0:00
So, Bill, this uh this marks you retaking The Crown as the most frequent Invest Like the Best guest, beating our good friend Michael Moeson out for The Crown. Welcome back.
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Well, I can't I can't think of anyone I'd rather be neck and neck with uh on the entire planet.
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And this is also interesting that this is the first one that you and I have done just the two of us since 2019, if you can believe that. So, time time flies.
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Um, since it's just us, I I would love to go very broad and start the conversation by just talking about the state of things as you see them.
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I know this is something you used to do in in your benchmark days was sort of give like a state of the union markets edition.
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I would love for you to do that for us as we enter summer of 2025 with everything that you're seeing out there in the world. I'm excited to do it.
0:47
Yeah, I used to kick off our LP meeting with a state of VC.
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with a state of VC. Um, so it's a it's a it's a process and a presentation I'm used to giving and I've been noticing a lot of things recently that are different in the world and maybe permanently different about the venture capital world and a lot of the talks
1:07
that I would give um were based on what appeared to be inherent cyclicality in in the venture business and that has been kind of upset or kicked over or a little chaotic recently which we'll get into um I offer I offer two qualifications as we dive into this. Um
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Um the first would be you know I'm and Michael would appreciate this.
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I'm I'm a huge fan of system level thinking.
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There's a there's a book out there on on how to think in systems that's pretty cool.
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And all my Michael and I's time at the Santa Fe Institute is basically tied to the theory that systems behave differently than their individual components.
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and seeing across systems is it's not easy.
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It's a difficult thing to do.
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But as we dive in, I think a lot of the components of the industry are kind of bouncing into one another.
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And it's the the aggregate effect of all those things that's that's super interesting.
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And so you have to kind of step back and look at it from far away.
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And then I I I also want to qualify up front that I offer no judgment on any of their participants.
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like there are there are there there are people and firms taking action that change the state of the field and I think they're all acting reasonably and in their best interest.
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The the aggreate effect may not be positive for the world but I don't I don't I'm not ascribing mal intent or anything to anybody and I want to clarify that upfront.
2:42
So if you'll allow me I'll I'll I'll start to dive in.
2:45
I want to walk through a handful of market realities as I see them.
2:52
So in in in the first part, I don't really want to think too much about analysis, but just highlight a bunch of thing that if you're in the VC market, and by the way, you know, I think what we're going to talk about is important to VCs, it's important to founders, it's important to LPs, anyone that touches the ecosystem.
3:11
This is super high level stuff.
3:12
So let me walk through the realities and then you and I can chat back and forth about some of the interpretations of those.
3:19
So the first thing I would just bring up which people have talked about so I'm I'm I'm just putting it on the table as one of the key variables not trying to overanalyze it which is the continued rise of the mega VC fund.
3:31
When I first started you know everything was bespoke.
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Most most of the well-branded funds were focused on early stage.
3:39
Um they didn't participate in late stage.
3:41
Um and the funds were modest compared to today.
3:44
funds were modest compared to today. Um today many of the branded firms I think have moved from maybe 500 million commitment every three or four years to five billion you know so so 10x and they're they're participating in very
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actively in what we would call late stage although I I've always thought late stage was a euphemism for big check you know because you there there are people willing to put 300 million in an AI company that's 12 months old right so that's not late stage, it's just big check. But so
4:16
But so there's a there's a whole bunch of firms that have moved up market and then they've also created um different industry specific funds and things like that all leading to much more capital under management from many of the brands.
4:32
And then there's a ton of parties that have you know entered the latestage market with different approaches and some of those have always been there.
4:39
Jeremy, Fidelity and and Capital Group have always done a deal or two every once in a while, but I think you know Treaties, CO2, Altimeter, Thrive, who I think is is really doing some interesting and differentiated things in the market.
4:54
They're all super active and and then oh yeah, Masa is back, right?
4:58
Like we hadn't heard from him in a few years, but he's he's back in out there in the market as well.
5:04
He's like an indicator all his own. Yeah. Yeah, I agree with that.
5:08
So, there's a lot more money there's a lot more money out there.
5:13
Um, the second reality that that people talk about that but it's it's kind of staggering.
5:19
I think the phrase that's used most I don't love is zombie unicorn.
5:23
So if you look at the number of companies that were I always like to think pre-LM and post LLM because it really is kind of a dividing moment as everyone's gotten excited about this new platform shift.
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Um there's somewhere around a thousand.
5:41
So these are a thousand private companies that have raised money over a billion dollars and some have it.
5:48
Chat GBT told me it was 1250. NBCA says 900.
5:50
Let's just say it's near justice a thousand. Yeah. Yeah.
5:54
Um it s it seems like they've ra raised somewhere between two and 300 million each, you know, and so you you roll all that up, it's 300 billion.
6:05
Um NVCA estimates that it's $3 trillion of assets on the books of the LPs.
6:12
Um and I I I did I did some one-on-one calls with LPS.
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you know, they've slowly increased their participation in venture from anywhere from like five to 7% up to 10 to 15.
6:30
Um, and then it can it can it can be as big as half of their private equity commitment.
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So VC alongside private equity, some have private equity a lot bigger, but it's gotten bigger and bigger on their balance sheet.
6:44
So it's important um there's there's I think a lot of questions about this group of companies.
6:54
One is what's what's their correct value?
6:57
You know a lot of the marks for their last round was set back in 2021 21 or something. Yeah. Yeah.
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which is when you had a real kind of market peak that kind of second year of COVID.
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If you remember, all the tech stocks blew up and Zoom blew up at that moment and kind of everyone did really well in that window.
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Um so, so there's a question as to what they're worth.
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Um the the the investment world doesn't seem excited about this group of companies just kind of writ large.
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um they don't have super high growth rates and I want to talk about why I think that is um and the thing that most people may not believe but I guarantee you is true no one has an incentive to get the marks right and so for those that that don't know this world you know private investing both on the PE side and the VC side is this weird world where the the the GPS the people responsible for the investments report the price to the LPs. They get to pick it.
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Now, there's auditors in the background messing around and and you'll hear frustrated LPS because some firms will be conservative and price them low and some high.
8:15
So, they get mixed signals from different people, different prices on the same asset from different GPS, right? Yeah.
8:20
But but the thing people may not realize is the managers of the VC group at the large endowments have no incentive to try and rightsize this number.
8:32
In fact, many of them are bonused on paper marks and so if anything they have the reverse incentive to get them right.
8:38
Don't the founders have the incentive to get these things right though?
8:43
Is isn't it ultimately better for long-term company building that you not operate in some farcical way? It's a great question.
8:50
I I think there's two things that fight against that.
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One, every founder I know has multiplied their percentage ownership times whatever the highest price their company was ever valued at and thought about that number as their net worth.
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Like it's I I don't think it's right. But who cares?
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I mean, it doesn't doesn't mean anything.
9:11
I don't once again like I I say that without judgment.
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I think it's natural like you know that you would do that.
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But then taking that number down by 70% or whatever is tough to do.
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And then the the the other the other issue is um quite frankly the lick preference.
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And so this is another technicality.
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So I'll explain it for the listeners but the amount of money you raise in aggregate just the the the raw number becomes your lick preference.
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And in M&A account in M&A outcomes, the investor can choose to take the lick preference and not convert to common so they can get their money back.
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And so if a company's raised $300 million and they're worth2 billion, um lick prep doesn't matter that much.
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If the valuation is now 400 million, then the lick prep could take 75% of the company in a sale.
10:09
And that's a real, you know, that's a real issue out there for people.
10:16
If we go back to the the list of thousand uh zombie unicorns, as you drill into that universe, how often do you find companies that are profitable and therefore like this problem can just go on forever like until they choose to take another mark versus those that are going to die at some point that would require they raise and reset the price?
