E41: Do VCs Add Value? With Parker Conrad and Parker Thompson

23:19But we're going to pretend that we're founder-friendly because we need to win the next deal. That's performance art, right? And it's oriented around the founder as opposed to the company. So let me ask a slightly different question. Putting aside, like if everyone's saying, okay, look, you know, we want to do what's in the right, in the interest of the company, which I think most founders genuinely do. When sort of the founder of a company and the investors disagree, the question is kind of how do you resolve that? Yeah, yeah. I think, I mean, it's case by case. Like sometimes there are founders, for example, like a common reason a founder needs to leave a company is they are exceptional during the chaos phase of a company.

23:56And every company succeeds by escaping the chaos phase, right? You move out of pre-product market fit, you get to scaling. And some founders just can't do that. And how they respond to that is they start throwing bombs into their own company. So I think a good investor will try to help that person either succeed at that role or help them understand that actually they've done a great job getting into here. They should go do that part that they're really good at and let someone else take over. But I'm not saying like the investor is necessarily smarter there. But I'm saying like there's a fact pattern where we can sometimes all agree this person is just not doing this job well.

24:34I mean, obviously, there are cases where founders need to leave the companies that they – Or leave the role. Or leave the role or whatever. I guess I kind of – like the whole setup though to your point is that the investor is sort of like a neutral arbiter of that. Yeah, I don't think so. I agree with you that it's – VCs can fuck up companies. We agree. Yeah. A board can fuck up a company. A more common case than removing you as CEO is it's very common for the CTO to not be a good VP eng and to coach those people into a role that's better for them over time. It'd be interesting to look at percentages, but more often than not, I think people who are good on the engineering side at building companies early don't end up being good at scaling them.

25:17yeah less often i think the ceo visionary that's where you can fuck up a company i think where you're like look let's put in you know uh gosh who was the guy who replaced jobs at apple right this is the classic example go to from selling sugar water to selling john scully scully um yeah so you know we can blame vcs for doing that which is where it's you should want to work with humble people because if you work with people who think they can do your job better than you they might try. Yeah. Gosh, I'm trying to think about how to respond to that. But it seems to me that when founders and investors disagree, I guess what I don't like is the dynamic that's arisen where people sort of say, look, whether or not the founder...

26:02I get it. I totally grant that there are some cases where someone can't continue in the job. But we've sort of set up this system where for some reason, it's like the person who's put some money into the company that we designate as sort of like the sort of arbiter of that. The question is like, why is that? And like on some basic level, it's because like they negotiated those rights as part of the investment agreement. And so I think there's a fair question of like, well, as a founder, like, should you be willing to sort of give them that right? I think for me personally, I look at this as like, look, I'm interested in having investors, you know, as partners, I'm interested in their advice.

26:40We definitely need capital, but I'm not personally very interested in giving them a giant red button, sort of a self-destruct button that they can push at any moment in time. So then I think one more interesting question to me is like, okay, when founders and investors disagree, who's more likely to represent the interests of the company? Because obviously, there are cases where an entrepreneur might be wrong. There are cases when an investor might be wrong. So then it gets to a question of incentives. And I'll make the case for why I think founders generally are, everything that you said being true, why I think founders are a lot more likely to be operating the interests of the company than investors.

27:22And I think there are really two. It comes down to... Because basically, when a VC wants to do something with a company, a VC can be wrong in two ways. One, they can actually have the wrong incentives. They can be doing something that they know is probably not in the interest of the company. Well, I think there's more than that. And the second one is they can just be wrong. And so the second one to me is kind of easy. On the one hand, VCs are sort of not their day-to-day, which maybe in some cases gives them a little more objectivity. But I think it's far more likely to cause them to misread the situation, to not really understand the day-to-day reality of what's going on at the company, what's happening on the ground, the market dynamics.

28:07They're making big decisions off of very small amounts of largely anecdotal data. And then the second thing is how do VCs, in what ways are investors actually misaligned with the interests of the company? For founders, I really believe that founders are putting the interest of the company first. And the reason is that one, founders, to your point, they have a portfolio of one. It's like their entire life is invested in this company. But more than the financial investment is the fact that they're just there all the time. As a founder, you probably feel a lot of affection for the company and the people around it.

28:40And that's not always true of investors. Investors, I think there are a couple of things that can come before the interest of the company for an investor. I kind of rank them as the first thing for an investor is usually their personal brand. So if there is a case where as an investor, your personal brand is like misaligned with that of the company, that's very dangerous because a lot of investors, you know, their career, their future deal flow, like it's all about, you know, their personal brand and sort of the press that they're getting about this and the way they're perceived by LPs in the larger market.

