Wins Above Replacement: The New Way to Judge Founders

25:29Take that example, right? What Travis is doing with Adams and what Jeff is doing with Prometheus are relatively similar, right? Similar theses. It's interesting for everyone who's listening or you to go, who has the higher war for that idea? Is it Travis who's obsessed about transportation for the last 15 years? Or is it Jeff Bezos? Right. And that's a great example. It's like, and then also we think about it all the time when we're investing, do we have a high war? Like, I think I was the perfect series A investor for you. I know what you're doing. I can push you, things like that. I would not be have a high war to invest in a company curing cancer, right?

26:11So we talk about war all the time in terms of the founder fit, but also us as an investor fit. And then answer your second question. We backed 12 previous unicorn founders in our last two funds. And so we're not backing people that quote unquote need help. We tend to be backing some of the best. So I think you treat everybody the same. But what we do is when we invest, we say, what needs to be true for this company to be able to get to their next round of funding and be able to scale? And obviously a repeat founder or even somebody like you, Samir, given your experience, right? we're going to try to make an impact differently than we are a first-time founder, right?

26:52First-time founder might be, hey, let's really spend a lot of time helping them with how to hire because hiring is one of the hardest things that everybody will do. Versus a unicorn founder, you might be kind of thinking about how you get into hyperscale mode or things like that. So I think for us, as an investor who's very hands-on and takes an operational approach with our founders, what is dictated is how we make an impact because again we just want to kind of supercharge what great founders are already doing it's such an interesting framework because i think about and there was a interview recently that travis kalanick did and i don't know if you actually saw the interview but he was kind of going through his time at uber and obviously he went scorcher on some vcs in fact there was this whole twitter thread around most vcs at negative value and it's often because they treat founders the same, regardless of sort of their war.

27:47Why is that in your mind? Why do so many VCs have this reputation with founders? Yeah, it's a good question. Yeah, I think I heard Travis say that he thinks that if Andreessen would have been his lead investor in Uber, he'd already be doing what he's doing with Adams, right? And I think it's just, again, not all VCs are created equal. I think you look at someone like Andreessen Horowitz, A16Z, they have had very good vision. They think big, right? They're famously saying if a great founder comes to them and wants 100 million, they insist that they take 300 million, things like that. And other founders, other VCs, I think generally speaking, venture capital as an asset class has a lot of institutionalizing to do.

28:33And I think a lot of VCs think that different rules apply to venture than private equity or other kind of very established asset classes. And I think we've all seen it. Not all investors are created equal, right? There's so many tech companies that, you know, I saw something recently that was valued in over a decacorn and sold for barely a billion dollars and had some very smart VCs on the table. And I was just thinking to myself, man, how did those smart VCs not guide this better to lock in more value? But yeah, I don't think Travis is totally directionally wrong, for lack of a better term. I'll say it nice.

29:08Yeah. And look, I mean, a lot of people have actually jumped on that train and there was a lot of discourse. And even Vinod Khosla going back that said, I forget what the exact stat was, but it was something like 80 % to 90 % of VCs in his mind actually don't add value, but they add negative value. So they actually work against the company's best benefit, either because the advice is not, they show up on a quarterly basis to a board meeting. They want to pontificate because they want to add value, but fundamentally are missing the mark. And now the founder is running around looking at feedback that ultimately either isn't aligned or they're forced to take on.

29:44And so I think - Where do I sit, Samir, on Allocate? How am I doing? Give me my report card in front of all your listeners. Well, I mean, I think it's one where I think the best conversations with your investors are ones where you can have them outside of the board meeting when you're just picking up the phone and saying, OK, I have this problem over here. And you feel that the comfort is there that you can be vulnerable. And that's what we've always had as a relationship to which you're like, yeah, don't worry about it. Or, hey, this is how you think about it. And that's the type of relationship that's helpful, which is when I have a need on something, whether it's talent, whether it's fundraising, whether it's a go-to-market sort of strategy, I can pick up sort of the Rolodex and you're one of the, you know, like if you look at the priority names, I can call you and it's not, I don't feel like I want to be judged, but I'm going to feel like we're aligned in building the business together.