10:37
Well, I have to admit I haven't done like a statistically significant survey.
10:42
Um, which might be interesting for someone to do and and and maybe there's someone at a fund of funds or someone at um Pitchbook or someone at Carter that that might be able to come up with that.
10:54
I'll tell you it's a leadin to to what I think happened.
10:57
So, we were in the middle of a very long zero interest rate period, which I think the acronym ZERP is used now for that window.
11:05
And that was unprecedented in a hundred years.
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Like zero interest rates for what was it?
11:13
Ended up being five, six, seven years, something like that. Yeah, long time. Long time.
11:16
One, it postponed any VC correction, but it just created a ton of of money and speculation.
11:21
Um, and a funny aside, I got invited I've only been to I've only been to to see Mr.
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Buffett once in my entire life and it was a group of 20 people and it was tied to a fundraiser but we got we got one question each and I said to Warren I said I said you know your DCF doesn't work if the entry rates are zero said I said all it does is create a lot of speculation and he said you betcha as you would expect.
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So that was it brush with greatness.
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But anyway, um there was a lot of speculation that amount of money that I mentioned 275 anywhere 200 to 300 unprecedented prior to that window that companies would raise that much money.
12:08
And when they raise that much money, a couple things happen.
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I think you end up with too many participants in a single field where you would have had whittling earlier.
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Um, and so you end up so that that makes market expansion more difficult because there's three to five survivors instead of one or two.
12:23
Um, when you overfund, you do everything.
12:28
You know, there's tons of great articles and research about constraints lead to creativity and you're better off like choosing, you know, one or two primary product initiatives.
12:39
But when you have that much money, you do seven. You do them all.
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And I think we had a mini correction in like 2022 23 and this was before AI blew up and most of them ran towards break even to your exact point and I so when you run to break even you stop doing those seven things you go down to the two things but those seven things and overfunding your sales force they led to revenue is not very sustainable revenue and so when you cut it back and go towards break even your growth rate gets hit.
13:14
It would just be natural.
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And so, um, yeah, that's what I think led to low growth.
13:20
Um, I do think what you said is true.
13:22
Many of them had enough capital to get towards break even or near it.
13:27
And and you would think that'd be a positive.
13:30
And based on all my previous talking about the the wonderful nature of traditional company building, of course, I'm supportive of that.
13:40
But there is an underlying reality and they could perhaps exist forever which I think leads to the zombie tag. Yeah.
13:50
What what uh what's the so what of it all?
13:51
So no one has the incentive to take the marks.
13:58
So isn't it just going to stay this way?
14:00
Like let's come back to that. I let me move on.
14:03
I want to get these market realities out there and then we'll we'll dive into what's possible.
14:08
So the the let me see the the next one's IP you know like exits like where these things are going to actually you know price in a real way. Yeah.
14:18
So we got mega funds zombie unicorns and then the capital markets.
14:24
So for reasons that aren't I think well articulated well well understood both the IPO and M&A markets have stalled um over the past couple of years.
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2021 was actually pretty good um on both fronts.
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Um but things have stalled.
14:40
Um I think it's really important if you look at last year 2024 the NASDAQ was up 30%.
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And the window was closed or that seems to be the general belief of everyone out there.
14:53
Never in my history of paying attention to the capital markets or being in venture capital do you have a successful NASDAQ market and a closed and no IPOs. Yeah. Yeah. It makes no sense.
15:03
Yeah. Yeah. It makes no sense. those that was what was correlated and so something else is happening you know um I I I believe you know a part of it which you know I've been very passionate about is the IPO discount that the banks you know force upon the market especially the well-known high branded
15:22
ones um but other people point to the cost of going public too high other people cost of the point to the cost of being public too high and then of course we know money's everywhere And so we'll come back to this in the second part, but people don't have to go public or at least the very successful companies don't have to go public. Um M&A is a bit
15:41
Um M&A is a bit harder to unpack.
15:44
Everyone blamed it on Lena Khan, but but she's gone and it's not M&A.
15:48
We didn't have record M&A in the first five months of the year.
15:52
Um it's likely mag seven related.
15:55
you know that those seven companies are sitting on an ungodly amount of cash and in any natural universe universe that would lead to massive uh M&A and I'm sure they would love to use it for that.
16:11
Yeah, I think they buy back stock for because they can't.
16:15
Um but Washington's not excited about it.
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The EU is really not excited about them being active and and it it it's kind of a stuck situation.
16:27
People don't want to enter into an M&A agreement with a low certainty of close.
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And even the Whiz deal, which is the big outlier this year, um the minute they announced it, they said it would take over a year to close.
16:39
Um and that's that's very difficult for a board and a management team to take on.
16:46
Um waiting a year, it's just it's hard.
16:50
Do do you think we'll see a$1 trillion private company soon?
17:01
Um, isn't how far is how far is SpaceX from being there already?
17:04
It's a third of the way there.
17:06
Uh, opening eyes a third of the way there.
17:08
Stripes a tenth of the way there.
17:09
You know, there's a the good handful that if they keep their success trains going, like they they will get there.
17:16
And I'm trying to make the point about, you know, the need to go public is if you can be a trillion dollar private company.
17:22
I mean, it seems kind of kind of crazy.
17:23
We will get we will get to that.
17:27
And then the last thing that could be hurting M&A is just the um the overpricing like we continue to fund the we did we did in 2021 and we continue today to fund the most exciting companies to perfection.
17:43
And that that can have an impact on M&A as well.
17:46
can have an impact on M&A as well. Maybe maybe say one more click about the why behind that can why why that can keep happening in your estimation like it it is it just because the feedback loop is the first I think it was I think it was zer I think it was zer in in up until
18:03
that point I think post LLM the world believes and and I think this is my fifth point or something but the world believes AI is the biggest platform shift in anyone's lifetime and and so if you believe that you know and Then the other thing I I I do, you know, I go back to when Mobes and I were were back at at First Boston 30 something years ago. The notions of network effects and
18:26
The notions of network effects and compounding effects weren't well understood or recognized or believed.
18:31
I think that's a wholesale belief right now.
18:36
And so, you know, people that have watched Google or Meta, you know, go from looking expensive at 12 billion to three trillion like like they if they assume something might be that they can't overpay in their mind.
18:51
Um, which I think is rational for the independent player.
18:57
If everyone does it, you know, the market's starting to to price it in, but but we'll see. So, that that's it.
19:07
Um, the next big thing we're talking about is many LPS, not all LPs, but many LPS have a liquidity problem.
19:14
And that's a new reality.
19:16
It's tied to the lack of IPOs and the lack of M&A.
19:19
Um, it's also, you know, it's also fairly new and unique.
19:26
So, in the f I found this stat in the first quarter of 2025, US colleges and universities issued 12 billion of debt, which was the third highest quarter ever.
19:38
And so that that's an interesting reality if you're using debt to fund capital commitments because your endowment doesn't have the liquidity it needs to pay out the three or 5% or whatever it is that they always had traditionally paid out.
19:53
And then very recently, you probably saw this Harvard, you know, announced they're in the market selling secondary for a billion.
20:02
They have a lot of unique things that would make them be out there.
20:04
But even more interesting, Yale has announced that they're in the market looking to sell $6 billion dollar of private equity.
20:15
The fact that Yale is the one doing it is super important and super interesting from a historical perspective.
20:21
Um, I would argue no single institution's had a bigger impact of this on the strategy of endowment management than Yale. David.
20:32
Yeah, David Swinson is the historic the godfather of this model. No doubt.
