Uncapped #34 | Mel Williams from TrueBridge

0:00The two characteristics that we've identified that are most important for exceptional investors are, number one, they approach the market from a contrarian standpoint or first principle. standpoint. Number two, they have conviction. When they see it working and they see it when in their portfolio, they're willing to push their chips on the table. And that's hard to do. All right. I'm very excited to have Mel Williams, the co-founder of TrueBridge here. Mel, thank you very much for doing this with me. It's great to be here, Jack. Thanks for having me. So you started TrueBridge like 17 or 18 years ago.

0:31And today it's like one of the premier fund to funds and venture and you've got eight billion under management you were very early to funds like thrive founders fund and you also like provide the data that powers the forbes midas list so like you're very in the know about top venture firms and how the ecosystem has been working and so my goal with you today really is to understand your vantage point on venture where we're at what it looks like and sort of um you know how you're how you're seeing things because for us as uh venture investors. Our job is to pick companies. Your job is basically to figure out how to pick investors.

1:07And so that's kind of what I want to open up with you about today. Sure. The first place I'd love to start is just getting your overall pulse check on it's 2025. AI is obviously very important. Companies are growing quickly. They're valued more highly than ever. We just came out of these doldrums post-ZERP, but now we've had a couple of years of like very exciting time. How are you overall feeling as somebody who allocates exclusively to venture? Like what's your sentiment? I think overall our sentiment is excitement. You know, we think we are at the leading stages of an AI wave that will power business opportunities and return generation over the next 10 to 15 years.

1:51We're in the early stages of that. There's evidence that it's working, right? And it's working at scale. And so I think all of those things are very exciting. I think at the same time, it feels like a very frothy investment environment. Valuations are relatively high and they're very high at the earliest stages, it feels. Like they're higher at the early stages than at the late stages. I think so. I think so. So I think if you look at some of the more recent growth rounds, they've been done at revenue multiples that are not peak revenue multiples. Yeah. And don't look that different than public multiples.

2:20That's right. That's right. So what's the, you know, I think Palantir is trading at a thousand times revenue. OpenAI's recent round was not done at a thousand times revenue, right? So what's the right market multiple for those assets? And so I think in the growth rounds of the market today, capital's being invested around and being raised at relatively healthy multiples. At the earlier stages, at the formation stages, where there's less evidence of a product, less evidence of a product market fit, you do see founders with credibility, founders who could check a couple of boxes, raising large pools of capital at very high valuations.

2:57Yeah. I mean, one of the other tricky things is it does seem like the growth rates right now are genuinely faster than they've ever been. So like before AI, it was like if you were going one to three of ARR as a software company, you could get your A done. And now it's like one to five, one to seven, something more. And so I do also think it's really hard to put multiples on these companies when they're growing really fast. I think that's right. Which makes it complicated. The pace of revenue growth is something that we haven't seen before. You were just mentioning, though, these like early stage rounds before there's product market fit where founders effectively go straight to an A.

3:28Yeah. Yeah. And so you probably have a lot of that in your portfolio. We are seeing that. Yeah. We're seeing that across our portfolio from our flagship funds and the branded firms all the way down to the to the seed firms. Outside of AI, and obviously we'll come back to that, but like in other categories like hardware, defense, maybe consumer, like what other what other sentiment sort of updates have you had recently? Yeah, I don't think the market is as frothy outside of AI. And so I think it's a very reasonable, if not attractive market when you move outside the AI space. I think valuations are still attractive.

4:01I think founders are still talented and you're seeing good companies starting and being built. You're seeing capital staging in at relatively attractive valuations in response to milestones being met, revenue being generated, etc. So I wouldn't characterize the market outside of AI as frothy. But within AI, which today represents 50 % to 60 % of the activity across the venture landscape, there's more demand than there is supply. And so we're seeing behaviors that are challenging, right? Obviously, we're hoping that everything here turns out to be good. In a world where everything that's happening right now doesn't turn out to be so good, what do you think are the main risks that you see right now that would explain the future of like why this went wrong?

