E31: Slow's Will Quist on VC's Job to Fund the Creation of New Data Sets

25:53And if you're correct, it's wildly valuable. It's not actually at the consumer level. I think that kind of falls, the value proposition for most franchises out of the gate ends up being pretty subjective and hard to test and measure. But the bet that once you have two or three locations, right, and they generate a certain economic profile, there is a novel bet that that economic profile, that atomic unit of that franchise can replicate, right? And that outcome can be generated by people who are not the founders and they can be generated by people that sign up. That's a novel hypothesis and each business has its own.

26:36And historically, that moment has kind of happened year seven, eight, nine, when you've got, right, you grow corporate locations, stack enough free cashflow and you can spend a couple million bucks you need to build the business in a box, so to speak, and then have the runway to test it to see, great, how do I get franchisees, get them up and running, get enough runway until I have the data that that suggests the performance I got at my corporate units will replicate. And so all of a sudden it's like, okay, these are really rad businesses to own at the end. And it turns out they have a moment, they have a venture type box in here.

27:10And so I think that really set us off running down the path to unpack it more and explore to see, take that out of the lab and out of the theory and see what it really meant in practice. And I think got great feedback from the franchise ecosystem ecosystem from people who run them, advise them, et cetera. I will say it began to also dovetail with our take on vertical SaaS, which is that software eating the world isn't necessarily going to mean infinity more software companies. And that actually, if you actually just think of it selfishly from a founder's lens of, I created something really novel that changed the economics of something.

27:45What's the most efficient value capture path? And I think we're learning that isn't always 80 % gross margin because a lot of industries have a certain dynamic. But what software does is it obviously reduces the variability and outcomes. And so if you can begin to have franchises, right, that are leveraging software-based tools to get more consistent outcomes on operations, it kind of is another accelerant, right, to franchises being unbelievable businesses and begin to have some real overlap with a more historical network of venture deals. Yeah, that's well articulated. A quote that you had related to the previous point that you tweeted recently was, the point of raising using working with venture capital should be getting a true or false answer, not success or failure.

28:32I thought that was a good quote. So, yeah, that's something that's really important to me that I like stress early on with founders. And it's really hard to say because when you're in it, success feels like all that matters. And again, I understand it. I think choosing to build a business with venture, right, it does change some of the dynamics where you're not necessarily just running a pizza joint to keep the lights on day to day. that you actually need to be going into it with a grand supposition, a grand thesis, that if true is wildly valuable. And if you're going to do that, you need to be very open to getting a false answer, right, to any experiment.

29:16And so that to me is just another distinguishing way of going through the fundraising pipeline of, right, should I or should I not take work with venture capital? and I think that viewing it through the lens of, oh, I'm raising it because I want to find out if something is true or false, not because I want to hustle and build a great business is a good intellectual test for raising and working with venture capital. Yeah. Let's do a brief deep dive on slow the fund itself in terms of how you guys have thought about fund size, how you guys have thought about portfolio construction, size of companies per fund, because you guys have done really well and are eminently fundable.

30:00And thus, you were in a position where you could play whatever game you wanted, right? You could play the box group game, maybe how you guys started a little bit, kind of participatory in a bunch of great companies. You could play the first round game or the USV benchmark, like really concentrated, just small side of companies. You could play the multi-stage game because of your ability to raise great marks. And you decided to do not exactly any one of those three things, but maybe a little bit of each, if I understand correctly, but leaning more towards the concentration in a smaller amount of companies.

30:32Why don't you talk about how you guys have thought about fund size, portfolio construction, and amount of companies per fund, and why that makes sense for your strategy and where the market is? Yeah, that's a good question. I'm not sure it's kind of one of these things that's been built up over time. It'll take me a second to unpack the pithy one-liner answer. I mean, I think at one layer, we always said that we didn't want to be series A investors, right? That we weren't comfortable being hyper competitive and having an edge in that market, right? So I think that rules out certain portfolio theories and certain scales of funds.

31:13I mean, I think a lot of this has been pretty organic, right? We started with a$65 million fund where we kind of had the mandate to do, it had a very broad mandate of what we were going to do. And I think we increasingly found ourselves in situations, we were probably writing 300 to 500 grand seed checks when we were doing that fund, where we were getting there, getting to the table, and candidly waiting for someone who could write a bigger check. So I think there was that portion of it saying there seemed to be an organic opportunity of things we thought were really exciting and worth doing that we were now getting the conviction to, moving to, and waiting.