20:38
And so, um, the, you know, Yale, I think they say, had a 13% compounding return over 35 years under David Swinson.
20:48
He is known for the Yale model.
20:51
And the Yale model is put a lot more money in illquid assets than than than liquid assets.
20:57
And the reason no one did that originally is there's a lack of transparency, there's a lack of liquidity, they're hard to manage, all this stuff.
21:06
Um, but he did it and it worked.
21:09
I would suggest that what we might be seeing is the exact result of everyone copying the Yale model.
21:17
You know, Howard Marks famously said, "You make a lot of money when you do something non-conensus and accurate."
21:25
But what if everyone copies David Swinson?
21:27
What if everyone goes to 50% of liquid? Will it still work?
21:30
I think that's a provocative question.
21:33
Um, but I think that's what happened for sure.
21:36
And the fact that Yale, which led us into this strategy, is trying to get out I find super interesting.
21:47
If you think about the if you think about these LP liquidity issues, is it the thing that ultimately breaks up this big log jam that you described? Could be.
21:56
And and we'll get we I'm going to if I can get past these realities, we're going to answer. Sorry.
22:01
The AI wave came at a really interesting time.
22:03
This is this is my my fifth point, I think, out of six realities.
22:08
Um we were headed to this mini correction.
22:12
And if you you I you have to remember Patrick, people were tightening their belt.
22:16
These companies were laying people off.
22:18
They were trying to get to break even.
22:20
There was worried about them being able to raise money.
22:24
And I would argue over the past, you know, 30 years that I have a window into VC, the corrections were healthy.
22:32
Like every time the VC community got out over its skis, there'd be a correction and things would settle back down.
22:39
I would watch, you know, I would watch Morgan and Goldman open offices on San Hill Road and then close offices and go away and, you know, Fortune and Forbes pay attention to Silicon Valley and then go away.
22:51
And I saw that multiple times.
22:53
Um, you never had a full correction here because AI came along and everyone got so excited.
23:01
And I'm not saying they shouldn't be excited.
23:03
Like if it is the biggest platform shift in in our lifetime, then you have to get excited about it.
23:09
It has implications for the zombie unicorn group and everything else if if it if that's true.
23:16
But we've all of a sudden seen massive amount of interest in investing.
23:21
We're seeing companies, you know, the AI companies, what do you think their what are their valuations like relative to revenue? What? Oh my god.
23:29
god. 10 10x 20x a a normal company is that yeah something like that or or in some cases more right um and despite the fact that the traditional LPS are kind of tapped they were able to go find money elsewhere um the the Middle East
23:47
is the area where most of that money was coming from and you know over the past 12 months how many times has a friend of yours been in the Middle East like a lot and they're talking to to fundraisers and So, they were able to find the money. Um, the money has come in. Um,
24:00
Um, the money has come in.
24:00
Um, and people, you know, are out there spending it against this opportunity.
24:09
It's something no one wants to miss and it's just an important component of everything that's going on here.
24:14
Um the last thing I I I wanted to talk about um what you already hinted at is there's a new motion in the latestage market and and I think Josh and the team at Thrive have have been leading.
24:29
They're not the only one, but they've been leading the way here where you go at companies that were already on the list to go public that the journal was talking about.
24:41
they're going to go public next year and you present them with an offer that I don't know if you want to call it too good to refuse but something of that nature, you know, and founder liquidity encourages employee liquidity.
24:52
It might encourage angel liquidity.
24:54
Um, and you basically encourage the company to stay private and we've seen that now a couple times.
25:04
Um, you know, more most recently like data bricks, right?
25:08
Um, but Stripe and Patrick and John have gone on different podcasts and talks about I mean at one point it said like at one point it felt like they were saying yeah we we we might go public but not now.
25:22
More recently it sounds like what you said we might never go public and some of the LPs that I talked to this is fairly unusual.
25:29
um they've traded in and out of Stripe, you know, and and the company's somewhat comfortable with it.
25:37
And that's very new and unique in our world.
25:40
Um yeah, I think I think the ability to for those companies to get the capital they need either primary or for their employees to sell some of their stock or for LP, you know, early investors to sell the later investors.
25:53
It functions like a by appointment public market or something like that. Correct.
25:56
more like the old pink sheets kind of trade by. Yeah.
25:59
And if if you're if you're running one of these great, you know, Stripes undoubtedly a great company run by incredible founders. Yeah.
26:06
Why take on the additional burden of extra work and scrutiny and data disclosure and, you know, show your competitors what you're doing and all this kind of stuff.
26:14
If functionally you have your own captive private market, it it make it seems to make sense for everyone involved, which is why I wonder if it might just keep going. Well, it might.
26:25
and and uh if LPS can, you know, can create liquidity by selling some of their Stripe without a problem, then they don't care either.
26:32
It doesn't even it doesn't even come up against the liquidity problem.
26:35
We're about to dive into all that.
26:37
I I want to mention one thing that I think is fairly interesting and intuitive once you hear it.
26:45
Um but those investors that are encouraging that behavior, I think there's another element that's going on here.
26:54
If you think about a traditional IPO, the thing I hate maybe more than anything, as you already know, um the bank's gonna be very uh deliberate on their allocations, right?
27:07
So, if a company were going public, a I don't want to pick on any let's just say large uh public investor and private investor, you know, firm X, you know, puts in for an allocation.
27:23
What do they typ they you know they they overs subscribe by 100x hoping and they may get one or two percent right of the offering like they're not going to get 30%. Right.
27:32
And when these um firms go to a company like data bricks or or stripe or whoever and encourage this round they can get 30%. Right.
27:47
And so they can get a bigger ownership percentage than they would get through a traditional IPO process.
27:52
And and in fact, you know, they share a lot of these deals.
27:57
So kind of an oligopic, you know, opportunity to hoard I use that word provocatively to hoard the public IPO growth years and take it away from the public markets.
28:09
So we all know Amazon went public less than a billion dollars, right?
28:14
and then traded, you know, over a trillion.
28:16
And the public market had access to all those great years of compounding.
28:21
And if you step in and and delay that and get a dec, you know, a decent ownership you wouldn't get otherwise, maybe those firms are better off than they would have been participating in those companies while, you know, while they were public.
28:35
But here's here's here's here's the even the the kind of super important piece that goes on top of that.
28:43
They then turn around to go to the LP community and say companies are no longer going public when they want used to.
28:49
If you want exposure to that growth in these important high-tech companies, you have to invest in me.
28:56
So, we've gotten through your your market realities and now I I would like to poke and prod at all of them.
29:03
Um and and my frame here is the the interesting premise to me is I come from a place of wanting very healthy capital markets.
29:11
The US capital markets are an incredible thing to have happened in world history and have driven so much of innovation.
29:19
So like my perspective is good healthy functioning capital markets that price risk well.
29:22
Um and and so I'm I'm in favor of like whatever whatever does that.
29:27
Um, and I'm curious where you think that the system given these market realities is most broken from that perspective and you hope that it changes.
29:38
Yeah, I mean I I agree with you on the on the wish and I I think that we are way better off if there are more companies.
29:47
You know, one thing I didn't bring up in the realities that I I know you know and most people know is but like the number of total public companies in the US is way down from peak.
29:58
And so there's even there's less companies going public and you know I I think a big part of that is is this IPO process the the brand name banks.
30:06
Um I had my friend Jay Ritter rerun the data is there you know up like 25 26% underpricing.
30:16
You add in the 7% fee and you're like a 33% cost of capital.
30:19
You know, I I know one CEO that was that's on file and talking to their bankers and the banker said, "We think you should price it X."
30:28
And the founder said, "I can raise a billion tomorrow at 20% above that."