29:15And I think, you know, the second thing is, you know, the brand of their firm for the same reason, which actually can be sometimes different than their own personal brand. And then the third thing is the returns of their firm, which is where what you mentioned comes in, you know, they need liquidity on investment or they need - Timeline, markup, scale about, you know, something like that. And then I think the fourth thing is like making the company successful. And so while I think it's like 99 % of the, it's true that 99 % of the time, the interests of investors and the interests of the company are aligned.

29:46And, you know, it is true that, you know, life is long and often in the course of, you know, five to 10 years of building a company, there are cases where suddenly you find yourself on the opposite side of the table from an investor, and they're not actually acting in the interests of the company. I guess for me, it's kind of like, well, I don't have a solution to this problem. I'm not saying that founders are always right, but I also don't sort of buy into the idea that investors are sort of trusted, neutral third parties that are in a position to sort of adjudicate that. No, no, I don't think they're neutral at all.

30:19I mean, I think we're using investor and board member interchangeably, which obviously there's a lot of overlap, right? In practice, what you're doing is you're accumulating a set of partners as you go and over time giving up some control over your board. So as someone who doesn't take board seats and I don't want them and I don't think it makes sense particularly early, I think these people can be good partners. And the right way to think about it is you as a founder need to think about who's going to be a good partner for your company. And this is one thing I hope people would walk away from this podcast doing.

30:55No one ever asked me, how big is your fund? When do you need an exit? What is your business model? No one ever says that to me. I have that conversation with founders a lot, and we're going to raise a Series A. It's like, all right, let's think about partners that are going to be aligned with us long term. You can do that. I actually think the number is probably less than 99 % of the time we're aligned. We're probably, maybe we're aligned 80 % of the time. It's also very different because you're a seed investor and you don't take board seats. And so I think there's a big difference between – seed investors are often just financially their incentives are more aligned with entrepreneurs.

31:30Yeah, we might as well have common stock, right? Because like, yeah, you basically have common stock. Particularly the farther along the company gets, the more sort of you're aligned with the common stock rather than the board. I'll tell you where we're not though. I mean we're still playing a game where I'm looking for that billion dollar outcome. And it turns out that most of the time when we're investing, I mean, if we're doing our job well, we're looking for things that could be that. But a year in, it's often obvious that it's not. And probably it's in my best interest to have a company go raise an A anyway so I can get a markup, so I can look smart, so I can get money to do the next thing.

32:03Yeah. Founder alignment is telling that founder, hey, listen, this is not a$100 million opportunity even. You should just find a$20 million outcome, do right by yourself and your team and move on. Or not, or just run the thing, right? That's founder alignment. My economic incentives, even they're not aligned with the founders, right? But I try to personally take a long view, which is, look, I'm not going to make my money on this one. I'm going to make my money on that Parker Conrad deal that I did. So let's have these people be happy and hopefully we can do another one together. Yeah, hopefully.

32:38I like that. For me, I think where things get really dangerous is when you have an investor that there's no like one thing, but it's some combination of an investor who's taking a board seat, who has larger ownership, is putting a larger amount of their fund to work, where suddenly it changes from them sort of feeling like they're along for the ride to them feeling an obligation to like make sure that things like happen in like the right way. Because then you get, you know, just I think there's a dangerous dynamic of having someone who who has very little context day-to-day about your company, like no matter how brilliant they are, they just don't have sort of an on-the-ground reality of sort of what they don't have that perspective, as well as they feel like they need to add value somehow.

33:23And so they're sitting around each day trying to think about like, okay, what should I be doing with this company? And there's really only one lever that an investor ultimately has. And they have like a giant red button on their desk and they come into work each day and you know they sort of say well you know we don't we don't press that red button here like that's not that's not what we do but every once in a while you know they you know something something's going wrong there's something bad that's happening and i was like well what do i do what do i do should i press the red button is today the day it's like no no no we don't do that but then eventually over the course of you know sort of a long sort of the life cycle of a company the risk is that you know someone's like screw it let's see what happens.

34:04You probably say that the best thing you can do is just not give up control of your board, right? That's number one. But let's say most founders can't do that. I don't even think that really... When I said that I thought my view of this was very nihilistic, I meant it because I don't actually have an answer for people. I mean, how do you diligence investors? Based on what you learned at Zenefits, what have you done differently with Rippling? So this Eric Tornberg guy, did you call his references? Did you call his mom? How did you figure this out. I think what most entrepreneurs should be looking for an investor is like a do no harm.

34:34Yeah. Look, it's great. I mean, there are, but I'm going to say that I've never been incredibly value add, but it's also, it just seems like the, they're more likely than not to, to be the opposite. I mean, I'll tell you what I'll give you, you know, for the podcast audience. My advice is always, um, if you're really trying to diligence an investor, um, ask for a list of their companies, ask for the ones that didn't go great and call those founders. because, I mean, I think when it's all going well, everybody's happy and everybody's cool and it's fine. It's when things go sideways that you figure out, you know, who freaks out and who's there for you.