31:46waiting. And so I think there was a bit of the theory of like, why would we wait versus be a million and a half dollar fund lead the round? And this is seven, eight years ago, but like, why, why wouldn't we do that? So I think that was one elevation in the model. I think we found ourselves increasingly with strong points of view, right? And, and while we don't have a platform team, like engaging with founders increasingly, right? Not just being someone nice in the cap table, but kind of having an ongoing, And Sam likes to say we're always on text message with our founders and like continuing engagement.

32:17And I think as a lot of the old heads will tell you, as your time gets pulled in a direction, you kind of need to meet it with some ownership because that's the non-scalable resource. So I think that pulled us more into being ownership sensitive. And then I think there's the acknowledgement that we are taking a fair amount of risk, right? And we are walking down some unknown paths. And so too small of an end is probably not a responsible portfolio dynamic. So I would say that there was no grand summit where we zoomed out and said, this is exactly it for those reasons. I think there was more of an organic discovery of who we were, the work we wanted to do and could do in a differentiated way.

33:02What was available to us, candidly, from a market opportunity, and then what was the right capitalization path. And I will say, I think having peers and friends and mentors like Box first round, right, and being able to sit with them and go, what were the pluses and minuses? Because folks were a step or two ahead. I think we were very deferential and willing to learn about the pluses and minuses of the different strategies from a portfolio theory. And so why not, you know, 10 companies less or 20 companies more? Like what is sort of the ideal amount of companies to fund? I don't know. I think it's false precision.

33:40I mean, what we target is 40 to 45 companies per fund. I think that's like become a pretty standardized number for the funds in our set, whether that's first round or kindred or others. I don't think we're hard. I mean, I think at SLOW, we're always open to intellectual debate to revisit premises. But I think that is the number that has felt like that gets us the right amount of shots on goals for the opportunity to really sink into one without being so, so deluded on the impact. I don't know. To me, it feels past a certain point that there's some false precision in the science. If I do 55 portfolio companies or I do 39, I think it's kind of the buckets of like, do you do 10 or 12 things?

34:29Do you do 500 things? Or are you someone that's somewhere in the middle? And again, I think that becomes stage dependent and in how strong a view you have on underwriting. Yeah. Yeah. Some people think that venture is strongly bifurcating where there are these aggregated multistage firms and then these small specialists. Talk about how you think about the right for a small but sizable fund such as yourself, a smaller but sizable fund such as yourself, to have the right to play in a world of multistage firms. Maybe you could also speculate on where multistage is going. I mean, this is where the tired trope on consensus, non-consensus comes out.

35:13And again, I think it's something that is probably overused and even overused by us. But I think that we do spend a lot of, I at least spend a lot of time thinking about what is our job vis-a-vis those big funds who are unbelievable at getting in front of talented founders, talented networks, and spotting opportunities. And I think, listen, I think our job is to get comfortable and an insight into a risk that is one click more than they're willing to take, is my honest answer. And I think for a bunch of reasons, the larger you get, the risk appetite, right, the point at which in the flipping of cards you want to deal in, if you think of like, hey, you got to flip five cards and they all come up your way and you have a public company.

36:02the card flip you want to come in does change the more scale you get. Your incentive structure changes. The ability of where you're able to spend your time changes. And candidly, they've earned that right to kind of probably take less risk than we do because they've sat in their chairs and built great brands and put up amazing returns for years and years and years. So I think that's the real discussion I have in my own head of like, hey, what risk are we taking? what are we taking on? Almost I assume that they're perfectly rational, intelligent actors, which I think for the most part they are.

36:40They're understanding risk reward as well as anybody when they choose not to do something. And so then the question becomes like, why am I comfortable with it? Is it a price thing? Is it an insight thing? Does my money make those risks go away in their mind because they're rational actors and price goes up. So I think that's happy. I mean, I'm happy to unpack them more. That's it in a nutshell, though, is like, where can we go that others can't or won't right now? So what you're saying, Will, is you don't want to be competing with these multi-stage firms. You want to be going where they're not.

37:17Yeah. I mean, I don't think we have... And again, everyone has different views on this. I'm not sure we have a great business model for competing with them on pretty known quantifiable risk paradigm. So I think it becomes incumbent on us. Can we do something? And I think the thing you have to learn is there is such a thing as too much risk. So can you find this balance of intelligently taking on risk and getting compensated for it, I think is our job. And I think in a world of aggregators or increasing aggregators who are kind of all playing the same game, there becomes a real role for people who can do that consistently and intelligently.