30:32
You know, to to your to your point about like why go public if the private markets are this fluid and liquid and and and optimized.
30:40
So, um I don't know what it would take.
30:44
You know, I would I would think DL's DLS with a capital raise are just going to get rid of that piece.
30:49
There's a really interesting um uh post by Hester Pierce that maybe you can put in the show notes.
30:57
It's only like eight pages long.
30:59
She's the longest standing commissioner of the SEC.
31:01
There's only four right now.
31:04
Um and she's the one that's been the most crypto friendly.
31:05
But this post called a creative and cooperative balancing act um argues that maybe blockchain uh is the path to fix the IPO market which is provocative.
31:16
Um but I'm in what sense to tokenize the private assets and let to tokenize tokenize the securities and you I mean no one would go back to doing a a crypto allocation the way an IPO works.
31:31
It would immediately be DL like right. Right. Right.
31:36
Right. and how I mean that's how ICOs already work and so um yeah so that's interesting I'm going to watch it you know M&A is tough the regulatory pressure is so high you know we had those weird pseudo acquisitions in the AI space with the license agreement and the hiring of the people but we haven't
31:56
seen one in a while that was that was kind of a way around it um and and look when you when you price things so high I mean you know You look at some of these AI rounds, you know, I I could see it making sense for Apple maybe to be in the market for something like a Perplexity, but they just raised at 15 billion or whatever. Like, you know, it
32:17
Like, you know, it makes it hard for things to close when when the prices are that high.
32:22
Um, so I don't know on the capital markets.
32:25
It's funny you mentioned that statement.
32:27
I think a lot of people say out loud, we have the best functioning capital markets in the world.
32:33
They're the envy of the entire globe.
32:34
I'm less convinced personally.
32:39
What about what what do you think uh are other interesting pockets?
32:42
You mentioned the Middle East and how um you know, they they have been incredibly front-footed about this entire wave of technology, you know, really like pushing hard to be majorly involved in the most interesting companies and technologies and infrastructure.
32:57
Is there other innovation in capital markets that that you've seen that I mean, I don't know if you'd call it innovation, but the the CO2 had an announcement recently that was different.
33:09
And um and I I I'm just reading I haven't talked to Philippe about it.
33:14
I'm just read I'm mentioning what I read, but I think they took the minimum.
33:19
So, they used to have a $5 million minimum for a commitment.
33:23
They're taking it down to like 25,000 or something, and they're going to work with an investment bank to place it.
33:29
It's a similar reflection of the point I made about how they would pitch their LPs, but but it's tapping into a capital pool which people sometimes refer to as dentist and doctors, you know, that that might not otherwise have access to a manager like CO2 and bringing more capital to bear.
33:49
The same thing I hear is happening in the PE world.
33:52
I think one of the big PE firms is is in Washington begging to let 401ks invest in privates trying to unlock different sources of capital.
34:02
And and and it's it's interesting.
34:05
Someone pushed back on me when I was testing this theories and say, "Oh, but we we can find, you know, the US institutional LPS are tapped.
34:13
We'll find capital elsewhere.
34:15
Look, we're finding it elsewhere."
34:17
But that's just putting more money in the top.
34:19
And I couldn't quite think of the best metaphor, but you have a pipe that has input and output and the output's stuck.
34:28
I guess the human digestive system might be the best way to think about it.
34:34
And just eating more food doesn't help with the constipation problem.
34:37
When when you when you talk to LPS, um obviously you don't have to like name the specific people.
34:45
What what are they saying to you?
34:47
Are there things that they're not saying out loud that they're they're talking about more in private that you think are important?
34:53
I think there's um a heightened awareness of all the market realities that I discussed.
35:01
Um and I think in their place they have to make a decision and and LPs I mean talk about long-term decision making.
35:10
talk about long-term decision making. if you're working in an endowment like you just you don't get much time to make a decision and your feedback cycles are 10 or 15 years so you know it's tough but you have to start thinking about whether these things we're discussing are temporary or permanent and if they're
35:29
permanent you have to change the way you do things so as I mentioned one of one of the LPs I talked to had moved in and out of Stripe knows the person to call that is running capital markets basically at the firm and uh and is starting to consider that it could be permanent and thinking about you know how they need to be positioned for some for a world like that. Um Apollo came
35:54
Um Apollo came out I think maybe today or yesterday with this interesting report that of the firms that have more than hund00 million of revenue 87% now just by count are private.
36:08
Um now obviously if you did that by like market cap it would be more skewed towards public just because of the huge technology companies. Um but pretty crazy.
36:16
I mean even with that minimum of 100 million is a lot of you know a lot of revenue and so we're just living in a world that is a a very private marketsheavy world.
36:26
Um just seems undeniable. Yeah.
36:29
and and and maybe I'll change some of the ordering around here and because I had like five five analysis points, but I think that's a messier world.
36:39
I mean, the comment you made about, you know, the best world would be one with highly functioning capital markets where it's efficient to go public and where things trade in liquid markets and trade daily and you know with low transaction costs.
36:54
I do think that's the better world.
36:56
If we move to a world where, you know, the answer to getting the everyday consumer into high growth tech is to put their, you know, endowments, 401ks, IRA into, you know, these venture funds that are charging two and 20.
37:15
I just think there's more obuscation, less transparency.
37:19
There will be more fraud.
37:21
There will be higher transaction costs.
37:24
It would be the nature of the beast.
37:24
um you know and and and when we use the example of a stripe or whatever that's one company you know and and and we might go up to five companies in the example but we're worried about 1500 companies and they can't all do that they can't all be striped.
37:42
You know, one of the things that you taught me many many years ago is look, you sort of have to play the game on the field and also think about where is the game going and play play for that future reality as well.
37:55
But if we take the sort of game on the field approach of this messier private markets heavy, you know, liquidity reality, I'm curious how what you think it means a couple different groups should do.
38:07
Um starting with founders actually going all the way down to like the entrepreneurs that are actually driving all this value creation um funded by these capital markets.
38:15
What is the logical thing for them to do given the reality especially like in the AI world like if they can raise at 15 billion maybe they should uh and so I'm curious how you would advise them as a group to respect this game on the field and and do the optimal thing for their own success.
38:36
they are forced to play the game on the field.
38:39
And this is I think the worst part of this whole world.
38:43
There's a word that I I found um called a a gavage tube.
38:46
Do you know what a gavage tube is? I do not.
38:49
gavage tube is? I do not. So a gavage tube is what the French use to force feed the geese so that they can create for and what ends up happening in this world because it's the same thing that happened in 2021 is the minute there's a company
39:09
that has any amount of excitement about it whatsoever someone's knocking on the door trying to give them 10020 $300 million and I I think for for founders that have struggled their whole life to raise money, this must sound like the most, you know, ridiculous comment ever, but it's a reality. And I think you know
39:30
And I think you know it, right?
39:32
Like, you know, this is a reality.
39:34
And what that does is it forces everyone to go all or nothing, swing for the fences.
39:43
And I lived it in the Uber Lift situation.
39:45
But we're gonna have that type of capital battle in every category under the sun.
39:51
And you, you know, you mentioned the notion of like traditional company building.
39:57
Traditional company building isn't spend 100 or 150 million a year in cash burn, but all the big AI companies are doing that. Maybe more.
40:06
I think OpenAI said they're going to be 7 billion in a year.
40:11
Um, and that's not, you know, your grandfather's startup business or your grandfather's venture capital.
40:18
That's a radically different world.
40:20
And if you're a founder, you know, you'd like to think the advice is, well, ignore all that and build your company the way you want to build it.
40:29
But if your competitor raises $300 million and is going to 10x the size of their sales force or 50x it, you will be dead before you know it.
40:37
like you won't be around.
