E54: Trae Stephens on Founders Fund

0:05Welcome back to Turpentine VC, a podcast where we discuss the art and science of building successful venture firms, VC to VC. Today, we revisit one of the best and most referenced episodes to date. An interview with Trey Stevens, general partner at FoundersFund and one of the co-founders of Anduril. Trey reflects on the iconoclastic DNA of FoundersFund, why having no process is a differentiator, and the future of the firm. Let's dive in. Trey, welcome to the podcast. Thanks so much for joining. Thanks, Eric. So Trey, you've been at Founders Fund for quite a while now, right? How long? Almost a decade?

0:45Yeah, I started in January of 2014. So coming up on 10 years. So Founders Fund has done phenomenally well since the beginning, almost a couple decades ago, perhaps. And it's not obvious why, because the people who've done super well at Founders Fund, they weren't household names necessarily before. There's something about the Founders Fund DNA that produces phenomenal returns. And I want you to reflect over the past couple decades, what is it about how Founders Fund operates that has led to it being successful fund after fund after fund? I think at its core, it's all related to the debate culture, like the openness of conflict and conversation internally.

1:28I had no idea what venture capital was really when I started here. I was at Palantir at the time when Peter asked if I'd be willing to come over. And when I started, I have no background in finance, had never made a personal investment of any kind, but I think had had a lot of these back-and-forth debates with Peter on a variety of things. And it turns out that that was the most important characteristic that I could have coming in, is you have the ability to develop conviction and the ability to defend that conviction in front of groups of other very smart people. And the practical aspects of venture came later.

2:11And it turns out they were probably a little less important than the core conviction building process. My sense is what made Founders Fund successful early on was just some outsized bets, very concentrated portfolio, and just a massive winner like SpaceX, Airbnb, a few others that really catapulted the brand and reputation. That this wasn't just Peter's thing, but this is a real institution that can produce great, great investors. Yeah, I think some of Peter's core hypotheses about the venture tech space that he built out as part of Zero to One as well, the book that he wrote back in the early teens, are about concentration.

2:56So you should really double down on your winners because venture is a power law distribution. You know, the best companies tend to return the vast majority of all fund returns. And so you want to have as high of ownership as possible and the biggest winners in the fund. And so we certainly spend a lot less time than most funds kind of like shooting out capital and smaller dollar amount increments like you would for a typical like seed stage or angel fund. And we do a lot more highly concentrated bets in, you know, series A, series B to make sure that by the time that you have a SpaceX or a Palantir or an Andrel or a Stripe, that you've acquired as much ownership as you possibly can.

3:38Yeah. We had Ben Horowitz on the podcast and he talked about how, you know, Indrecent has 500 people, et cetera. They've invested massive amount of services that, you know, makes it hard for other, you know, firms to compete to sort of win a deal against them in his words. What does Founders Fund believe about the world that's different about how A6 and Z believes about the world that leads you to take the strategy you've taken. Yeah. I mean, to be fair, I love Andres and Horowitz. They're a large investor in Andrel. I would be the last person that would say anything bad about them. Our pitch is very, very different than theirs.

4:11Our pitch is that we'll be the least annoying investors that you deal with. We're going to be very hands-off unless you ask us to be hands-on. We will be there to be reactive and supportive in whatever way we can in those moments. But by and large, we're going to give you the space that you need to operate. And I think this goes with the original thesis of why we're called Founders Fund is that we wouldn't invest in a company if we thought we could run it better than the founders. The only way that we'd ever get to conviction on a company is if we believe the founders would be much better than we would be at running that business.

4:49So that pitch is, so far as I can tell, having not only invested here for 10 years, but also starting two companies that are now portfolio companies at Founders Fund. It's incredible how true it is that we are very not annoying, far beyond how most funds probably think about themselves. Yeah, it's amazing. It's amazing positioning in a sense of in a market where every firm is trying to talk about how much value they provide, what you're somewhat doing is talking about how much value you're not going to take away. It's a jujitsu move. It's like, like everybody, you know, VCs add negative value, we're going to add less negative value, you're going to control the company, etc.

5:32I think what you're also bringing significantly is because you're so concentrated, and you've had wins, when Founders Fund is on the cap table to signal to the market that this is this is going to be a great company. Totally. And you know, I think I think most investors wouldn't say that they're being value extractive. Like I think they honestly believe that they're going to be helpful. But, you know, it's very, very hard to like move the needle for a company, you know, on a like hyper part time basis. And to the extent that VCs believe that they're being super helpful, they're either very, like actually being super helpful to a company that's desperately in need of their help, which is not a position that you really want to be in as an investor, you don't want a company to be, you know, in desperate need of your help.