35:09So that would be my generic advice. I mean, I think that's a great idea. First of all, like most of the people that you're going to call are probably not. There's no sort of like profit for them. Yeah, upside down. There's no upside in kind of trashing the investor even if things didn't go well. So I've been shocked about just the number of founders I've spoken with who publicly say great things about their investors. And their investors would introduce you to them as references. And then over beers with another founder are like, oh my gosh, we wouldn't blame this guy trying to sue you. Point, all this kind of stuff.

35:46And I think that if someone sat down, I think if you spoke with a bunch of late stage, privately held companies, and you asked them if you did it all over again, and you had a choice when raising money from your Series A investor of having them on your board or not, I would bet that nine out of 10 of them would say they would rather not have had them on the board. What would be your optimal board? I'm curious. Obviously, we're in this world where VCs take board seats. How would you construct a board? My optimal board would be a bunch of people whose advice I valued that weren't investors, where there wasn't the weird dynamic and the sort of incentives that can come into play.

36:28You know, someone gets into a situation where, you know, they feel like, you know, their neck is on the line or, you know, they've got their own reasons that they need something to happen that sort of can very often run counter to the interests of the company. If you have a group of just like purely independent people, that doesn't happen. I don't think that's realistic though. I mean, I think the reality is that investors want and need board seats for all the reasons that we mentioned. You know, a lot of sort of the power that investors have is ultimately about sort of that kind of brand dynamic.

36:59Like, I don't think you can maintain board control, but like, I think a lot of the investors that don't insist on board control, they don't insist on board control because they're smart enough to realize that they can effectively control the company without it. And controlling future financings. Whether that's through protective provisions around future financings and exits and things like that, or even just the sort of moral authority that comes with being a board member investor. I talked with a founder at one point who told me about sort of a Series A investor that there was something that came up and that Series A investor threatened to sue him.

37:37Was like, hey, if you don't do this, we're going to sue you. And then what are you going to do? Your lead investor suing you. You'll never work in this town again. And how's your company ever going to raise money from here on out? You know, there's no way. I mean, as a founder, you're kind of like, it doesn't matter that you have board control. You're kind of like, I can have board control over like, you know, a flaming dumpster fire. Or I can like do what the investor says. So I think like the sort of like origins or the source of like VC power over companies, it's not really about board control.

38:14It's the fact that every subsequent investor is going to go talk to your board member VC, whether that board member VC has one vote out of five or three votes out of five. It doesn't really matter. And you need your company to be at the top of that person's list for the company that they're like, this company kicks ass, or you're in deep trouble, like very, very deep trouble. When you said you'll never work in this town again, it made me think of this old article that came out about Naval Ravikant, I think in like 2005, 2006, when he had had a, I think, issue with his previous investors. I think it was August and Benchmark.

38:52Benchmark, yeah. Yeah. And I think there was a quote in there that said, you know, someone said he'd never work in this town again. By the way, I think VCs do that all the time. I think that's people don't talk about it. Threatening founders? I mean, I've heard from so many founders who's like VCs have threatened to sue them. And most of the time, it doesn't actually happen. It doesn't come through and things get worked out. But it's definitely a lever that I think investors have is that sort of pulling that with founders. You know, it's funny. I feel like it resonates with me when you say it's hard to find some of this information.

39:24But I'll tell you, I keep a list and I'll tell anybody. Can you tell us for the podcast? I'm not going to say it on the podcast. Should we read the list? No, this is my list. That's exactly part of the issue, right? It's like, you know, you've got a list. I mean, I've got a list. You know, I had one of my companies recently that a VC really did something shady. And they called me and asked for advice. And I was just yelling in my phone on the streets of San Francisco, we're going to just do these idiots know what they're doing. And the call to arms was great. Like no one involved in this deal is ever going to work with these morons again.

39:58It was a relatively young firm doing something really stupid for reasons that made sense to them. And now we know we just don't work with those folks again. So I think there is some of this where it's like when VCs feel screwed by other VCs, there is institutional memory there. You've just got to find the ones who are not going to do that. Well, I think it's one of the powerful things about things like Y Combinator. They're almost like a union for entrepreneurs on this stuff. And they maintain some institutional memory behind the scenes of these kinds of things. I generally think, by the way, that for entrepreneurs, the right answer if you encounter something like that is to fight it.

40:33is to not back down and just be like, okay, fine, bring it on. Because just having talked with a lot of other entrepreneurs who did that and having discovered that most of the time investors don't follow through on it, that it's sort of a bluff to assert control. Well, and understand their incentive structure as well. In the case that I mentioned, this fund had put a meaningful percentage of its first fund into this company and it had been marked up relatively significantly. The company needed more money going through a rough patch. They provided some money and then gone back and said, actually, we want a bunch of warrants on some unreasonable term.