40:40
So, you are forced to play the game on the field.
40:42
Um, I guess the good news is the because these c these investors are so eager to throw money at you, you can probably take founder liquidity, I think that's bad for the company's potential long-term success, but because it fits with their strategy, they're all encouraging it.
41:03
Um, and so I guess there'd be no reason not to.
41:07
If someone's going to pay 30x revenue and and and force you to play a game that you're not comfortable playing by burning hundreds of millions a year, you should probably take a little off the table.
41:18
Um I I I think it's bad for the ecosystem that we are going to remove all the small and middle outcomes and just play, you know, grand slam home run ball all day long.
41:32
But it that's what it feels like to me.
41:35
And it feels like we didn't learn anything from the Zer days.
41:37
All of the problems we talked about that created the zombie unicorns.
41:43
We're just rerunning that.
41:45
Like there was that's maybe part of not living through a correction, but like we're funding these AI companies the exact way we funded those companies.
41:55
I I'd love to play with with one piece of this that I think is really important before I get back to asking the game on the field question for GPS and LPS, which is really just to get your take on AI as a new general purpose enabling technology because that is the key difference between now and 2021.
42:11
It it it certainly does I mean we've never seen just like we've never seen rounds like this, we've also never seen revenue ramps like this in companies.
42:20
And so, so it does appear to have lots of hallmarks of I mean I'm sure I know you are like me because you love technology.
42:26
I use this stuff all day every day.
42:28
It's the most amazing technology I've ever encountered. So do I.
42:32
I would love you to just riff on um the let's I'll call it like the bull case in all of this where no one's acting that irrationally because we we really do get 5% GDP growth or whatever crazy numbers because this just this just is a different class of technology even versus like say the internet which is probably the last one this big. Yeah.
42:53
And and look, there's I first of all, I agree with you.
42:56
It is I mean, I would never take the opposite side of the argument that it's not a legitimate platform shift.
43:02
And if it's a platform shift as were mobile or the internet like or the PC, that's big enough.
43:07
It doesn't have to be better than those like if it's just good, just be another one.
43:15
and and and so it's certainly one of those and might be bigger which which leads to everything that we've talked about and and as I started I offer no judgment on any of the individual players like I think it is what it is.
43:30
Um there is some chance in my brain and I haven't fully thought through all the implications of this that some of the revenue growth is is resale um of compute and so many of the players in the market are reselling a rapper on top of a foundation model on top of a hosting service and many of them I think people believe are at negative gross margin.
43:58
So you you might in buying something from a rapper company be getting compute cheaper than you would have got it from the model company who's getting it cheaper from the hosting company and and and that revenue is being counted three or four times with negative gross margin.
44:15
And I don't know until we get to a point where unit economics matter and they can't matter in a in a allout war market that the gavage tube funding creates.
44:26
You have to go for market share, right?
44:29
You have to um and and so that I think that window is in front of us be in terms of how that settles out.
44:37
But but I have no doubt, you know, even if you want to step away from the the foundational models like the work that Brett Taylor's doing at Sierra, like I have no doubt that's real and will impact every one of those companies that he touches or they touch.
44:54
Um, and will change those companies materially.
44:56
I just don't have any doubt of that whatsoever.
44:58
So um so I think it's I I guess that's a long answer of saying I think it's a many of these things are a rational reaction to what's happening.
45:08
What what what about this class of technology you've lived through and invested through lots of these technology paradigm shifts?
45:16
Um what about this one gets you the most excited especially relative to the other ones that you've lived through?
45:27
I I it it's some my answer to that question is um decidedly personal.
45:32
Um and it relates to what you just said.
45:38
I'm probably doing 40 or 50 searches a day on on a AI platform, which is more than I ever did Google searches.
45:46
Um it's almost all a form of very quick learning like super quick learning um about either particulars I forgot things I don't know about like and it's um every day and and I think to myself you know for those people that are inherently self-learners the speed at which they'll be able to get things accomplished and and move up the ladder is like breathtaking.
46:20
Um and then and then I think outside of LLM, you know, from Tesla FSD to other types of problems that are being solved with traditional AI, um those are super interesting to me as well, maybe more profound.
46:36
I I do I do worry that LLMs have a limitation.
46:42
It's potentially solvable, but they were created around language.
46:44
um they're not great with numbers.
46:46
And when people say, "Oh, the the generalized AI is just going to replace all compute."
46:52
I I I don't see that they're going to have to fix some things or merge it.
46:57
The way the way when you ask an AI math now, it goes off and writes Python.
47:02
That's, you know, you're going to have to do more of that type of work um to get to that place.
47:07
If you're espousing the but isn't it real argument, I I I can't um I can't push back on that.
47:16
Let's jump one more degree ahead to the GPS again.
47:19
The same question about this is the game on the field.
47:24
What what's the rational approach?
47:27
Um and I have two versions of this question.
47:29
One is just like one is like the Spock answer and one's the Kirk answer.
47:33
The the the Spock answer is just like yeah, this is what's available.
47:37
I'm building my own company and I want to do the rational thing to build the biggest company as an investor.
47:41
And the kirk would be like if you were to restart a venture firm today like how you would approach it.
47:48
Would you have a small fund like you had at benchmark?
47:50
Would you have a more go anywhere fund with different fees so that you can you know play the game on the field?
47:55
I'm curious for both both perspectives on on the GP side.
47:59
you know, as I answer it, I I want to highlight um one of two last things I wanted to get on the table, and that is that time is a massive problem.
48:09
And so, you know, we're moving the time to liquidity of these companies from uh 5 to seven years to 10 to 15 years.
48:20
I don't know the exact number.
48:24
And I and I think you know every LP is aware of that.
48:29
I think I forwarded you this NVCA um graph and in in there it has the percentage of committed funds that's paid back in the 5 to 10 year window of a venture fund and it used to average like 20% it's been as high as 30 and it it got down to five last year and it's like in the five to seven range.
48:50
um which hints at the big LP liquidity problem, but it's a problem for GPS too.
48:59
You know, the reason time is such a massive problem is you have the cost of capital, the IRRa that just eats away.
49:05
And everyone loved to say, "Oh, it's not IRR, it's DPI."
49:08
But if time doubles, it it is irr like that's what really matters.
49:16
And um and and in addition to that time uh the the cost of capital, you have dilution.
49:22
So every one of these zombie unicorns is diluting three, four, five, six% a year on equity issuance uh to the employee base.
49:32
And when you combine those two, it's a real, you know, it's a real problem.
49:37
So, if you take um let's say you you were expecting to get a $100 back from an investment in year 10 and you want to delay it to year 15.
49:47
If you just take that 10% compounding, you it now needs to be worth $160, you know, dollars out in year 15.
49:55
You know, if you if you make the argument that these people invested in venture to get a big return, then your cost of capital is not five.
50:03
That's the the risk-free rate. It's 15.
50:05
And then it's 20% a year.
50:08
15 plus the five from the equity dilution.
50:10
And now if you wait five more years, guess how much money you needed instead of $100?
50:15
$250 for fiveyear delay just to meet the same return expectation people had of the asset class.
50:25
So I you know that's a real problem.
50:28
I think there were a certain number of companies that were either acquired or went public in a stage and then you know entropy exists.
50:35
then you know entropy exists. all companies kind of have trouble growing over the very long term and and once again I think you're kind of taking that window out and I haven't asked an LP you know people love to talk about if you take out the big winner what's the return of the fund but I haven't asked anyone the question well what if you
50:55
keep the big winner but get rid of everything else because that kind of feels like where we're headed so so I don't I mean that's a long way of saying I really don't know the answer to your question uh I I do I you know I spent my whole career in early stage and I still love that time period and I think it's the the time window where you can make the biggest bet uh and have the biggest outcome. I really hate um to think about
51:21
I really hate um to think about everyone of uh of the next generation of of general partners having every company live through what was on the field in the Uber Lift situation because you know you go into a board meeting and you know the the other company raises another billion and the the thinking that you're forced to do at the table like well should we go neg negative gross margin for two more years like and take market share.