6:18or they're just doing something to like boost their own self-esteem to be like, gee golly, I'm just like the most useful investor ever. And the value of that to the company that's, you know, being massively successful is like, you know, it's a dubious claim at best, I would say. Yeah. And I think another sort of marketing position that you guys have taken, perhaps just organically, is Founders Fund is the only firm where you can look at a company and say, oh, that's a founder's fund company. You know, something like Andrew, something like Palantir. You know, you just kind of, it's maybe the boldness of the vision.

6:57It's maybe the type of company because you as a pioneer these kinds of, you know, sort of government tech companies or it's also just the aesthetic of the founder willing to be contrarian, willing to say something different. And that's just a very strong market position you guys have built over the last decade. Yeah, I think that's totally right. Right. I mean, there's a lot of different words that you could probably put on this. I think contrarian is overuse. Like people throw that around as if it's like some hallmark of, you know, successful Silicon Valley stuff. Somewhat true, I would say. There's definitely some value of independent thinking.

7:35The Founders Fund brand, I agree with you. There's something to it where you can just look at something and you kind of know that it fits us. I think it's like more than being contrarian. It's like being kind of iconoclastic. It's like you're doing or saying something that people are like, that's either very right and troubling or it's like not something that I would ever say out loud. And we have a tendency to kind of collect these like, you know, lost toys and draw them together into a community of like-minded people. Yeah, totally. Brian is an interesting microcosm here because... So Brian, one of the earliest investors at Founders Fund, one of the more successful investors at Founders Fund.

8:20It's not obvious as to why in the sense of he didn't have this... He's not like Ryan Peterson, where he had this massive unicorn company that he built, although he did work at Google, of course. And he's also not the world's domain expert in any specific categories, as far as I know. And when you talk to him, he goes on podcasts, he's kind of like, Oh, I embrace the beginner mindset. And, you know, like it's not just obvious why he's absolutely crushed it. And then similarly, you mentioned you didn't have a background when you got into investing background, you got into Founders Fund. I feel like Founders Fund has just been able to recruit these investors who are not like the most obvious picks as to why they would crush it based on their investing background.

9:00And they've absolutely crushed it. You included and Brian and others. Why do you think that is? You know, having gone through a bunch of pitch meetings on both sides of the table, I think that a lot of investors are, maybe they're good at collecting information. Maybe they're good at like intuitively making decisions. Maybe they're good at getting access to deals as like the other side of that equation. But they're, you know, they're making kind of decisions in a similar way to a lot of other firms. And so you could, you know, put a blindfold on and go through a bunch of different pitch meetings with different firms and walk out of it and be like, I genuinely have no idea which one of these pitch meetings was with which firm.

9:41I think with Founders Fund, you kind of know, because if you've ever sat in a pitch with Brian Singerman, which many of you listening to this podcast probably have, oh, you know, because he's asking difficult questions that make you super uncomfortable. And I think that that's kind of something that happens across the board with us is that we encourage the investors on our team to really dig in and push people on things that might make them a little bit uncomfortable. And I think that comes in through the truth-telling aspect of this as well. It's like a lot of our founders will come to us not to get help or to sit on an advisory board or take a board seat or anything like that.

10:21They just want us to tell them the truth. And there's no one like Brian Singerman to tell you exactly what he believes to be the truth. It takes a special kind of person to be that honest with other people. Yeah, totally. I'm curious how you guys think about investor recruiting. About a decade ago, before I started Village with a few folks, I was talking to Jeff at Founders Fund about a potential process. And I was letting him know that I had other interests. And maybe he was just being nice or iconoclastic. But he said something like, if you're getting other interests, that means we don't want to hire you.

10:54We hire people who wouldn't work at other venture firms or who wouldn't be obvious for other venture firms. I'm not sure if that was just a Jeff thing or Founders Fund thing or if that's changed in the past decade. You've made some more obvious hires recently in Ryan Peterson, Sam Blond, and others. But I'm curious how you guys think about partner recruiting at Founders Fund. Yeah, I mean, you're right. Historically, we do have a bit of a rep for hiring people that you wouldn't normally have approached for a venture role. that has shifted a bit as we've really reached out to people that we just had a high conviction in that were already in our network.

11:28I think you really want people who are going to think differently about the world. And I think the worst possible case for us is to hire a really, really talented person, a very smart person, a very analytical person who would be a great fit at a lot of venture funds, thinking that that would translate well to Founders Fund. And I think, you know, I won't say it's like a toxic workplace. That's not the right framing. But it's definitely challenging. I mean, you have to be the type of person that embraces debate and that embraces people thinking things that are very, very different than you think.