4:47I think we're just going to see companies that don't get product market fit, right? We're going to see companies that don't get product market fit that have raised a lot of capital where capital went at a high valuation. And so I think we're at an interesting place in the venture industry where if I were to say, let's look forward over the next 10 years, I think the following two things can be true. We're going to see a lot of carnage over the next 10 years. And we will see more value created over the next 10 years than we've seen in the venture industry. Like in the late 90s, it's like, you know, a bunch of those companies got wiped out in dot-com bust, but then you had it also like Amazon and Google.

5:23That's right, that's right. And venture has always been a power law driven business. It's even more so today. Yeah, it does seem - Right, the magnitude of the winners is even greater today than it has been in prior cycles, I think. What do you think explains that? I think it's explained by the lower marginal cost of software. I think it's explained by incumbents and individuals being more willing to try new software more quickly, right? I think in the last cycle, a lot of your incumbents were asleep at the switch, right? And so we saw growth rates were slower, right? In enterprise buyers, growth rates were slower.

5:57No one's asleep at the switch in the cycle, it doesn't feel like. And so enterprises all have budgets to go try a bunch of AI software. Consumers are signing up for ChatGPT as fast as you can imagine. And so I just think there's more society has embraced tech as a potential solution more. So I think we're seeing the ramp faster. As you know, I obviously like I work with many more companies at like the Series A stage than at the later stages. And one of the things that's really interesting is when I was starting Lattice, recruiting against the incumbents, like let's say like Fang roughly, was mostly not easy.

6:34But like it was if somebody didn't want to go to those companies, it was like not competitive. It was just like a different product versus now it's like all these even very hot series A companies. It's like, well, OpenAI and Anthropic and Meta and these other places are extremely compelling, even to very startup minded employees. Right. Right. And so I also think the talent aggregation that's happening at these big companies at huge scale is different than it seems like it's been before. I think that's right. Or SpaceX and Anderle and all these places. I think the value of signal in this market is magnified.

7:06Right. And Signal in this market seems to be attracting capital and talent and customers at a rate that we haven't seen before in the venture business. How do you feel about the dynamic where a lot of venture platforms, many of which are some of the best in the world, are now getting so large that, you know, a high percentage of their dollars basically are just going into these, you know, snowballs rolling down a hill that are just like runaway huge. Like, is that something where you're like, I, you know, would rather have the early stage exposure? Like, actually, those companies are going to be massive and getting into those companies at almost any price is good.

7:45We think a little bit of both, frankly, and we structure our portfolio that way. We do realize venture is a power law-driven business and that your returns are generated by the companies you're invested in that end up being winners and less so by the valuation at which you entered those companies. And so we think kind of the venture growth stage of investing and CDE rounds, if done right, with the right firms and the right companies is a really attractive risk-adjusted return in this environment. Really attractive risk-adjusted return. And the platform funds have the right to win across those stages, right?

8:20At the same time, there's just, there are individuals who have a unique angle and or a unique approach to founders, a network of founders who have proprietary deal flow and who have a right to win at that stage in a competitive environment. And so we like that segment of the market as well, which is really the earliest stage of the market. So basically, you're kind of in a mindset now of it's either the premier platforms or you try to find, you know, individuals with these edges. It is. It is. Yeah. What about the rest of the market? Because obviously, most of the market is not one of those two things, I guess.

9:00I mean, maybe just by dollars, but. Yeah. So, you know, I'm worried about the long tail of venture in this in this market cycle. Right. I think the magnitude of the winners is going to be, is outsized in this market, is likely to be outsized in this market. We're seeing evidence of that today. I think the signaling effect is so strong that the brands have real advantages in this market. Generally worried about kind of a long tail of venture, worried about companies that are unable to pivot. Prior legacy software companies are unable to pivot into AI related opportunities. That's what scares us the most.