51:56
It you're not going to find it in a Harvard case study.
51:58
I'll tell you that like it is a unique set of cards um to be playing and it's super you know high stakes poker with strategies that are not you know you're not going to read about them in good to great like this isn't this isn't how people who you know traditionally ran companies and made them great.
52:20
all the stuff you read in every Buffett letter will not apply um in that in that world of of capital competition.
52:31
I want to talk about LPS now and uh the tendency or lack thereof for capital to seek the highest riskadjusted return in general.
52:39
general. it should be the case like in you know in a rational sense that over time the pools of capital would shift around and seek the highest risk adjusted return like that's the whole point and so I'm curious what you think the impediments are to that just
52:56
happening and it's another way of asking like what should LPs do now like they're the capital owners uh or they represent the capital owners their job ostensibly is to get the best riskadjusted returns relative to their their own personal needs what should they do and what might stop them from doing it? Well, this this
53:12
Well, this this would probably be the last point that I'd love to to drive home and then we can just talk broadly about the situation.
53:22
But you asked a provocative question at the very beginning of the podcast early on.
53:27
You said, you know, could the LP liquidity issue be a catalyst of some kind that that causes this this world to change?
53:36
And there are a lot of things pressing at that.
53:39
Um time is a problem as we've already talked about and they've been putting debt in place.
53:46
Um there's broad talk in Washington about endowment taxes which drive more liquidity requirements for these endowments and it's something they've never had before.
53:57
Um, you have the research cuts, not just the aggressive stuff at Harvard, but even the the research cuts on the um on the normal NIH and NSF grants. What was that?
54:11
That extra part where they cut it from 60 to 10 the overhead or whatever like even that is going to cause the universities to tell their endowment, you know, we need we instead of 3% we need 5% or we need 6% a year.
54:24
And so those things are the kind of things that could push um the LPS into more difficult situation.
54:34
You know, Yale maybe being first into the secondary market looks exciting.
54:39
You're a small endowment.
54:41
You've never had access to Sequoia, so oh going to get to buy a slice here through Yale.
54:45
But if if you had a a secondary pricing fallout as more and more big players come to the table, that could have a a reciprocal effect on all of this stuff.
54:58
Um, and then I think the other big thing to watch is whether the Middle East might change their mind.
55:03
Middle East might change their mind. the chief investment director in Qatar and you know Shik Sud Salim Alsaba um he said you know the head of the world's largest sovereign wealth fund said the clock is ticking for private equity and
55:20
join the chorus of investors who've grown worried about the industry's valuation practices um that's a different perspective out of the Middle East like and if that were to get infectious and become the universal opinion instead of one of the players opinions. That would have a big impact
55:38
That would have a big impact out there.
55:41
Um, so I think I think that's the area to watch.
55:43
If I were an LP, what would I do?
55:46
I mean, I I certainly think you dabble in the in the latestage private market on both sides as a seller and a buyer to see what the motion looks like.
55:57
Um, so that you can feel it out.
55:57
I I don't want to create a run on the bank, but you might really re-evaluate whether the uh the Yale model works if everyone's doing it, which which I think it definitely worked when Yale was the only one doing it, but I but I don't know that it that it works now.
56:13
I think it'd be interesting to find a PE firm that was going to very aggressively go through the zombie unicorn group of thousand companies and try and extract value.
56:27
I would think there's some opportunity there to look at it optimistically instead of pessimistically.
56:34
Um, so I might I might be interested in that as well.
56:36
If you were thinking about the strictly returns part of this equation, you're one of your original partners, Andy Rackliffe, was very fond of saying you want to be against the crowd and correct uh to earn the most money.
56:50
the most money. is part of the answer perhaps looking to invest in private markets away from AI where the pricing and supply demand story is extremely different like you know if you just go to a a more run-of-the-mill company the capital markets are not super excited to
57:07
fund them and they're evaluating them in very strict calculator terms to a degree that's nothing like what they're doing in AI is that a place to go spend more time I even think some of the names I've already mentioned that are considered to be you know These latest stage uh investors are thinking this way. They're
57:23
They're thinking what if I can find a traditional company that may not understand that AI would enhance it but that where we can go do that ourselves and maybe that is a disruptive way of looking at things.
57:36
The that that non-conensus accurate quadrant the first time I read it was Howard Marx you know who I read everything I can that Howard writes.
57:46
Um there is a I think an inongruence between that point of view and these platform shifts because these platform shifts um have have now become um consensus and you know you'd have to not invest in AI which sounds outlandish right and so I just I don't know that you can apply those two things simultaneously.
58:13
One thing that's super interesting about AI to your point and maybe you know is the big companies seem to have moved very quickly.
58:21
I mean if you go on you know Service Now's website it just drips of AI you know the Microsoft earnings transcript had 67 occurrences of AI you know and Satcha just talked for two hours about AI.
58:36
Um, it's a it's a weird thing.
58:39
A lot I think a lot of what we read, you know, in in crossing the chasm or or the innovators dilemma, you know, the big companies are supposed to be slow to mobile, slow to the internet, slow and that's an opportunity for the startups.
58:54
This is a interesting one where I think a lot of the big companies have paid attention early.
59:01
early. Do do you think that that's just happening now though in a different form and maybe the example would be uh in theory Google should have been in the very best position to dominate like every AI use case and yet basically no one I know is using Gemini or Google to
59:20
do codegen or to do their just daily driver LLM work or frankly much of anything else and they're using startups cursor anthropic openai um and and so it's just even even though they are moving fast like the technology companies themselves are just redmonstrating this the same phenomenon again. Yeah I I think there are data
59:38
Yeah I I think there are data points on both sides.
59:41
I think it's an that's an interesting argument.
59:44
Apple is an interesting argument.
59:45
You know Microsoft having missed one and survived puts them in a better position to be alert about the next one. Right.
59:54
Um, I saw an interesting interview between Freedberg and Sundar where he asked him if he had ever read Danov's dilemma and he admitted not.
1:00:07
So when when your company's crushing it, you know those kind of things.
1:00:10
Ah, you know, those were for somebody else.
1:00:13
But yeah, maybe now maybe now he should read it.
1:00:16
evaluating a an exciting new AI company where the revenue is of a different nature than maybe like enterprise SAS was or something.
1:00:24
How would you go about assessing the quality of revenue in a new AI startup today as an investor?
1:00:32
I think it's tough for the reason I mentioned before.
1:00:35
They might you might be getting, you know, a a million-doll deal and it has negative gross margin for you.
1:00:41
But the on the flip side, you're looking at any AI model that's two generations old sells for 100th the price per token as today's.
1:00:54
And I think you could probably have confidence that you're going to um price optimize later.
1:01:01
And one of the interesting things that the partners at Benchmark have have been looking at and assessing is when companies move to optimization mode and how they make decisions differently once they do that um than when they're in experimentation and sandbox mode.
1:01:21
And with the amount of capital you have, you can run sandbox mode longer, right?
1:01:26
And before you go to optimization mode and and we saw this on the internet I I like to highlight that the first two years everyone built on Sun and Oracle everyone all the startups did and five six years in no one did and so that's why that's why it's so important to pay attention to that to that shift.
1:01:48
What do you think about the interesting international competitive dynamics in AI which existed to a lesser extent in some of these other platform shifts where it was mostly the United States you know western technology at the forefront.