37:57That's a good segue into your slow PhD program. Program is like a very, there's no other way to say it, but it is much more grandiose than it actually is as it plays out. But yes. So I love, talk about what it is and then talk about the philosophy behind it. Yeah. I mean, I think it's at its highest level marketing, it's our way of working with people who are in the I want to build phase. I think it's easy to start with what it isn't, which is like, it's not an incubator. These aren't our ideas. It's not an accelerator. We don't want folks coming in that are already kind of halfway through the experiment and want help running the experiment more quickly.

38:39This isn't an EIR. We're not paying people on salary. We're not taking equity. It's none of those things. And to me, again, it feels like a throwback to real venture where founders may have a real strong worldview and a sense of what they build in it, but diligence from old venture funds took four to six months, not because the VC was skeptical, but because there were a bunch of legs of the story as it relates to risks around market development and risks and the value proposition and quantifying it in the business. There were a bunch of things that needed to be double-checked and verified before everybody said, hey, it's worth the founder's time and it's worth our money.

39:21So that's kind of what it is in. I mean, I think my path to getting here has been – it was a funny journey when all of a sudden it just hit me in the face. I think one leg of the story is coming from the later stage, spending more time on the early stage. I guess one weird belief I have, or I don't know if it's weird or not, is like, I really do think you need to believe that you have some chance of buying public stock at the first day that you invest. You can't know whether it's 10 % or a 90 % chance, but on a binary scale, you can kind of squint and go like, hey, if all the dominoes fall their direction, is this a company that can take earnings calls?

39:59You know what I mean? Or can write up an S1 that's really compelling. And so I do think you want to know on a binary scale, do you have a chance of that? So I spent a lot of time really on going, all right, that's where we're shooting for. Like, I know what those look like because I've invested at the later stages. And then I just became coming, okay, well, the S1 just ends up being the summation of a bunch of other things you believe being true. Rarely do you work against the grand vision of the company. You do a thing to do a thing to do a thing to do a thing. And so it felt like these sub-hypotheses were developing and a lot of the diligence and pitch meetings with founders were really mapping out the dominoes of what would need to happen and how did they think about when and why.

40:34It was a really fun, dynamic conversation. Somewhere along the way, it just hit me in the face, right, as I was making the parallel of hypotheses and like, oh, this looks like a dissertation. You stand up, you've got a bunch of data, you pull it together in 90 pages, and you stand up and defend it on Wall Street and not within it. So I kind of seized on that language for a while and went down the path. I think the more I unpacked it, or I started unpacking it more when you kind of ran into this era of, hey, I'm just going to fund you. Like, first thing, you know what I mean? We all know the story of, like, super exciting friend, really smart, tells me they want to work on something.

41:12I want to be supportive. I immediately say yes, right? And, I mean, that obviously picked up and was happening in an accelerated fashion. And it didn't sit right with me intellectually that that was like the proper path, really from a founder standpoint, right, that their opportunity cost was being really, truly measured and valued in a way that they were aware of at minimum or optimizing. And so I kind of was sitting with that, sitting with this dissertation analogy. And that's when it hit me that the way a great PhD program works or the point of a great PhD program is to increase the odds of being novel and correct.

41:50and put you on the most efficient path to getting yeses and nos because resources are scarce. And so once I viewed it that way, you start unpacking more and more of how the ecosystem was operating in kind of in contrast to the PhD programs. And you realize one of the key things that was lost, that PhD programs have decided one way you increase the odds of being novel and correct are making sure that you have a master's degree. Professionally, that's hard to define, but you have some depth or breadth in a category that has given you, right? You have depth and breadth in a category. You have some ability to think 1 % differently or learn to, and that those two things give you the best odds at flushing out novel and correct.

42:33And so that was kind of the final straw, right? In my mind of like, hey, we understand this part, or at least the process by which kind of the gates you should jump through. if what you really want to do was increase, max out your odds, or at least be aware of them, and then understand a credible, efficient operating path. Why don't we, I mean, this seems to make sense. I couldn't find an intellectual hole. Why don't we find some friends who we know want to build and see if there was some set of framework and core curriculum? So we did that, found some friends who trust us, like us, had free time to burn, whatever it was, and went through the process and just had a blast on all fronts.

43:13It ended up being extremely valuable to folks going through it. It was super interesting work for us to do and was leading to interesting outcomes. And it kind of went back to this idea to take our talk somewhat full circle that a founder's most important job is to be an investor first, right, is to be an allocator of time and money. And I find what this program does is help us really help the founder get a clear lens on the opportunity cost investment they're making. And I think, listen, you can play this out on your own network. But when you think about the people you enjoy backing or want to back, a lot of them have pretty high opportunity costs.