9:36Yeah, there was a tweet, which I know you didn't see because you're a serious person who doesn't waste time on X. But Martin Cassado. I'm not on X. That's good. You're smart. Martin from Andreessen posted something that was very thought-provoking and got a lot of people stirred up. Basically, he was like, increasingly good investing is consensus investing. And you're kind of kidding yourself if you say it's something else. Basically, it's like, you know, obviously at the later stages, like good companies are known. But today in 2025, it's incredibly, incredibly early on you're able to see. And it got a lot of people sort of frustrated and, you know, reacting and saying, actually, you know, the best companies of the last 10 years were not consensus.

10:20And, you know, then it flipped and it created this big debate about where's the value in investing? Is it, you know, being able to see the future that other people can't see and finding diamonds in the rough? or is it, you know, winning, you know, the hearts and minds of founders that, you know, any idiot can tell is really good and just, you know, having the right to back them. Yeah. I'm curious how you think about it. It's an interesting quote. I didn't see it. So thank you for sharing it with me. Within the context of your interpretation of this quote, I think it's both, right? I think, you know, as we look at the market today, 90 % of the market is chasing the heat and chasing the signal.

10:57And 10 % of the market is the signal. Sequoia is the signal, right? Peter Thiel is the signal. Josh Kushner is the signal. And so whether a Sequoia or a Founders Fund or these very high quality firms, Mark and Ben at Andreessen, whether they are chasing the signal, whether they are investing in contrarian opportunities with conviction, they're creating the signal that the rest of the market is really chasing. So I think it's both, to be honest with you. Well, it's interesting you say that because those examples have both. They both create signal and they can also win once somebody else has created signal.

11:37Correct. Correct. Which is part of why they're so dominant. That's right. That's right. It seems to me like right now, sort of like companies, you know, get these power law, you know, winner dynamics. It seems like venture firms could too, where it's like, if the signal is that powerful, why shouldn't these firms be managing double or triple or quadruple the money they're managing today? Yeah. Unless you think that like the tech market's not big enough. Yeah. It's like, why not just give the ball to the, you know, seven foot center who can dunk it every time? Yeah. I think you're right. And I think that's what we've seen over the last 10 years in venture, right?

12:09I think brands matter. We think brands matter in venture. Good brands equal positive signal in the marketplace. And positive signal has real positive meaning for founders in terms of raising additional capital in terms of attracting talent, acquiring customers, helping in the regulatory environment, right? And so I think if you look at founding a company, there are really three things at play here. Number one is not only do founders need capital, but founders want help. You did it, right? Starting and growing a company is not easy. And so you want capital, but you want help. Ventures, number two, venture has always been a power law driven business.

12:53And so as a founder, you really want to do things that increase the probability that you're one of those companies that are founded each year that really matter. And number three, I think we're in an environment where the magnitude of the winners is going to be greater than ever in this cycle. And so if I'm a founder, I want to do everything I can to increase the probability that I'm one of those power law companies, even if that means taking a lower valuation, I'm raising capital. from a brand that has extremely positive signal, right? Yeah. I mean, the other thing, these big brands will invest, you know, many, many times, huge amounts of money into a company.

13:33And so even if you take, you know, a lower valuation, that's now like this, you know, mega deep pocket you have that will help you, you know, have capital advantages, which are a huge deal in competitive markets. I think that is important to founders, right? Yes. I don't know if you enjoyed fundraising, but I'm not sure. I know many. Yeah, there's parts of it that are good, there's parts of it that are bad. You know, I think if you talk to most founders, they would say they don't like fundraising and they would prefer to spend as little time fundraising as possible. And so when you do raise capital from one of the large brand of firms that are lifecycle investors, you have someone who can fund your growth over time.

14:06Yeah. And I think that's attractive to founders. This plays into a debate that happened on this show. Not exactly, you know, not at the same time. But Josh at first round was talking about how there's just physics to venture math and you can't have ginormous funds and get great returns. The math just won't allow it. Then I had Mark Andreessen on the show and he said something more of like a techno optimist view of nobody can appreciate how big these companies are going to get. Being in the winners always drives great returns. You can put a huge amount of capital into these things. And we're just scratching the surface of how big tech can be.