30:35And I think that's actually really rare. In fact, most people just move on from companies after a couple of years. And so I actually agree heavily with Travis now being on the founder side that, look, the delta between a great VC and a mediocre VC couldn't be as wide as it is right now. That's the nail on the head. The delta between good and great when it comes to VCs is just so, so great because you think about something like private equity. Most people have followed a traditional path. And so they've acquired certain skills to get to being a PE investor. Venture, man, there are so many different ways to become a venture capitalist.

31:14Not at all created equal. Like take Carl Alomar, one of our partners, right? He had built and sold two of his own previous companies. Then he took DigitalOcean pre-revenue to a$5 billion IPO. He reminds me today, it's an$18 billion company. But yeah, he's totally right. He's totally unique or not totally unique, but he's on the upper echelon of the type of board member that could help you hyperscale or get into IPO. Quite honestly, he's going to be able to guide someone on towards an IPO maybe better than I have versus I spend a lot of time kind of in the trenches. We always say in venture, there's only two phases.

31:51It's trying to find product market fit and then it's hyperscaling. And so, right, we can spend a ton of time as a founder and as an investor trying to find private market fit. And then at least at M13, right, we have so many operators, since everyone's an operator by background. I know who to call on our team to go, OK, these guys are exploding. Let's bring in our head of talent who scaled DigitalOcean or Carl to talk to this company, which he did. We have a company in our portfolio that will remain nameless that in less than five years is getting wants to be IPO ready. Sure, I could opine on that.

32:27But instead I said, actually, let me just go grab Carl. Here's a guy that actually got a company ready for an IPO. Touching on that a little bit, because what I've seen from you guys and from you in particular is when you don't know something, you don't pretend you know to just to pontificate and try to add value, say, look, it's not really my arena, but let me connect you with Carl or Latif for anybody on the team that might have a different purview that could actually be helpful. And I always say for a lot of VCs, like 90 % of the job is do no harm. And then the other 10 % is like, where can you actually accelerate things?

33:04And so on the 10 % acceleration, it also requires you to hire the right people, right? So you think about Carl, you think about Sarah, some of the folks that you've brought on. What are you looking for to ensure that there's consistency of that do no harm and that you are the type of firm that you sought out to build because it's not just you and Courtney anymore. Yeah. Yeah. I think it's just fundamentally different. Again, if you go back to earlier in the conversation, I said, we set out to create an institutionalized platform. We didn't design, set out to raise funds. And so again, we are company builders.

33:37I said, I think of myself as an operator first and an investor second. And so for us, it all starts from the way you, I always say the difference between good and great people is great people do consistently what good people do sometimes. And so for us, we obsess about our technology stack. We obsess about our culture. We obsess about our processes. We obsess about our agentic AI. And I think that's the key because that means consistency. and that consistency, I think, is the reason, you know, in the recent Dow Jones ratings, we were the third highest performing venture firm of the last decade in North America based on performance data, is that like we obsess about just trying to do the right things over a long enough period of time.

34:25The thing that I talk about all the time is like Vegas. If you're going to go to Vegas and you want to play blackjack, if you have the best odds of winning, go to the gift shop, buy the little laminated card and sit for as long as you can at the blackjack table and just follow those odds. Yeah, we've all been at Vegas and somebody will say they'll hit the dealer was showing six, but they'll end up with 21 and they say, gosh, I knew I shouldn't double down. And that's the answer. The answer is you absolutely should have doubled down, right? That was an outlier circumstance. So what we always think about at the firm is let's separate the decision-making from the outcome because sometimes you're going to have outlier outcomes to the positive, right?