43:49I don't know what they could take per year of RSUs, but it's not nothing. And so when you start realizing that as soon as you incorporate and say yes to a scout check, you're probably in this for two, but more likely three years, no matter the outcome, sacrificing it, you begin to realize this is like a multimillion dollar investment founders are making into the world's most like volatile asset class. And so this kind of presents as a really helpful and consistent, almost objective way to help them, right, be aware of the investment they're making and how they might shape it such that they maximize their opportunity cost.

44:27So I don't know if that explains it. I've had a hard time getting it out succinctly and in a way that answers all the questions because it's a bit of a weird out there take. But the net of it is we're spending a ton of time with people that we feel like have depth and breadth and high opportunity cost and trying to work with them really. And some we talk to every week, some it's every day, some every month. Like it's really we're not trying to set this up for scale and productizing and structure. We're trying to do this in as organic a fashion as possible and help them navigate kind of the idea maze in line with some of the principles that have emerged from PhD programs that have kind of increased odds for folks pursuing it.

45:06In that way, it's very different than the Y Combinators or the OnDecks or the Entrepreneur First or other sort of more structured, more formal sort of programmatic ways, right? Totally. Absolutely. And I think they, listen, it's hard to argue almost everyone who's doing it and still doing it today has enough case studies to say like this works and it works for people. So I think it does end up being a dramatically different flavor. I think where we've seen success is with people who have connectivity to how the game of venture capital works, right? They're in it. They have some sense of how to raise and use venture and where to access it and kind of, and so that's not a governing or kind of a gating item, but they're also, they have significant opportunity costs and they're aware of it.

45:55They might be a second time founder who has already been in it or have real credible roles and opportunities they'd be turning down to go after. Not to say YC doesn't attract those people. I mean, Parker Conrad went through it with Rippling. They get a lot of them. I think we've just seen more appeal from those types of founders. And again, from people who want to walk through it pretty programmatically and defend their own opportunity costs. And we don't start with, you're going to raise venture. Let's think of an idea. It's like we start with, where do you know more than other people? How do you think that world works?

46:27When the world works that way, what is built, right? And really work down the funnel that way. And applying venture capital becomes almost the last step rather than the first step of the process. You tweeted something to the effect of, if you want to start something, the first things to figure out are, what do you think is true? How's the cost, time, and money to find out? And how valuable is it if you're right? Yeah. I mean, I think that's a little bit of me redescribing my box, right? I think starting something to start something is fine. Listen, you only live once. Do whatever you want. I mean, I think in my experience, it really, it's dramatically impactful when you can start with, I'm just addicted to convince the world is going to work in this certain way.

47:08And I think the further out the time horizon, the more impactful you can be and it can be, candidly. But starting with that and then beginning to understand, like I said, what needs to be built in that world when everybody's connected to the internet what are all the things that are built right and trying to understand which ones get built at which time at which point you can begin to make some guesses about value capture moats right where are things going to coalesce um and then and then you can kind of play that all the way and like all right what's the first thing i do and how much money does it cost um and so i think that's that's probably me shorthanding or tweeting out my box of his adventure or not.

47:48But I do encourage more and more people to start from that lens of dreaming about how the world works, as opposed to starting from a granular pace of, I want to build, so I'm going to build X. There's enough outliers in Silicon Valley that you can convince yourself of any strategy and any path if you really wanted to. Totally. The prompts you gave me that made me really think were, how will the world look in 10 years? What are the necessary components that will enable the world to work that way? Are they already being built? What are the problems that will emerge in that world that you could solve?

48:22Or what are the net new opportunities enabled only in that world? Can you talk more about that or maybe give an example just to make it more concrete? Once you get into a worldview, there's actually an interim step that I recommend everybody. You see, like, one, be granular and specific. I think saying, like, the internet will be a thing isn't as helpful as, like, I just, billions of people will be connected to the internet buying things. Like just that level of granularity or specificity, I think makes it easier to imagine all of the, all of the things that exist in that world in order to enable that world.

48:55So yeah, I think once you get addicted to it, the thing to really do is to give yourself some kind of score of how convinced am I? You know what I mean? Like on a scale of one to five, like, am I like a three that the world's going to work this way? Or am I a five out of five? Like, where am I on conviction about this worldview? Cause that's going to be, I mean, it's a hard road. Like it's going to matter that you're really convinced that it's going to be that end state. And then the other thing too, is like, be honest with yourself on a scale of one to five. Like how much have you earned that insight?