41:12And what they hadn't thought through was like, actually, you have the leverage because these guys need to go raise another fund. And if you call their bluff on this, and they really take action against you, they have to mark down their portfolio, it's gonna be really bad for them, but they're acting out of fear. And so understanding that Basically, a theme of this podcast for me is understand your VC's business model. That's really interesting. I didn't even think about that, that you get in a situation like that as an entrepreneur. Well, look, that's what I mean. I think maybe you alluded to this earlier.

41:41Maybe I misunderstood your point. If you're marked up, you're a meaningful percentage of some fund for some firm. That's the guy who's like, I want to come in and quote unquote add value, right? They're the one who's really like, all right, I got to get this thing through. You know, they're getting involved, but you have leverage, right? They need this thing to succeed. You need this thing to succeed. So in an ideal world, you would turn that into a constructive conversation where you're like, hey, man, I appreciate that you want this thing to be successful. Some active listening, right? I need you to add a little bit less value.

42:13Here's a list of things I could have you doing over here. But trust me, I'm stressed out about this more than you. Yeah, it makes sense. Later stage, Series A, Series B, board members, where else are their incentives misaligned? Or where are they most misaligned? Or what can entrepreneurs learn from understanding the real business models besides? I mean, I think it's a useful exercise for any entrepreneur. I do this occasionally where I just show them a spreadsheet that's like, here's my business model. Here's how many investments I'm making. Here's the distributions of outcomes. Here's the one that matters.

42:41And what we don't know is, are you this one or one of the other 20, right? And understanding, for example, how to think about fund size with respect to the kind of investment A somebody's going to make. Maybe somebody can't write less than a$20 million check and you just don't need that. It's not good for the company. Don't talk to those people. Something that I've encountered more and more is founders who have been grinding for five years and they actually could raise a Series A. But the self-aware ones are like, man, I'm just so tired. I don't know if I want to get on that treadmill. And some people are just like, they don't think and they just go do it.

43:16So thinking about what you want your company to be should inform the kind of partners you take on. Because, man, if you take my check, and you don't want to do something that's good for my business model, that's when we're gonna have problems. Now, if something goes wrong, that's okay, right? Like, you know, we invest in companies all the time that don't work, and the people are awesome, and we get excited to do it again. But if you want to take it one direction, that's, you know, you want the nice lifestyle style outcome, quote unquote, and I need the venture outcome. And you're just using my money to fund this thing that I didn't have the expectation you were going to do.

43:51Of course, we're going to have friction. I was talking to an entrepreneur this weekend and I was really moved. It was a series B founder, raises series B, but when they were going out to raise series B, it's him, the CEO and one board member. After a few months, the board member thought, Hey, this isn't a fundable company and wanted the entrepreneur to sell it. And the entrepreneur didn't want to sell it. And so the board member sort of tried to sort of block the, Block the financing? Block the financing, yeah. Yeah. And basically, the entrepreneur revealed to me that it was like a year-long chess game where finally the entrepreneur ended up raising a Series B, ended up kicking the investor off the board.

44:26But the mind games that it took for the entrepreneur to do that just added an incalculable amount of stress. And this was because the Series A person said, hey, look, what's going to happen here is there's not a big enough opportunity. You're going to raise a bunch of money above me in the preference stack. and I'm never going to get my money out. It's fine to disagree about that, but hopefully the conversation was about the best interest of the company, right? Like if it is, I don't know, do you have an opinion on what this was? There is Series B, they better be a billion dollar company. Are they a billion dollar company?

44:57I hope so. I think it's too early. I don't have a strong enough view, but the entrepreneurs certainly think so. Parker Conrad, you would say fight harder? What would you say? Entrepreneurs right there who are struggling with their board or? Yeah, I'd say fight harder. And I also, I mean, I just, I hear stories like that. And that's where I kind of go back to like the original conversation that Parker and Parker, that I was having with Parker here about sort of like investors being sort of the adjudicators of this stuff. And, you know, why is it that they have that power and that control? And, you know, the reason that they have that power and that authority is they've negotiated the sort of, you know, preferred right in the financing where they get to sort of block any subsequent financing transaction if they want to.

45:41And so, you know, one question is like, should investors have those rights? And, you know, should you as an entrepreneur allow them to have it? And now the real answer is like, you don't have a choice because like those are standard deal terms. You know, you can try and negotiate those out, but it's like really hard to do. But it doesn't only take a park of combat to change it.