35:05We invested in SpaceX at$15 billion at a fund one. That IPO price was an outlier outcome to the positive, but that's what you get when you invest in great companies that are market leaders from visionary founders. And sometimes I talk about investments that we've written down to zero and I said, it was the right decision. It was the right investment. This happened and this should not have happened and it was an outlier. And so for me, it just starts with that consistency. And again, it's building a culture and a platform no different than if you're the LA Dodgers, right, you have certain ways that you go about playing your game on the baseball field.

35:41And that leads to better outcomes over a longer period of time. Well, it's great that you bring up that because it actually reminds me of and you probably I don't know if you've read the book or seen the movie, but Annie Duke, who's a World Series of poker player. And she actually talks about separating outcomes for decision making and focusing on process. How do you, what is that retrospective that you do? To be able to distinguish between, was it lucky or was it the right process that can lead to consistent returns and more outliers? And these things are interconnected. It's not like everything is 100 % luck or 100 % skill.

36:16It's usually some combination of that. Yeah. Yeah, one thing we talk about at the firm is one of our 10 principles is kind of be brutally honest in the short term and hopelessly optimistic in the long term. It's kind of similar to my telescope and my microscope. So we do retrospectives on anything and any investments that don't go right. I'm thinking about raising the bar the other day. We did a retrospective on a$2 million check. And I was like, gosh, we're going to do a lot of retrospectives because game venture is a game of outliers and out of a$400 million early stage fund. But I love the team on a very modest size check, which will a lot of times not be successful, did that.

36:54And we just, we do exactly the same as that. We just separate out the two. And conversely, when things go well, we say, yeah, we got lucky there. Better to be lucky than good. I always say chance favors the prepared. Or one of the things we say at the firm all the time is the harder we work, we find the luckier we get. But I think that's exactly right. We obsess about the decision making. And then, I mean, Samir, I think you probably thought when I walked into your office eight years ago and said I was going to build this differentiated venture firm with former operators with a focus on hands-on execution, you probably thought I had a lot of puff-free or type of thing.

37:32But I tell the team is you just got to wake up every day and execute. And whether it's my job or whether it's the founder job, if you just execute well enough over a longer period of time, again, that's the blackjack analogy, the right outcomes will follow. Along the way, there will be outliers, but the odds don't lie, right? And so that blackjack analogy, that was an outlier. You keep just sticking to it, but you kind of got to respect the process, right? Because you go, oh, we got lucky there, or that should not have happened, but you go, just keep doing the right things, keep doing the right things.

38:06And so it's a belief that the right outcomes will follow. Yeah. And you develop your own rubric of what that right process and how do you foster that right process through the right people, decision-making, framework structures, all the things that allow you to get into luck more often. And when luck hits, it's really a lot of luck versus a very small outcome. And that is where kind of the skill comes in, which over long periods of time, skill does kind of shine through. When you think about, you mentioned eight years ago, and obviously we're now in a very different time where AI is everywhere, the amount of capital going into companies, funds is at an all-time high.

38:43If you and I talked eight years ago and we said, okay, there's going to be three companies in the private markets valued over a trillion dollars within seven, eight years, we'd have been like, that's crazy, right? Like now there's two for sure. One was SpaceX, which just went public anthropic, close to that and open AI, very close to that too. What is the game on the field today? Yeah. So it's so funny, right? Because I heard you kind of tee it up earlier in the conversation. you said, it's so different. Everyone's flocking to a handful of compounders, right? Open ANI, Anthropic, things like that.

39:16But what's so different about that? Because eight years ago, we would have talked about Airbnb, Uber, Pinterest. It always happens, right? Again, all I think is different is the outcomes will be bigger and they will be there faster, right? Yes. And so last cycle's$1 billion company will probably be a$3 to$5 billion company in success. And Uber was$100 billion company or Airbnb in the last cycle. And this cycle's version is a trillion dollar company. And it happened faster and bigger, right? So I am of the opinion that we've seen this before. It's just more magnified, Shorter timeframes, bigger magnification, right?