49:22Yeah. Like have you lived it, breathed it, studied it enough to get it. And you can go with a one and a one or a five and a one, but I think having that reflection for yourself is a really good gating item. Once you do that, then you can kind of go great. What are all the things that need to be built that make the world work that way? right if things aren't built start there and figure out what what what gets built in what order and is that in your skill set right i think that uh that the next intellectual challenge if you look and go shit i'm really convinced the world's going to work that way not everything we need is in it's just a matter of timing for the world to develop that way then you go what are the problems right when when everybody is running on sass right when every application is cloud hosted and being bought on a subscription basis, what are the challenges, right?

50:11Well, you might lead you to AWS or subscription-based billing, right? You can kind of talk your world, kind of talk yourself with a friend. It's hard to do in isolation, but like you can begin to imagine some of the credible problems that exist when you're right about how the world works, right? You get convinced everyone's going to be buying things online. Maybe you started a cardboard company. I don't know. You know what I mean? Like you're like, okay, when everyone's buying online, that creates some real challenges and you might go, shit, the thing to actually do is buy cargo delivery vans in Stockton.

50:40And then I think that the related one to that that's always hard to deduce your problems is like, are there new opportunities? Are there new businesses that can be built? Are there new when the entire world is AI native, right? After I get past infrastructure and problems created, are there just wild net new experiences, products, et cetera, that can be delivered? Um, and, and so I, I, I kind of, I can encourage people to walk through that intellectual journey. And I find that like, it gives you, it gives you the space to be creative, right? Which I think a lot of people ideating who want to build don't give themselves or at least give them, right?

51:23They jumped so quickly to product business, product business, which you need to get to, I think, but early on in the journey, I think a lot of the special sauce in any organization you build, whether that's venture backed or a nonprofit or a bootstrap. Like the special stuff starts from the journey. And you know what I mean? And being long dated on the timeline and being able to be creative. Gearing towards closing here, if anyone here is listening as an incredible operator, I highly recommend doing a whiteboarding session with Will if you're lucky. I had the benefit of doing it. I really enjoyed it.

52:01Will, any closing thoughts on the PhD or more broadly related to our conversation? And also, audience, besides the PhD, if you want to hear Will be on more podcasts, please do let him know because I've been trying to convince him for over a year that he should be either a guest or hosting more because you have lots of thoughts on venture and people who want to hear about him in startups. Listen, more love and feedback is always good and encouraging. We have a couple in mind that hopefully we can get organized and at least drop one of them. No, I just, I'd encourage anyone that is building to walk through it in a very intellectually honest way.

52:35Don't start with any presuppositions on the kind of capital you're going to need. Try to start from it as first principles as possible on what you know and how convinced you are, and then let kind of logic dictate you through it. I think on the other side, for people who want to be venture capitalists, who are venture capitalists and are kind of, I mean, there's plenty of them who like have a great playbook and don't need my, have way more carry than I do and don't need my, my expertise. But I think to the extent you're looking for some guideposts, being honest with yourself about the type of capital you have, the consistent underwriting that this is a luck-based endeavor where you've got to have decision-making processes that you can execute X amount of time.

53:14And that's how you get the odds in your favor and really deciding for yourself what your approach to blackjack is going to be. And then the final nuance on that, that I think is hard is it's one thing to read the book on blackjack. The problem is the optimal strategy actually depends on how large your chip stack is. And so I think that's the final thing for individuals that are investing to be a, once you kind of in, you kind of come to the conclusion, you're playing a luck based game that has probabilities, that's about decision-making. You really do have to go and understand how many, how many hands of blackjack, so to speak, you're going to be playing.

53:49I think the optimal decision for slow early on is not necessarily the optimal decision-making framework for slow at this scale, just given the, the N of N of opportunities we're going to, we're going to process. Yeah. But one choice in that is also how big should the chip stack be? And, and one, one thing I've wondered, is it possible to get the benefits of a big fund in terms of a big team without having a big fund by having other sort of businesses tied to it? But I think you would dispute sort of that even the big team adds that much value in the first place. But that's something that I've been curious about.

54:24Yeah. I mean, I think this gets into like a longer follow-up conversation about what it kind of, are you playing an asset manager product game, right? Where you want to be long technical innovation and you just need to buy it in the right size at the right time for your strategy? Or are you practicing core venture capital, which will never drive amazing top line revenue in a business, but can drive outsized returns relative to the equity and the people. So that's a whole... We'll have a cliffhanger for next time. Will, thanks so much for coming on the podcast. It's been a great episode. All right, bud.

54:56Thanks for having me. Turpetine VC is a podcast from Turpetine, 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.

55:11Thank you.