14:44Sort of just different takes on the question. You're in the business of figuring out how to invest in these funds and make the most money. So I would ask you sort of how, if at all, do you think about this fund size question? Where does it fall in the stack rank of things you care about? Yeah, I think at some level, and we're invested in both Josh at First Round and Mark at Andreessen. And I think at some level, they're both right. Fund size does matter. It's hard to overcome the math, right? Josh is right. You're less likely to turn a billion or two or three billion dollars 10 times than you are a hundred million dollars, right?

15:24But at the same time, you have to be in the power law companies to generate long-term returns. And so when we look at the data over a long period of time, and we go back to the 1980s, and we look at the venture returns from the 1980s, what we conclude is that fund size does matter, but it's not the only thing that matters. And if you look at returns over a long period of time, what you'll find is that often the largest fund in the market is the highest returning fund in the market. And it's a self-reinforcing cycle. So how would you explain that? The highest returning firm is able to raise more capital, is able to hire better talent, is able to attract better founders.

16:08And it's just a virtuous cycle, right? Yeah, I also wonder if that best fund is still deploying less than they would have been capable of deploying in many cases. So I think that is the key question. And the calculus that we always look at is how does the fund size relate to the capabilities of the firm? And it's not the absolute fund size that matters most to us. It is how does that fund size relate to the capabilities of the firm? How does it relate to the size of the investment team, the strategy, the level of conviction. The access. The access to founders, the good founders, the level of conviction they have about portfolio construction.

16:46And where we've seen... The level of conviction there, you're saying more concentrated is better? Exactly. So where we've seen firms get tripped up, and Joshua Leonard did some great research on this at the University of Chicago on fund sizes and venture returns. And his conclusion was, it wasn't the absolute level of fund size that mattered. It was the increase from one fund to the next. And when fund sizes were more than doubling, that's when firms got into trouble. And we see evidence of that in the marketplace. We'll see a firm that is managing a$700 million fund, building a portfolio of 25 companies where an average position size is - 15 to 20 on energy.

17:23$15,$20 million, right? The market gets hot. They go from$700 million to$1 ,4 billion. four. They need to build the same 20 to 25 company portfolio, but an average ticket size needs to be an average investment size needs to be$40 million. And they need to have$70 million in their winner, in their winners, right? And making that shift when you're sitting around the table within a venture firm, investing in the next round, just having the conviction to put$70 million into one company when you've historically put$20 million into your winners. It's just, it takes time to make that shift, right? And so that's where we've seen fund managers get tripped up.

18:05The concentration thing is really interesting. Like I, some of the, like the large firms that I really respect, like Founders Fund or Thrive or Green Oaks, I feel like are pretty, like, I feel like they have a lot of dollars into a relatively small number of companies. You know, the two characteristics that we've identified over, over, you know, our history, our 20-year history, and just going back and looking at the data over time. The two characteristics that we've identified that are most important for exceptional investors are, number one, is a combination of contrarian investing or first principles investing.

18:38And so it goes back to this comment that they are the signal, right? They're not following the signal. They're willing to invest when others aren't. They're willing to approach the market from a first principles standpoint. And Peter Thiel is a great example of that, right? I mean, he did the Airbnb round at$3.5 billion when no one else wanted to do that round, right? So number one, they approach the market from a contrarian standpoint or first principle standpoint. Number two, they have conviction. And when they see it working and they see it win in their portfolio, they're willing to push their chips on the table.

19:15And that's hard to do. That's really hard to do because for a lot of people, it's hard to sleep at night when you have that level of concentration. But that's how the winners and that's how the highest performing funds in the venture industry have generated their returns. Concentrating into their winners. Concentrating into their winners. Just as like a vague barometer on it, like what does a really concentrated portfolio look like? Like what percent going into the top first, second and third largest positions would you be like, yeah, that's concentrated? Like where would you be like, even for founders fund, that's a little excessive?