46:28know, it's right there, you know, look, they're fiduciaries to their LPs. Like, you know, they have to, you know, maximize their returns. And, you know, sometimes... It's like the plumber is a fiduciary. Never mind. I mean, a lot of this is I felt like, I feel like if, you know, if people just talk more honestly about what investors were and what this relationship was, it would be a lot better. It's, you know, it's when people are talking about investors as service providers to entrepreneurs and things like that, that it's just like really gets muddy. And then entrepreneurs are surprised when their plumber comes and tells them like, listen, I'm going to eject a stream of liquid sewage in your living room unless you move out and give me the keys to your house, right?

47:10Plumbers don't do that, but like VCs do. Yeah. I mean, one thing I would say here is like, I mean, you feel free to disagree about this, but I think I subscribe to the Hunter Walk school of how we should talk about VCs, which is most of them are good people. We shouldn't give them permission to be, we shouldn't expect them to be evil because then we give them permission to do evil. I think most of them by and large are good. And I think probably like the way that I would interpret the situation that you just gave us, Eric, was like, look, this VC thought that they had the right answer for the company and for the founder.

47:45The founder thought that he or she had the right answer, yeah, you should always go with your, I mean, you're the founder. You should always go with your, do what you think is right. You should just always do that, right? But try to hear, just try to hear this other person. And hopefully if they're articulate and they're well-meaning, you at least hear it. And then you make the call, right? That's what we say. And if they disagree, the investor shouldn't try to stop. I mean, I am not a Series B board member or Series A board member sitting there worried about my$10 million check. So I don't want to speak for those people.

48:19I feel like we have a luxury. Like your seed investors have this luxury, right? We might as well be buying Common. We're going to make our money on the big winners. So it's just easier for us to help you do what's right for you. So I'll leave it to a Series A investor to sort of rationalize or defend that scenario. I think another point it's worth picking on is you mentioned union for entrepreneurs. And YC is sort of like an accidental union, right, in some ways. But should there be more formal union of entrepreneurs negotiating for their own rights? Oh, sign me up. I just started here. You know, YC started their Series A program recently, which I think is like just really fascinating.

48:59Because look, I don't know where it's going to go or what's going to happen with it. But I think that is a potential vehicle. Like, you know, in the seed realm, like YC really standardized a lot. They standardized deal documents, like basic terms, like not like, you know, they didn't standardize like the valuation cap, but like everything else about a seed round is like largely predetermined by the sort of template documents that they created. You know, they, they turned the fundraising process into something where, you know, you have like a sort of enough investors that are looking at the company all at once to have like a real, a real auction.

49:30And, you know, I think if YC was able to do that for, you know, later rounds, and it would look different. I mean, you probably wouldn't have like a three minute demo day pitch. You'd have to do something different. But if they were able to take this and standardize deal documents and say, look, investors know they're not allowed to block future financing rounds. And this is what board composition looks like. And these are the preferred rights that they have and the ones that they don't. And I think it would be hugely destructive to the VC business model. I think the biggest challenge for both entrepreneurs and investors when you're raising these later rounds of capital is you have this limiting factor around your time.

50:12And I didn't realize this until I first went out to do this myself. But what happens is a lot of times, I mean, you guys know this, but a lot of times when a deal is really hot, it's blindingly obvious to everyone that this company is going to be really successful. Everyone in the ecosystem is like, this is obviously going to be a huge... Or everybody thinks it is. And sometimes they're wrong, but there's usually a lot of consensus that I'm sure that when Uber raised their Series A, everyone was like, this is going to be really big. And so the question is, the problem is, is that when you're an entrepreneur and you're in that situation, one of the things you run up against is that if you're going to raise money, you need to go to these Monday morning partner meetings.

50:50And everyone holds them on Mondays. That means that if you have a process where things are moving, investors are not going to give you a term sheet and give you three weeks to decide. They're going to give you 24 hours to decide and then you're going to negotiate for 48. So that means that in practice, you've got to have GP meetings with all of the investors that might participate in your round on the same Monday, which means you can really have at most like six. And you can't really cast a wider net than that. And that's why I think brand ends up being so important to these investors. And it's why the returns for the top tier institutional investors are so much better than all the rest.

51:27Because if you're an entrepreneur and you know very little about this industry, you've stumbled onto just like lightning with something that you're building. It's clear to everyone that that's the case. Who do you talk to? You talk to the people you write about in the newspaper, right? Like that's, you know, you talk to, you know, Sequoia and Benchmark and, you know, like a couple of other firms. If you're like the third tier investor, like you might recognize that that company is amazing, but you don't even get the meeting. You know, that's the sort of challenge that they have. And from an entrepreneur's perspective, you know, when there's only like five firms that you're speaking with, there's a limit to sort of how much you can negotiate, you know, terms and valuation and things like that.

