherwise, they operate differently. So they're going to access companies in different ways. They're going to evaluate those companies in different ways. And then they're going to partner with those companies in different ways, which leads to a different type of referral flow and flywheel over time.

1:08:24And so I'm willing to make a bet that this form of differentiation is something that grows an advantage over time versus being tied to a single GP or otherwise is transitory. And I think with what we've tried to do, that's what we try to do is to say, you know, we access companies differently a lot through our talent network. We evaluate them differently. When I sit with a technical founder, I don't sit with that technical founder, do my best to take notes because I don't understand, call an engineer that I know, bastardize the story, and then have that engineer talk directly to the founder, and then take that engineer's judgment as my investment judgment, like I should or shouldn't invest.

1:09:03What I get to do because of our model is sit in that room with an engineer who probably is more senior than the engineering founder who's starting the company. And I get to watch that technical conversation. I get to interject when it's appropriate and ask questions about the business and sort of try to understand how the technical decisions leverage the business model and how the business model allows the technical decisions. And the unique advantage is the compounding effect of that that that founder is able to create. And then afterwards, I get to sit with that engineer who's on my team, who's an owner in my firm, who has meaningful carry in the fund, and ask them what they think and why.

1:09:38ask them the pedantic questions that I didn't understand in that meeting and come to a very specific point of view and then leverage their network to say, who else could we talk to that's equally technical that might have a point of view, either positive or negative, who might be a customer for this, right? And that allows us to have a very differentiated approach to decision making than others. And then on the support side, I think it speaks for itself in terms of, you know, we have a scaled team, but it's a one-to-one service delivery mechanism. So we take diverse expertise and we deliver like benchmark.

1:10:09And I think that that stands out as well. And so I think you need that level of differentiation. So then LP says a dollar invested here is better than a dollar invested somewhere else. And I think that that's what you have to have. Let's get more granular on how you think about the talent networks in terms of what you think about the firms that you, you know, want to want to be compared to the best sort of talent, you know sort of networks uh firmed right the first rounds asis disease etc obviously they have you know much more AUM given their longevity um how do you think your talent networks are are different or where have you decided to um like really go deep in terms of your you know you mentioned um companies you mentioned some themes um but but let's get more granular what exactly you're doing around talent networks and and what you're not doing because you you just you can't do everything you don't think you know those are the best places to play Yeah, I think our talent networks are built on the backs of the needs of our founders.

1:11:08And so it tends to be a lot of engineering, product leadership, hiring, which is very early. The first engineering hire that comes in and works with that technical team of three to help really scale a company. um we we later stage you sometimes get into sales networks and so forth but i think the core of our talent network is really product and engineering and the folks that are delivering tremendous impact at companies across the valley today um identifying them reaching out to them either cold or because they're already in in a network uh that that one of our talent folks has um building those conversations and building those relationships over a very long period of time by starting with, delivering on, and then always coming back to the idea that success for the general partnership is creating the very best opportunities for the most talented people in Silicon Valley.

1:12:02And if we can do that on a consistent basis, whether that opportunity is working at the GP, whether that opportunity is working inside of one of our portfolio companies, or whether that opportunity is being a founder and starting a business, we will win in that talent flywheel over time. And so I think the way we focused on it is recruiting of the very most talented people and building those relationships with the initial idea and impetus that we would place them at one of our companies. But when they are not interested in leaving their current role or they're not interested in the industry that that company happens to work in, we don't just hang up the phone and move on to the next call.

1:12:41We talk to them and understand their motivations and their backgrounds, the work they're most proud of, the types of things they would like to work on, what inspires them, et cetera. And we keep track of all of that. We have a greenhouse instance with over 110 ,000 people in it that we've spoken to over the last seven years. And we can go back to that over and over again. We can join that proprietary data with public data about where people are and where they've gone and how come. And then we can reach back out to them and we have this ongoing relationship over time. And then the root of that, the nucleus, many of the people on our talent team were responsible for placing people in the best job they ever had.

1:13:21So when Anthony Klein, who was at Stripe from 250 or 300 people up to 3 ,000, talks about the people that he placed at Stripe, that really helped join the business. It's an amazing group of people who had tremendous impact on that business and have gone on to have tremendous impact either on other businesses or as founders. Same thing with Josh at Robinhood, same thing with Nazi at Facebook and Uber and otherwise. So we have the power of the gratitude. When you're a talent person, you do a great job and you place someone at an appropriate position that allows them to grow, allows them to expand their career.

1:13:57When you reach back out to them, they take your call. And so I think as long as we always orient around the talent and we optimize to create the best opportunity for those people, long, long term, that creates a flywheel that's really, really powerful from an investment perspective, but I think even more importantly, from a firm perspective as to the impact we can have on the ecosystem. Let's wrap by talking about the LPs because it's something you've thought a lot about. So obviously you want to work with LPs whose missions align with you, but you also have this belief that you want to pick the right partner, emphasis on the P in terms of who can really add value.