12:06I think the base assumption that most people in this community have about Founders Fund is that Peter is the type of person who would hire a bunch of ideological or political sycophants. And it's just not, it's like literally the opposite of what's true. And I think that would surprise a lot of people is that they would think that Peter's just surrounding himself with people that are just going to yes him to death. And actually, there's not a single person at Founders Fund that will yes Peter to death. And I think that's part of what drives the returns, has driven the returns historically, is that we're filled with a bunch of people who argue about basically everything.

12:45And I think we reach better decisions as a result.

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14:15Yeah, it's really interesting. There's something about the Founders Fund brand that is willing to be so organic externally, even if it, you know, the bad of everything or the good of it is sort of authenticity. The challenge of it is what you just mentioned is chaos, perhaps. Yeah, it's a bit chaotic, for sure. And I don't think we would want to give people the external perception that we run a really tight bureaucratic ship, because we don't. It is sort of chaotic. If you think about the way deals get done as being kind of explanatory for the types of deals you make, I think the more bureaucratic and organized you are, the more likely it is you make mediocre investments.

14:57Because if like one person meets with a company, they're like, I like this, but you know, I want someone else's opinion. And you pull in like your partners and your partners are like, yeah, I like this. I think it's probably good enough to like get the GP's opinion that goes up to the GP's and the GP's like, oh, well, it made it this far. Maybe we don't like it enough to write a$10 million check. Maybe we like it enough to write a$2 million check. And then you end up having all of these like kind of mediocre conviction deals that fill up your portfolio. At Founders Fund, it's like not even possible to do that.

15:31Like there's no Monday meetings. We don't have like some organized structure or deal process. It's like the only way a deal gets done is if someone has enough conviction to fight through every single person on the investment team. And so like you have to have that champion. It doesn't matter if that champion is an associate or a principal or a partner or a long-standing GP. It's like everyone has to fight this process or lack of process, I guess I should say. And we're not hiding that. We fight with each other openly on Twitter. We're very open about how different we all are. We had people donating to different political candidates, which for people that are hyper-partisan in San Francisco, would be shocked to hear that Peter is still friends with people he disagrees with.

16:17But actually, that's the way the world should work, is that you should have a bunch of people around you that you disagree with. And that's just who we are. And I don't think any of us are apologizing for that. What is the right way to think about sort of governance or structure at Founders Fund in terms of how do decisions get made? Is Peter sort of the part-time CEO? Are there other people as CEOs? Is there a co-CEO? You just talked about how deals get done, which is, I guess, some level of consensus in terms of you have to convince everybody. How does decision making at the firm work more broadly?

16:51Yeah, so Peter is the CEO, full stop. And then there's a set of GPs that are, I guess, making the final stamp of approval on deals that are coming through the process. But as I said, anyone can get that done. So if you're two weeks in on the investment team, you have just as much right as anyone else to elevate a deal and push it with high conviction to get the approval that you need to get the deal done. I would not say that, by the way, it's consensus-driven because there are a lot of deals that get done without consensus. You have to get enough consensus to avoid it being vetoed, essentially.

17:34And I think that's really it. There's really not a whole lot of process outside from that. Yeah. And what about in terms of if you want to hire someone, if you want to do this growth? Like, is that just pitch to Peter, basically? Or like, how do certain things happen? It's all the same. The process is the same, whether it's a deal or a hire. It's just at the end of the day, like, can you convince enough people and avoid anyone being a strong veto? And the strong veto aspect of it is as important as the conviction and consensus part of it. Because if there's, you know, if Peter's like, I hate this, I don't want to do it.

18:10Or if Keith is, I hate this, I don't want to do it or whatever. Like, it's probably not going to get done. Yeah. It's fascinating. What you've done is you've taken what could be perceived as a weakness relative to other firms. You know, other firms would brag about, you know, how much support that they offer for companies, you know, all their services, et cetera, or, hey, this is how efficient we operate or whatever. And you've turned it into a strength. And so it's like, yeah, the good of everything is the bad of everything. but sort of things where you're, you're like, not as strong, you make it sort of this unique sort of benefit in terms of, hey, we're going to make better, better decisions this way.

18:44It's interesting to zoom out, like if I was, the way my brain works, when I think about creating this like venture platform machine, that's going to do well over decades, like if I could have built anything, it would have been something like YC, like a very clear, like it feels like YC can't lose. It can degrade, but it can't look like, hey, you have 1000 companies a year, you got special economics, and all of them, you don't even have to be that great of a picker, you could replace all your partners with new partners, they don't even have to be that good. It feels like this is just a machine that compounds, obviously, it's incredibly hard to build a machine, the only one or, you know, a couple have been built.

19:18But that that's like where my brain goes as to like how to win at adventure. Whereas like, if you were like, hey, create something over two decades that once a year, or that makes like 10 big Betsy, I'm not sure how many, you know, big Betsy guys make year, but is very concentrated. And, you know, is going to have turnover in partners, but just going to win fund after fund after fund after fund. That feels just so much harder to do. And yet, that's what Founders Fund exactly has done is created that machine to do that. Yeah, no, I think that's absolutely right. It's not clear to me that YC can't win or can't lose rather.