52:08Like it gets just a lot trickier. Yeah, I mean, I think where I'd rewind a little bit and say when you talk about this union for entrepreneurs, I mean, I think your takeaway as an entrepreneur needs to be the union isn't going to worry about you. You're just one of 125 companies in the batch or whatever it is. And I mean, I think what we don't think about is all the suboptimal outcomes that come out of the power of the union. And so like you go through YC and there's Demo Day, there's an auction process and you're going to get a better price coming out of that than any other process, right? But price is just one component in this overall process, right?

52:45Like what you're trying to do is build a team, a plan and finance it so that you can get this thing to the next stage. And I think it's obvious the metric, right? The obvious metric is how much money did we raise at what price? And you need those other pieces there as well. So I think what I worry about sometimes, not to pick on YC, but I think there's a lot of companies that, you know, they optimize for the metric that they see. They want to raise as much as their friend and they die. And we don't talk. I mean, it's hard to see all of the counterfactuals, right? You don't see the companies that could have done well had they optimized maybe for these other pieces.

53:23So I'm a much bigger fan of finding people early in your fundraising process that are going to help you put together the right syndicate of investors who have been through it before, who can help you think about what are the right milestones and strategy. And then using that fundraising process, like I don't know your company. I don't know what to tell you what to do in specific terms with your company. But I can tell you in generic terms what I've seen across 15 other companies that have been in your space, at your stage, what kind of risks and issues they're likely to encounter along the way and how they're likely to be judged 18 months from now.

54:00And I think that's where sort of if no one is there on your shoulder working with you closely and giving a shit, you're likely to just optimize for the things that are obvious to see. So union is great, but, you know, find somebody who really cares. So let me add a curiosity because I've never really understood. I'm probably the only person who's like really unsure of this idea that like, you know, prices and everything on financing because I get that that's like not the conventional wisdom. But let me just play devil's advocate a little bit on this. How do companies, by getting more money for the 10 % of the company that they're selling, because most of the time, people want to get, say, 10 % of the company.

54:41How is it that companies get killed by raising$4 million instead of$3 for 10 % of the company? So it's interesting. I have this theory that companies that sell less than 15 % of a round markedly increase their chance of failure. I don't know if it's true. I need to get some data around this. But whatever percentage you want, whether it's 20 % or 10%, the question is like at any given level of ownership, it seems like – it's always seemed just like sort of everyone – when people talk about, oh, well, it's not all about valuation. Like, look, I get it. The most important thing is actually I think to get out of the fundraising process fast so that you can get back to like building the company because that's the only thing that's going to save you.

55:21But while you're in it, if you look at it as like, look, I'm selling 20 % of my company, say. How is it bad for the company to get$4 million for 20 % of their company rather than$3 or$5 million? To say that it's bad for companies to raise more money, it sort of implies that the people running the company are kind of like bad capital allocators. No, it's – Look. They get profligate. And like, look, I get it. There are companies that are like that. But it seems like as an entrepreneur, if you're the type of entrepreneur that because you raised$5 million instead of$3 million, you're going to get like the fancy office.

56:02No, that's not fair. I know that is a problem, but that's not the real problem. Well, you're going to fail anyway. I guess like convince me, like why is it worse to raise$5 million instead of$3 million for 20 % of the company? Yeah, so I think what you see oftentimes, it's not that you're raising, you know, three versus five and the valuation is nine versus, I don't know, 12 or something, right? It's that you can be in a position and I'm, again, my experience is mostly seed. So I talk about seed, I tend to think financings are much more responsible later on, right? There's more adults around the table.

56:36Like I saw a company come out of YC and I'm not picking on YC. There's the adult children. Yeah, exactly. Exactly. fair to call me on it. You know, I saw a company and I love this founder and I'd known him for many years. And, you know, they came out of YC and they raised 1 million on 16 with a network effects pre-product business. And I said to him, look, I don't think this is good for the company. I think you guys are super talented. I think this is a phenomenal idea. If I were you guys, I would raise 500K at whatever, let's say five, six, seven. I don't know. I'm not really that price sensitive.

57:12I'm not worried about sort of my ownership state. But what I would do is I would build a phenomenal product. And I'd go out to market saying, hey, look, we raised a small amount of money, we built a phenomenal product. And now we want to raise two, three,$4 million to go drive adoption of this. And the reason that was my advice is because I felt like what was going to happen to this company if they raise I think actually in the end, they raised about one and a half was one and a half was too much money to go back to market and be judged just on product, They were going to have to show meaningful adoption, right?

57:43But it wasn't enough money to get all the way to millions of users in the kind of round that was going to allow them to do sort of the next phase of what they wanted to do. So I felt like had this been a round where they raised$500K at who cares what the valuation is or$5 million, both of those would have been better for the company than what they did. What they did was optimize to sell, you know, less than 10%. Isn't that really an objection about the amount of money that they raised and not about the valuation? Because when you said raise$500K at$7 or$8 million, my initial thing is like, well, why raise$500K at$7 or$8 million in order to raise$2 or$3 million later?