1:14:32So how do LPs exactly add value in your perspective and in terms of how do you pick accordingly? Yeah. So our relationship with limited partners, I say that we like to have partnership with a capital P in that relationship. We've been very fortunate to have a small number of larger LPs rather than a long tail of smaller checks. These are nonprofit institutions for the most part, whether they're in healthcare education, and then some individuals, but who've sort of taken the giving pledge or otherwise are supporting causes that the team generally believes in. And so the long-term interests are very much aligned in terms of when we are successful, these organizations that we believe in and we believe in their missions and their impact are successful.

1:15:17And that's very meaningful to Dan and myself, but also to the whole team. So I start with that, but then understanding their business and having a lot of respect for what they've been able to do allows you to create a room of folks with divergent opinions potentially around time horizons for liquidity or pace of investment, the areas of interest or not, things that you should be investing in or you shouldn't. From a firm perspective, are you investing in something that will compound over time or is this sort of a one-off opportunity in a given, either in an ecosystem with a specific investment or in some things we do, you know, with our fee base in terms of the having an office and supporting an in-person culture and so forth.

1:16:04And so I think there's divergent opinions around the table, but where we are very dedicated to the success of each individual mission. And so we can hear them in a way that aligns with their interests. And then we can weigh those things and do what's best for the firm, because ultimately that's what's best for them long term. And so the individuals that we've been able to work with, they have long history in venture. They share their perspective. It's a very transparent relationship. They push us on things. They point out things they might have done differently or things they hope we do in the future.

1:16:37But ultimately, they have made an investment in the general partnership and in our model. And as long as we deliver against that model and we do what we said we were going to do, I think they're very supportive over a long, long period of time in seeing this experiment play out and understanding how to maximize the opportunity that Dan truly created with this business model innovation. And that starts with Reid Hoffman, and it runs all the way through to some of the largest university endowments in the world. And we couldn't be more proud to be partnered with them. But I also think their input is tremendously influential in the way we think about building the firm and super grateful for that as a relationship.

1:17:19And I think it mirrors the way a founder would think about a great relationship with their VCs. Like there's not tactical pushes or you must do it this way or that way. There's a perspective on the choices that we're making and the choices that we will make. And I think we take those things very seriously and we have a lot of respect for those opinions because they've seen more over a long period of time. And they share those opinions pretty humbly, given the folks we have in the room. With that sharing, I think we create this conversation that has been really rich for us as we've set out to do this very hard thing, which is stand up a firm at institutional scale and then try to survive in a highly competitive market, attracting the attention of the unique, high-quality founders that want to build their company in this different way.

1:18:07Yeah. No, I love the emphasis on business model. Is there any other venture firms whose business model innovation has inspired you or other ideas you have around how you think other people should think about business model explorations? you know, things you want to put into the, into the venture universe? Yeah, I think, I think that, um, the, the transitions that we've seen in terms of operating style have been fascinating and I've learned a lot. I don't, I don't look at any of them and say, Oh, I wish I would do that. But I think, um, studying them is, is really worthwhile. Um, and you know, whether it's, you know, general catalyst now having a CEO or, or, you know, and you'll mark and Ben is sort of like, no, we run the firm and like, that's the way it is.

1:18:49Um, and then we have this sort of almost like fund to funds of, of all these, these individual investors. um, to benchmark just being like steady and true. And like, this is the best way. And this is why. Um, but I think studying all of those things is, is really critical. Um, and, and I say that inspired in part by something that Mike Morris told me, which is his, he said to me in this one meeting I had with him, that was really impactful was, was, um, if you're, if you don't feel that you're betting the firm, like the franchise on something every year, then you're not pushing hard enough. Right.

1:19:18And I think, and they have more than anyone done the best job of that. And I think the respect I have for what they've built over a very, very long period of time and through multiple iterations of business approach, markets they participate in, leadership, all of those things. I just think the inspiration that I have is not to become Sequoia because nobody can do that other than them. But I think looking at the way they operate and the way they've been able to build their firm is something that I definitely aspire to from an operational perspective, sort of the strategy perspective. And that, I think, is not to say we want to have a mega growth fund.

1:19:59is not to say that we want to launch an arc program, any of those things, but it's to say, maintaining that founder mindset and that owner's mindset of how can I be better? What can I do that puts the GP in a position to be more impactful, drive better returns tomorrow than it was today? I think we all have to be thinking that way. And I think of any firm in the ecosystem Sequoia does by far the best job of that. Yeah. It's a good note to wrap this idea of of betting the franchise of, of thinking differently. I've learned a lot and I really appreciate sort of the innovations on business model and product that you've, you know, had first one when we got to know each other first round and then taken to the next level with the general partnership GP.

1:20:41So Finn, thanks so much for coming on and sharing your, your learnings with us. No, I really appreciate it. It was great to be here. Turpentine VC is a podcast from Turpentine, the network behind Moment of Zen and Econ 102. If you liked the episode, please leave a review in the Apple Store or rate us on Spotify.