19:49Yeah. Or is there no number? So two thoughts. Number one, we see fund managers who are launching funds today, raising funds today with the intent of building a concentrated portfolio of 11 to 13 investments, right? And these are series A firms raised by experienced investors who believe they have good founder deal flow and good access and the right to win. And they're building concentrated portfolios from the outset, right? It's not a 25 investment portfolio. It's a 13 investment fund portfolio. And then when you drill it down to at the end of the fund life or at the max NAV of the fund life, what percentage is in the two, three, four winners?

20:31It's 60, 70%. In three names. Yeah. Yeah. And that's happened after. Because they're just driving, you know, those names are the successful names and their NAV is increasing and that's driving the value of the portfolio. It's probably like you should be so lucky to have names that are worth putting that much into. So it's probably a good thing. Yeah. So we've talked about like the big platforms, obviously. And I'm curious about the way you think about picking the other basket of sort of like less obvious names and less obvious managers for you to be in business with. Yeah. I guess my first question before I ask is like, why have that basket at all?

21:04Because, you know, we just talked about how great the sort of platforms are becoming. Yeah. What's the point? I know there's an argument for it, but like, how would you say it? I think established managers have always struggled with investing in the seed space successfully. And we've seen it over the history of those platform firms, right? For some of them, they've been in and out of seed. They've been in seed with various strategies, either as they hire individuals to invest directly in seed. They build a portfolio. They realize all the negative signaling effects of that that hurts their downstream investing.

21:39They get rid of that individual. You know, they're out of seed and then they go back a couple of seed managers to generate deal flow. And so I think if you just look at the history of venture of the last 20 or 30 years, the branded platform firms have always struggled to invest effectively in seed because it's tough and it's difficult and it has impacts for their downstream investing. And so for us, we want to have exposure to that segment of the market with people who are solely focused on that segment of the market and who we think are really good at investing in that segment of the market. So it's about exposure above anything else?

22:17It is. It's about exposure, but it's also about returns. If we look at the seed returns within our portfolio, our seed returns are accretive to the overall returns within our portfolio. Yeah, you just can't deploy as many dollars to it. That's right. Yes. And I guess it has more variability or does it have not that much variability when you're diversified? I mean, you know, the seed segment of the visual market today is very, very large. We could deploy a lot of dollars. We're not convinced that the manager quality is that deep. We believe in building concentrated portfolios. We believe concentrated portfolios are the best way to generate outsized returns for our investors.

22:56So we could build a portfolio of 50, 60 seed managers and invest a ton of money. But we consciously choose to invest a smaller pool of capital in a more concentrated portfolio of CEO managers who we think are best in class. Do you care more about strategies or the people? Like the equivalent question here to a VC would be something like, are you backing like founders or markets predominantly? And I actually think like some people think, ah, it's both. Some people will actually take a side on that. Like a lot of Gil, who's a phenomenal investor, have mentioned like market driven more than most people.

23:30Yeah. Other people are like all people. Yeah. Some people are really product obsessed. Like, do you have an angle on this for yourself where you're like, there's just some managers you want to be in business with no matter what? Or there's just models that you think are going to be excellent, you know, come hell or high water? At the seed stage segment of the market for us, it's more people driven. We try not to pick markets. We don't want to lock our limited partners capital up 15 years into a market that may be in or out of favor over that 15 year period. But we are very excited and interested in identifying people or groups of people who have exceptional track records, who have a unique angle to the market, whether it's a unique network of founders that they can tap into, whether it's a unique approach to connecting with founders, whether it's a unique point of view on a segment of the market.

24:20We're always excited about investing with people who have a unique angle and or approach that generates what we think is either proprietary deal flow for a right to win in a competitive situation. And then we're always excited about investing with people who can build a personal brand. You know, when you're at the seed stage and you're not walking through the front door with a Founders Fund business card or Sequoia business card, you got to stand out. And so we think that's part of the equation for us when we're looking at seed managers. It's evidence of strong investment judgment through a track record, this unique approach and or angle that generates proprietary deal flow or right to win and its ability to build a personal brand.