58:22Why not raise the$2 or$3 million right now at a$16 million valuation? Because I agree. If you're raising at that level, you can buy down some more risk for the company. I think there's two other problems with the valuation. One is that if you're raising that kind of round, you're going to get it 100K at a time. So this is a problem in two ways, right? I think it is 100 times harder to raise a million dollar check than it is to raise a 100K check because people writing million dollar checks are just going to think a lot harder about it, right? They're going to look for a better plan. I think as an entrepreneur, you should run towards that rather than away from it, right?

58:59And the other is what happens if this company doesn't get where it needs to go? But what you want is partners that are going to be there to put more money in and help it get there. Because no new money is coming into this company. If it's not there, it's done, right? So you're saying they weren't able to find easily$3 million at that valuation. Which I totally get. If you raise it at a price where you can't raise enough because there's not enough demand, then that's a huge mistake. Or just people will look at it and say, look, the risk-adjusted return on this versus another deal is just not there.

59:28I'm about finding a fair price. I'm actually not a price hawk, right? I feel like the big opportunities are going to make a ton of money. So like five versus seven versus 10, it's not that big a deal. But look, if I put 100K into your company at 15, I'm a very small percentage of it, right? So even if I have a big fat pile of money, if you come back to me and you're like, look, man, we're doing okay. We agree we did a decent job, but we didn't knock it out of the park and we need another million bucks. I'm just going to be less incentivized to help you get there. than somebody who put a million bucks in this thing out of their$30 million fund and really was there as a partner from the beginning.

1:00:05So I think to some extent, raising it in an up round matters to some extent, having partners that are more invested in the company matters to some extent, just the money correlates with having to have a better plan as you and you as an entrepreneur circling back to where this started was, I think an attitude adjustment that many founders should take is, you know, you just said, like, look, you should go into this fundraising process and get it done as fast as possible. I think you should be optimizing for something else. I think you should go into this fundraising process and say, look, I know more about my business than anybody I'm going to talk to, but these people are all smart.

1:00:37They see a lot of things I don't see. I'm going to use this as an opportunity to improve my plan. I want to come out of this fundraising, not just with a pile of money. I want to come out with the right milestones, the right money and the right partners so that I can succeed. And that's where if the VC is getting back to the founder friendly thing, if I think my role is just to sell you, if I just think I'm a salesperson, you're just going to get none of that, right? Like we should have a frame where I walk in and a good VC meeting for a founder should be, you know what? I walked out of here with some good ideas.

1:01:07That's how you as a founder should evaluate me as an investor is like, I walked out of this meeting and I had good ideas and I want to have another call with this person later so that I can get some more good ideas. Not because they know how to run my business, but because actually I could run my business better if I had this interaction over time. Actually, I had a question about one of those things. You said, if I own a little bit more and someone comes to me and they're like, eh, things are not going great. Can we have another million bucks? I'd be more inclined to do it. Do investors actually ever do that?

1:01:36Because my assumption and what I tell people is you should assume you're never going to get any more money. And the only way that you're going to get more money is if your metrics are so unbelievable that no one can ignore you. No one can ignore you. And so the idea that like investors will give a company with mediocre metrics like more money. No, but it's not mediocre metrics. You know what it is. To sort of like just tie them along. I mean, like maybe it's never happened for me. No, but there's look, you know, you as a founder have faith in what you're doing. And you come to me and you don't have numbers.

1:02:10And I'm like, I don't know, man, I can't see it. Right. And you're like, if you're rational, which is hard to be, you'd be like, I understand why you can't see it because you're not in my day to day. So I think what happens is a team is going along and they're doing well, but the numbers don't reflect the opportunity. Right. So I've had this happen a bunch of times where, you know, if you're close with a company and you're working with them, you know, you raise a million and a half. You think you're going to get there. Some A and B and C went wrong. You're not quite there. You need another six to nine months.

1:02:42Personally, I love these rounds because I have asymmetric information. It's very rational for me to write a check into this company and irrational for the Series A investor. So I'm going to write that check, right? We're going to do the, let's say, the seed at six. I'm happy to put another half million dollars into this company with a syndicate of people to get you much better positioned for that Series A, which in this market is further and further out as funds get bigger and bigger. That's a win. And if we can do that and split the difference and do it at 12 and then the A is going to be at 24 or 30 because the Series A folks don't care what they're going to pay.