1:02:04
China is the obvious like question the big question here around DeepSeek and and things like it but now also startups coming out of China that that are offering what look like incredibly impressive products. Yeah.
1:02:12
How do you how do you process the you know international especially China versus US component of of this race?
1:02:19
I think there's a super interesting development in the China situation that that will be very very fascinating to watch and that is when deepseek hit and took off.
1:02:31
We were all focused on how the US reacted the US models, Washington, you know, the fact that AWS, you know, hosted Deep Seek or whatever.
1:02:42
What happened in China, however, is Alibaba made Quinn um open source.
1:02:50
Uh Xiaomi has a model out now.
1:02:54
Um I forget the name of it.
1:02:54
Moby, I think maybe it's open source.
1:02:57
And um Robin Lee at BU had kept his model proprietary and he said in June it's going to be open source.
1:03:08
And so that level of competition if it leads to four deep pocketed all open products um is going to be be ultra powerful.
1:03:18
And we've already learned um that these models can train each other and help each other get better.
1:03:26
So, if you have four open ones that can all train on each other and everybody can get a hold of that, I think that's going to lead to a massive amount of optionality and experimentation that we're not going to have here.
1:03:38
Um, so I'm that's that's the most fascinating piece of the international AI um narrative that I've seen.
1:03:46
How much do you find yourself having like allegiances where you want a certain group to win versus other?
1:03:52
like what are you most rooting for?
1:03:54
I guess in in the whole thing.
1:03:57
whole thing. It's funny you bring that up because I I in I was noticing that some of the people that are the biggest China hawks are the ones that have bet on the new VC backed military companies and you know I just hate that that you
1:04:12
like you might become a wararmonger but but I I know that that's possible because when I made an investment like when you know when I was an investor in Uber like you defend it at all cost like that's the natural it's like your child, like you're looking out for it. And so
1:04:28
And so your allegiance are going to go where your investors are.
1:04:32
And I, you know, I still feel that for, you know, any company that's got benchmark attached to it.
1:04:40
Like I don't know that I'll ever like not feel that way.
1:04:42
Um, and so, you know, that that is what it is.
1:04:46
That's I think a lot of how this world works.
1:04:49
Um, in terms of just like the technologies, like I said, I think some of the nonLLM stuff super exciting.
1:04:57
You know, I can't wait to see what's possible with robotic intelligence.
1:05:02
You know, I'd love to see um us make uh gains in the health care space.
1:05:09
I don't think all disease will be gone in 10 years like the AI founders are saying.
1:05:14
I think that's ridiculous thing to say out loud, but um but it'll be fun to watch it all. it.
1:05:19
As you said, um I'm using this stuff every day.
1:05:22
The pace of change is the fastest I've ever seen in my entire career.
1:05:28
Like if you miss a week of news, like it it's like it's like a different world a week later.
1:05:36
You brought up the the defense startup kind of ecosystem.
1:05:40
I would extend that to say like uh the physical world hard technology ecosystem lots of which is nothing to do with war you know mining companies or whatever.
1:05:50
H how do you think about this category of company that is they're undoubtedly technology companies they're often they're often uh operating in very large markets uh but they have a very different capital intensity profile typically like they require tons and tons of capital to get to revenue and a long periods of time.
1:06:10
There's all the nuclear stuff, fusion and vision.
1:06:12
H how do you think about that kind of private markets technology investing?
1:06:18
I know you didn't do a lot of it which makes me think maybe yeah look as as as a rule of thumb like if I were you know a professor I would say you know you could study it like mathematically and it hasn't been a great place for returns and you could look at you know there was a massive amount of venture capital put into solar 15 20 years ago and it didn't work.
1:06:37
um you know there's one exception to this whole rule and it's anything Elon Musk touches right and so SpaceX and Tesla are um are data points but they're they're they're outliers really and they're both attached to Elon.
1:06:55
So I think it'll we'll have to see four or five of those from non Elons to know if it's possible.
1:07:03
I what I've learned and heard and studied about his execution prowess and his um speed that he develops inside of these companies.
1:07:14
I don't know that others can handle that or are capable of it.
1:07:18
It'd be great for the world if if they are and they are successful.
1:07:23
And and by the way, we've seen waves of capital availability lead to more interest in businesses that are less capital efficient.
1:07:32
Like there's a correlation there.
1:07:34
Um and so, you know, the other thing to watch is if that got tighter, you know, would the appetite still be there?
1:07:42
Many of those businesses involve regulation and you know, mining gets better if if we're not allowed to use China.
1:07:49
And so I hate that part of this world, but you know, I gave a speech on regulatory capture a few years ago and no one from Silicon Valley was in Washington at the time and now they're all there.
1:08:00
Hill and Valley, everything else.
1:08:02
So that's another element.
1:08:04
Maybe it should have been on my on my reality world.
1:08:10
It seems like that is just going to happen that venturebacked early, you know, private markets backed companies that deal with big regulated industries are just going to it's going to get processed.
1:08:20
And I'm curious if something like Anderoll, uh, which maybe is a $30 billion valuation, something like that.
1:08:27
So, not SpaceX level, but but big, um, is another data point in your mind towards like, okay, we we actually can execute in companies that require lots of capital.
1:08:36
No, unquestionably that's true um from a regulatory standpoint.
1:08:39
So I think it had historically been very difficult for companies to break through in these industries solely because of regulation and prior to Tesla there was like seven mo motors, right?
1:08:52
There were other attempts at building cars and none of them worked and I think a lot of them got got stuck along the way from a regulatory standpoint more than anything.
1:09:05
So, you know, Andrew, you know, being cleared by the DoD and and and actively selling into our military is certainly a new data point and a very impressive one.
1:09:16
Um, for a startup to have achieved that, no doubt.
1:09:18
Um, I don't know that that means every VC under the sun should jump into this stuff. You know, it's hard.
1:09:26
Like if you can make a software company or as people like to say a social network company spring to life um and and generate revenue growth and high margin, boy, that's a much easier path to riches than what we're talking about.
1:09:43
Now, are there any other pockets of the ecosystem right now that we haven't talked about that you are especially interested in, company types or or um investing strategies or dynamics?
1:09:53
You know, if I were still an active GP, and I think a few people are doing this, but if I were an active GP, I would be um thinking about verticals in AI and thinking about where AI is exceptionally great.
1:10:10
Um, you know, it's exceptionally great in language.
1:10:16
Coding is a um actually a a tighter form of language, so it's even better at coding.
1:10:23
Um and and and there are areas where that matters.
1:10:26
A lot of this has played out, but it matters in legal, that matters in customer support, but there's probably other pockets that have yet to be fully explored.
1:10:36
Um but that fit is super interesting to me.
1:10:41
Back to our original set of realities that you explored from the LP side and just like the capital markets, you know, systems level stuff.
1:10:48
What do you think is going to happen?
1:10:50
like you've laid out the the realities on the field and the various incentives and or lack thereof uh for change.
1:10:57
What what do you think is going to happen in the next let's say five years across the domain?
1:11:02
My my gut is that we have a problem.
1:11:06
Um Patrick and I you know and I'm I'm I've always been more of an analyst than an optimist even though I you know I was successful in venture so I had to be somewhat optimist but I started as a security analyst and I've just I'm born with more of a critical thinking hat.
1:11:26
So my bias would be that way and and someone could certainly take the other side and say, "Oh, Gurley's always predicting the next downturn or whatever."
1:11:36
But but my gut is we have a problem.
1:11:39
You know, the system as it exists today promotes less liquidity, less traditional highquality company building, and way higher burn rates.
1:11:49
And that's just not a great combination from my perspective.