19:53I think that there, if you build a massive portfolio of not concentrated seed stage investments and you do it with a very wrong-headed approach, whether it's like, we're going for geographic democracy, like we're trying to invest the same amount of dollars in every geography in the world, then yeah, there are ways that you can screw it up. I think they've gotten close to doing that a few times in the past. Maybe they've gotten saved by some big wins. I think what Gary is trying to do with it right now is great, like cutting back the size of the class pretty meaningfully, focusing on kind of core technology advancements, getting more concentrated on the angel side of things rather than doing a bunch of follow-ons and things like that that makes them competitive with other venture funds.

20:52There's a lot to like about Gary's kind of reboot. I guess on our end, I think you're right. It all comes down to how concentrated are you into the one, two, three best companies in each fund? And how well have you avoided being drawn into writing$102 million checks? And I think, honestly, it's really hard to do that. That is where discipline really comes in more than anything else. because everybody's going to want to follow on. They're going to want you to participate in like an extension round or a bridge or you're going to have like mediocre conviction at a Series A, but you don't want to lead the Series A.

21:35And so it's like very easy to get drawn into this death by a thousand cuts thing. And so making sure that you're really reserving and allocating to hammer and take much larger ownership in those winners is I think where we've done historically a much better job than most funds. How do you measure success on a shorter term horizon against Sequoia, against Andreessen, against Benchmark, or whoever you benchmark against? How are you measuring how you're doing relative to them? Well, there's always the assessment of which companies are we in and concentrated in, and which companies did we miss? So you're anti-portfolio or whatever people call it.

22:18And I think this is something that we go through fairly often as a team here. Like, are there big winners that we didn't get access to? Are there big winners that we passed on? I think during boom moments, that list gets really long. And then in bust moments, you look back and you're like, actually, it's not so bad. There weren't a lot of those that we missed. But the equally important part of this on the short term is saying, can we look at our existing portfolio for this fund and pick the two or three that are going to be the best returners and then do something more proactive to make sure that you're getting access to larger, more concentrated chunks in those businesses.

23:02Yeah. Why were you brought in? Were you brought in because there was going to be this emphasis on sort of GovTech, American Dynamism style companies? Or talk about a little bit about how you started as an investor and then we'll get into how that evolved to the incubations, etc. It's a great question. And honestly, I don't know the answer. But if you ever end up interviewing Dr. Karp or Peter on the podcast, I would ask you to ask them publicly to see if either of them give you an answer. It's like, you know, somewhat unclear to me if Dr. Karp was looking for a clever way to fire me. And Peter like offered him a safe out or if there was a more generous explanation.

23:40uh but yeah i i mean i had gotten to know peter pretty well when i was at palantir um i was uh kind of sensibly like running the sales org um there's not really a sales org uh as dr karpus pointed out many many times publicly um but i got to know peter pretty well and then he just kind of called me out of the blue and asked if i wanted to come join i think it was from a timing perspective like it worked pretty well like my my wife had uh just given she was about to give birth to our first kid who just turned 10 a couple of weeks ago. And it seemed like as good a time as any to go and explore what would be next.

24:20Palantir had grown fabulously from when I joined until the time that I left. And to the earlier point in the conversation, I think one of the kind of cool things about venture is that you can really learn this business by osmosis. like the most important thing is that you have an intellectually curious person, uh, and someone who, uh, reaches high conviction on things, even if it's loosely held high conviction and the rest of the stuff is not something you need to learn in business school. You know, you can just learn it by doing deals and by being part of, uh, investment decisions. Um, and, and I think that was really the way that I went about it that, uh, I'm very appreciative of.

25:05Hey, we'll continue our interview in a moment after a word from our sponsors. Talk about your journey to then incubating Andrew. And when you realize, hey, we need to go deeper on this space. This is a space that VC firms don't historically invest in. So talk about when that became really real. And then just how you guys... Because it feels like you've pioneered your incubation practice a little bit at Founders 1 too. So talk about how that's evolved as well. Yeah, I wouldn't say that we have an incubation practice. I mean, obviously, Peter co-founded Palantir. We were the first institutional investor in SpaceX.

25:38Keith started OpenStore. Delian started Varda. But there's no program for this. It's not like there's a specific way that it gets done every time. I just think we've been doing it for a while because of what I said before, which is that if the company exists and we don't think we would be the best people to run it, then we're going to invest in that company in as highly a concentrated way as possible. But where there are cases where the company doesn't exist, and we feel like we are, for whatever reason, the right people to start the business, we will do that as well. And to be honest, I didn't know this.