1:03:19Overstatement. Which Series A investors are those? Maybe if you could make a list of those Series A investors for everyone listening. Yeah, exactly. We'll put it on the website. We'll do one of those. These Series A investors don't care what they pay. Go talk to them. You might know some folks who are very generous at valuation. Actually, look, a general rule on that, in all seriousness, is the larger the fund size, the more price insensitive they're going to be on the Series A check. And just to get maybe this too much inside baseball, but look, if you've got a billion dollar fund and you need to put 75 to 100 million dollars into a company, you're not going to do that in the Series A.

1:03:56So if you're writing series A checks, you're more worried about, you know, getting that Parker Conrad company and having the option to put another 50 million bucks into the next round and so on and so forth. Then you are about exactly what your entry point is because your blended cost basis is going to be the average of your valuations across all those rounds. And you're putting a lot more money into the later financings in the first one. So that would lead someone with a large fund to be price insensitive where I might be super price insensitive to that crazy A valuation that's not merited by the traction in your business.

1:04:29So I'd rather invest to help you get there. And I've had big firms double valuations on a regular basis on checks that I've written into pre-series A companies in six months. It's great. I mean, it's a great place in the market to be as an investor. And I think you're seeing that, right? So from the outside, you look at this and you hear about pre-seed and seed and seed plus and A, and it just sort of seems absurd. But it's a reflection of the fund sizes and the strategies and how everybody's trying to make money in this ecosystem. Should there be a glass door for VCs? I think there's a couple of people who have tried to do that.

1:05:03I remember one in 2008 or 2009. There was someone who I'm trying to remember. Bill Kaplan, I think. Fucks VC or FUVC. Do you remember this? There was the funded. The funded. That's what I was thinking of. Yeah. Yeah. I don't know why those things haven't worked. I think it's just one of those things where most people are not willing to talk about this stuff. It's really hard, right? Like who's got an incentive to say negative things? Who's got an incentive to say positive things? I mean, I think the version that I would really like of this is an entirely positive version. That's just about like, I think a real problem in venture capital, at least in the, you know, pre product market fit stage is just getting your first yes, getting people who are really going to make their own decisions and act with conviction and not just wait for momentum.

1:05:48I really think that that's what's missing early. And so I would love to see a site where founders just go and say, look, here are the people who really said yes to me early, made my round happen. Because I think like when you're a founder and you're going out to raise money, you don't care about the last check. That's going to be easy, right? You're just looking for the people who are willing to say yes without asking, well, who else is investing, right? So I think that's what founders could really use early. And I don't know, I'd be curious about your opinion. But I think by the time you get to series A, you actually have a support system around you.

1:06:22You have an ecosystem. You know a bunch of founders. You have a bunch of investors around you. So it just doesn't feel like that's a real problem so much as this early stage is messy. It's where all the opportunity is, in my opinion. But it's also really hard if you're a founder trying to navigate it. So if you guys at Village Global want to build that, I will be your free product manager. Sounds good. I mean, I sort of take like the opposite view, which is I think that like the whole – it's inherent in the dynamic of VC investors having LPs that they need to answer to. That I think like most of these guys, you put their back against the wall and they'll slit your throat for a nickel.

1:07:03And I don't think the problem is like you have to identify one or two bad ones. I think it's that, you know, this is just like most of these investors, the incentives are very different from yours. And I think, you know, like I don't have like an answer on like how you avoid that. But I don't think it's that. Get profitable. Make money. Like I had a – there was – so in fact, the guy that I was mentioning who – that I mentioned earlier in the podcast who told me that his Series A board member threatened to sue him. Subsequently, this guy's Series A board member gave this guy's name to me as a reference.

1:07:39So I think that there's definitely a weird sort of – I think the problem is you just genuinely don't hear a lot of these stories. I'm sure most people that he spoke with as a reference, he gave glowing testimonials too because why wouldn't he? Unless you want to plug Rippling or any last things you want to plug? My new company is called Rippling. The basic idea is that with the deadweight loss of the SaaS revolution, I think, has been that businesses now have like 100 different systems they're using to run the company. And I'm convinced that there's this incredible administrative pain of just having to manage employee information across HR systems and IT systems.

1:08:20So you really see this when you hire someone. You have to get documents signed, add them to payroll and benefits and other things. But you also create their email account and get them key card access to your office and set them up in Salesforce and GitHub and AWS and other systems. So the idea behind Rippling is that it's an all-in-one HR and IT system where you can manage employee information across all those different systems. So you have a button to hire someone, and we get their documents signed. We set them up in payroll benefits and HR systems. But we also set up their access to all your different third-party apps and services, things like email and Slack and Dropbox.

1:08:59And we also ship them a computer. So it's kind of like all of the stuff that an employee needs on day one. We don't care whether it's like HR's job or IT's job or the legal department's responsibility or part of the finance organization. We kind of give you one system that stretches across all those things. And we can automate huge amounts of administrative work for companies. Cool. Awesome. Thank you so much for both coming on the podcast.

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