40:02We went from running like a Indy 500 card to an F1 card. Very tight calibration. A few seconds is the difference between winning and losing type of thing. And so I remind my team of that because I don't think different roles apply. I think for us, we focus on three things at M13. We say discipline, right? Everyone loves a frothy market like this, but these are the hardest markets to deploy in, right? It's actually a lot easier to deploy closer to the bottom of the market than the top of the market because you make your money when you buy, not when you sell, and therefore you have a larger margin of error.

40:38So we got to be disciplined. Two, we have to obsess about the value layer. So take what Travis is doing at Adams. He's doing food, transportation, and mining. Now, food and transportation make so much sense. He has 100 ,000 hours in the space, and they're interconnected. If he wants to bring down the price of food delivery to just slightly more than a home-cooked meal, he has to get everything right from how the food is cooked and automation to how it's delivered to et cetera. But why mining? Mining is because he wants to get exposure to AI. He wants to get exposure to chips. So he's choosing a value layer that is mining because of that, right?

41:20And And so, again, the skill of a VC in this market is not to know that AI will change the world. My housekeeper today told me the same thing. She knows that. Everyone knows that, right? The value is where do you get that value layer? Where's the best risk and probability adjusted value layer to kind of invest behind? So take one of our fun two companies for M13, just exited for just shy of a billion dollars in less than five years. And it was a 21-year-old kid who was using AI and technology to disrupt 911 call centers. Not a totally obvious play, except totally obvious if you think about it, because 911 call centers were designed to work with analog phones.

42:02And do you have a home phone anymore? So yeah, totally obvious to me. Not obvious to everyone else, but the positive of that is he had very little competition. He just had to execute. He wasn't fighting off competitors every single day. Or Polymorphic is a company we have that general catalysts led around behind us. It's a fantastic founder who's using AI and technology to disrupt local municipalities. Everyone's going after big government. He goes, you know how many towns there are in this country that still use pen and paper, and I can get them to pay me four cents per resident? Let me do some quick math for you how quickly that adds up.

42:42And we saw it, and general catalysts saw it. And so I think there are a lot of, to me, similarities to every past cycle. Today's Anthropic and OpenAI are last cycles, Uber and Airbnb. And so, but I think the other thing is, what's different about this cycle is in the last cycle, you had innovators competing with innovators, right? So it was Travis versus John Zimmer, Evan versus Huck. In this market, I think you have innovators competing with innovators who are also competing with the most well-funded startups we've ever seen in our lifetime, Anthropic and ChatGPT, who are also competing with the 10 largest tech companies on the planet, who I would argue for the first innovation cycle I can remember in my lifetime have the unfair advantage, right?

43:31Google has the talent. They have the capital. They have the data and things like that. And so what I keep telling the team is they'll say, man, that company, we should have done it. It's raised some frothy round. And I just remind our team, we are in the very early innings, maybe the second inning. I don't even think the third inning. And I'm convinced as quickly as some of these companies rise, they will fall because it is going to be a battle for the ages in terms of where the competition's coming from and things like that. Yeah. And I think because we're so early, we're still trying to figure out exactly where the value capture long-term will happen, what remains durable versus not.

44:08And it's too hard to know, but yet a lot of companies, particularly that are AI's hyper-growth companies, they're getting valuations very quickly. Rounds are happening again, like 2021, or it feels like three to six months, elapses and a doubling of valuation, sometimes even more. Now there's more progress happening between those two sort of rounds than it did in 2021, given we've seen revenues go from like 10 million to 100 or 100 to 600 million. Now, again, margins still are under question and what this looks like in the future. But when you think about where you play and firms like yourself, where you're running firm funds that are about 350 to 450 in that kind of frame, you look at the big platforms out there, you named one in general catalyst, and they're raising fund sizes whereby at the end of the day, the Series A is an option check to be able to pile a lot more money into those companies at that Series C, Series D, Series E, where even someone like Andreessen, we talked about Adams, they put a billion dollars into that.

45:10That's not a token check. That is a massive check to a degree we've never seen before. Where do firms that are right in the middle, not quite small like a seed stage, which might write a million dollar check, not quite the hyperscaler sort of firm where that 30 million at 400 million, who cares? Because if it works, I'm going to put several hundred million in. What is the game for you right now? And how has that changed over the last few years? Yeah. I mean, I think I always say in TE, I think there's three, four, five flavors of PE. You have the big names, you have mid-market, but it's relatively the same game.

45:48I always tell people venture is like 31 flavors or Baskin Robbins, where everyone has to play the game that the product that they have suggests they play. So when someone says to me, oh, you can never miss, I go, no, that's the multi-stage guys. And like you said, they can never miss. They can never miss an opportunity for a company that can carry hundreds or billions of dollars of capital to the promised land. And that's because people on this phone call or listening to this podcast gave them money, and they have so much money to deploy, they need those vessels, right? And so like you said, when they come down and compete with us at Series A, they're not thinking about like for us, at a$400 million early stage fund five, we obsess about alpha, right?

46:34And so we have a bar of certain return thresholds we think we have to beat. We have to believe that any core check, the base case can return half the fund, right? Which is very different. And so versus the big multi-stage guys, they're just a market index at this point, right? They are a market index for innovation. And conversely, some emerging managers, some hundred million, they're playing a totally different game as well. So the game that we play in this market is we rank 30 checks a fund. We always say when you're constructing a portfolio, you have to respect diversification first and power loss second.

47:11So you need enough shots on roll. Then you got to find five to seven companies and you have to have conviction and plow as much capital into them, right? So when you look at our fund one that was marked above 35X, our largest check we wrote out of that pool of capital is marked at 600X. And our third largest check, which was SpaceX, where we hit over 150X was our third largest check. We're very proud of that because not only did we pick great companies, but we had the conviction to go after them and size the check appropriately. So when we think about what we need to do in this market, we got to write 30 good checks per fund to find five or seven outliers.

47:51We then need to try to get signals a little faster than the market and buy up as much ownership as we can. In this market, one point of a company will be a lot of proceeds, right? Because we just talked about the companies getting bigger. And we need to find companies that are$5 to$10 billion and they can return the fund one or two times over. Now, I've seen some great Twitter action about the rise of the trillion dollar company. I love that. That was propagated by some very large multi-stage guys that need trillion dollar companies because mathematically, that's the only way they can have venture returns, right?

48:28That's not the game we play. And I always tell people, there is a risk. Like we all want to take enough risk. We all want to find outliers. Again, I believe we have taken enough risk to be in the Cedar Series A of 18 unicorns mean we have taken the right shots on goal and the right amount of risk. But there is a danger of taking too much risk, right? Think about Sammy Sosa and Mark McGuire. Let's keep going with the baseball. So I'm not going to assume everyone's a baseball fan, but they both set the record for the most home runs. But Sammy Sosa, who played on my beloved Chicago Cubs because I grew up in Illinois in a town of 800 people, he would either hit a home run or strikeout, right?

49:04So when you actually look at his wins above replacement, it wasn't actually that great as a baseball player, right? Because he would either hit a home run or zero. Mark McGuire, on the other hand, would hit a lot of home runs, but he would also eke out a lot of doubles and triples, right? And so you got to think about it when you're playing in a portfolio, like I wouldn't argue, if you think about my check and allocate, I made the point that I thought you could build a$10 billion company, but I made the point that risk adjusted, I think it had asymmetry to the upside because the business model and success compounds and has a long term.

49:40That is very different risk reward than if I were to back a founder trying to cure cancer. That person might cure cancer, or it might be a zero, but much more binary. So there's no way you can tell me my investment at the Series A and Allocate had the same risk as potentially backing someone to cure cancer. And that's where I think, again, VCs just go, everything's risky. And I go, man, that is just not true. There are spectrums of risk. There are spectrums of probability adjusted outcomes. My job is to think about our portfolio, get the right mix of exposures, right? And then obsess about that.

50:19And so it's different in this market, but it's honestly totally the same. We've invested through cycles. Yeah, the more things change, the more they stay the same. And look, I mean, this whole concept of this time is different. Sure, fundamentally, things are different because the world is different right now. But some of the behavior signals that happen where supply and demand get imbalanced, people are frothy, deployment starts crazily, like it usually doesn't end well for a lot of people. But there are, there's the other side, which every single year, since the beginning of time, there's always been companies of significance that have started every single year.

50:55Now they just happen to be bigger. And the issue is when the capital gets too far ahead of that, that's when it becomes tough from an economic return standpoint. I got asked this question, and maybe this is a good place to end. Someone asked me, are you excited or are you anxious right now? And I said, look, I'm both really. I'm incredibly excited. I think AI is going to be the biggest transformational agent we've seen probably since the railroads in terms of how it affects pretty much every industry in the entire world or lives, things like that. But I am anxious about what I'm seeing this game on the field and some of the lack of discipline, the behavior, the arrogance, the hubris.

51:34And it doesn't feel right for someone like me who's been in venture and I've seen this game play out. What are you most excited about and what are you most anxious about right now? I'm excited mostly because I think we've done a very good job of being disciplined in this cycle. It's been hard. But when I reflect back, same thing. Look, we all had to do that same exercise in end of 2021. You're looking back at your portfolio. You go, oh, I wish I could get those two back. But it needs to be one or two, not like, whoa. I won't name names, but I can name some very big name funds that you look at them today.

52:09You go, man, you just lost your discipline in that froth. And you just, when the tide went back in, whatever the expression is, something about having your pants down. So I'm excited when you hit it right in this market. Like we have a company we don't talk about, but it will do over a billion dollars in trailing revenue, 10 % EBITDA margin in its third year. That just wasn't possible. So your wins will be rewarded more handsely. And then I'm anxious about worry about being too greedy in this market. Like we as a venture firm. We have about 30, 35 large institutional investors. I always tell them, I will always sell too early.

52:47If that's something you're not interested, don't invest with me, right? We have 60 exits over the last five years. For every dollar we've deployed, we've returned 60 cents on the dollar. I will always lock in profits too early and return them to my LPs because I live rent-free with the Warren Buffett expression, which is the richest guy I know always sold too early. So I think that's what would make me anxious for a lot of these frothy names is do not be too greedy because what goes up, my experience tells me they might just come down. Yeah. Well, the two emotional states that kind of guide investment behavior and decision-making is fear and greed, right?

53:25And unfortunately, too many investors basically ping pong between the extremes. And during times where things are really nervous, like they do nothing because extreme fear. And during times like this, it's basically deploying at a pace and they shouldn't be deploying. And this actually goes on the LP side too. So I have a lot of friends who were LPs for invention for the very first time. And you look at their portfolio and you're like, you did a million in 2019, a million in 2020, 8 million in 2002. And then nothing in 22, 23 and 24. Of course, that never works when it comes to like venture investing.

54:01But I think it's just something all of us have to kind of guide to. And this has been a fun conversation. Congrats on everything you've built since the first day you walked into my old First Republic office in 2017. It's been a great ride and really excited about you guys continuing to build and all the help you've given us. Perfect. And Samir, I want to put you on the spot on this podcast. You can commit to building a deck of corners. Is that where we're going with Alicante? I think so. I the mission and ambition is. So let's do it. All right. Thanks for having me. Thanks for listening to another episode of Venture Unlocked.

54:36I hope you really enjoyed this conversation with Carter. If you'd like to get Venture Unlocked content straight to your inbox, go to VentureUnlocked.substack.com and sign up or head over to Apple Podcasts or Spotify and subscribe. Thanks again for listening.

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