1:11:52
And it's all self-reinforcing.
1:11:55
So all of the components that I listed, unless something happens at the LP level, I don't see a corrective mechanism.
1:12:04
I think we're getting sucked more and more into that loop.
1:12:07
There's a great video you may have seen where Josh Complement just walks through some simple GP math, you know, from his perspective, you know, with Jackman. Yeah. Yeah.
1:12:17
It's what is it's like 3 minutes long, you know, and maybe we'll put a post in there.
1:12:24
But I have a hard time disagreeing with what he did there, you know, pretty simple math.
1:12:30
Like this isn't in a place where it's going to work, you know, from the prices we're paying, the amount of money we're spending, and what you would need to have happen for VC returns to match what they've done historically.
1:12:45
It seems like a a tough, you know, tough situation to to puzzle out from my perspective.
1:12:51
What would happen on the other side of a reset?
1:12:56
So, let's just imagine a a simulation where we can bring like public equity pricing scrutiny or mechanism to like every available asset and and got a big pricing reset as a result.
1:13:08
like then what like what what are the pros and cons of if we have a bad moment that we have to go through?
1:13:15
What are the good and bad things that happen on the other side of that reset?
1:13:19
Do you think I mean I have a hard time thinking about I mean it it would I think most people would consider it awful and having lived through a couple of these resets you know I I did find this is uh maybe a bit humorous.
1:13:28
I found as an acting GP, I was much calmer and happier and found my job more fulfilling and more efficient and productive in the resets than in the manas.
1:13:43
Um, certain other actors may prefer the mania, like maybe someone with a sales kind of DNA that likes to be out there amongst it all.
1:13:52
Um, but I just found the conversations about traditional company building and all this like it was all more um efficient and uh authentic in those windows.
1:14:04
Um, and the pretenders left town right there.
1:14:11
They they used to when when the internet bubble burst, you know, there were companies that were consumer were called B toC and enterprise was B2B and and they there was a joke that that became back to consulting and back to banking because people left Silicon Valley when the money wasn't easy.
1:14:27
And the opportunist, the opportunist, I don't love, you know, I don't think they're in it for the right reasons.
1:14:33
And and and they they tend to overpromote, over raise capital, overparticipate in secondaries, and and leave situations that that can crash and burn.
1:14:46
And and I I don't love that.
1:14:49
Uh it's a part of the world when you're dealing with it at this speed.
1:14:54
So, so if it corrected, you know, people would look for opportunities.
1:14:58
I mean, one one of the things that causes this situation is I think everyone has studied history, everyone knows about compounding effects, everyone knows about network effects, everyone's studied cycles, they've seen boom and bust.
1:15:12
Um, and you remember how long the uh the stock market was down during the co original COVID correction?
1:15:20
Three weeks or something. Yay.
1:15:22
And then people started buying the opposite side, right?
1:15:25
And so, you know, I suspect that the conviction in AI is high enough that even if we were to have a six-month period where people thought AI was overstated, it would start rebounding very quickly is what I would think.
1:15:41
If you were starting a brand new investment firm today, what do you think would be the most important components of brand building for that firm?
1:15:50
We've got we're now in the era where some of the upstart private market firms like Thrive and Greens and Andre Horowitz and Rivet and the ones that were started sort of 2010ish a few years later are are incredibly big wellrespected brands and and they had their own way of doing that. We're in a new era.
1:16:10
What would you what advice would you give to upstart investors that are starting their firm this year and want to be you know those firms of 12 years from now?
1:16:20
It's funny, you just provoked something in my brain that is not the question you asked. But that's fine.
1:16:24
One one another negative element of all the systems issues that we're talking about is the the firms that that that beg their way onto the cap chart by writing a $300 million check or whatever.
1:16:41
They differentiate themselves by being the best friend of the founder they possibly can be.
1:16:50
This is a lot easier for me to say since I'm not writing checks and if anyone, you know, doesn't like what I say, they they're never going to compete with me to be a new board member. So, it's fine.
1:17:00
But, um, they don't take a responsibility of being someone to help you make better decisions.
1:17:08
They're never going to tell you no.
1:17:10
I mean, a a Grand example of that is the SBF FTX situation where no one took a board seat.
1:17:18
Everyone believed that he wasn't co-mingling and it ended poorly.
1:17:23
And um it's helpful to have someone along who will call when it needs to be done, who will push on unit economics.
1:17:32
And one fear I have about this world is there's less and less of that.
1:17:38
the the very best CEOs and I put people like Barton and Vinnie off in there.
1:17:44
Even Mark at uh at Meta has said this, they believe being public makes them run sharper.
1:17:49
And one one other negative of these companies staying private forever is they're not getting that feedback.
1:17:57
Um now let me try and answer your question. I don't know, man. What would I do?
1:18:04
Uh it it's a it's it's a hard time for me to imagine like starting on that journey because of everything that I just laid out.
1:18:13
Um so I really don't know.
1:18:16
I'm just going to have to take a pass on answer.
1:18:20
Well, I'm glad I sparked the other thought with the question.
1:18:21
Maybe kind of in closing you could leave uh leave people with a few thoughts on for founders specifically.
1:18:28
I always like try to come back to them because without without them doing their thing like there's that absolutely none of this matters at all. None of it matters.
1:18:39
Founders are facing maybe the best setup of all time with uh more tools to build companies, the most exciting new enabling technology maybe we've ever seen, lots of capital that's willing to fund that journey. Um any closing thoughts?
1:18:54
you know, you've seen so many founders build some amazing, you know, big businesses across your career, backed a lot of them directly.
1:19:00
Closing thoughts for them on the opportunity in front of them and how they should think about it. Yeah.
1:19:06
Just, you know, if you're if you're lucky enough to be in one of these hot companies, you know, it and and you're in the middle of this whole world that we talked about, um, I would offer a couple things.
1:19:17
One, unit economics will matter one day.
1:19:19
and and and that doesn't mean you have to sharpen the pencil right now.
1:19:24
Like I said, the two generation old models cost 1/100th a token.
1:19:29
You can plan that we're going to move to that and you can it's it's fine.
1:19:34
Like I I think that's fine to have a burn rate, but the unit economics will eventually matter.
1:19:39
Um you'll eventually have to scale the company up and operate in a efficient, productive way.
1:19:49
And I think when when you have kind of these allout battles, you can get lost or or you know, and I found a lot of founders think about um certain elements of operating prowess as red tape.
1:20:04
They think, "Oh, that's what big companies do. That's bureaucratic.
1:20:08
That's not why we're here."
1:20:08
But, you know, as you grow and get over 100 million and get to a billion in revenue, you just can't operate.
1:20:15
And this is advice in any cycle really, but it gets accentuated here because the amount of capital I I thought, you know, one of my favorite pieces that Reed Hoffman ever wrote, he wrote about Uber, this pirate navy metaphor where he said all all startups are born as pirates, but they eventually have to become a navy. And that's true.
1:20:36
And I think it's I think it's an uncomfortable transition for some.
1:20:40
Um, but you have to figure out a way to do it.
1:20:43
I and another thing that comes to my mind related to that there's a there was also a great blog post that I think Ben Horowitz wrote about he said we only want to back founders that go all the way and it was a genius thing to write because that's what founders want to hear.
1:20:58
It's actually true of every venture capitalist in the world because you got a 50/50 shot when you change the CEO and why would you put that risk on um on your portfolio?
1:21:07
But deep in that blog post, he said there were two or three paragraphs that says, "Of course, the founder has to want to learn how to lead."
1:21:16
And I think one piece that we miss so much in this industry is that there's nothing about a founder that in the way they're born that makes them capable of leading a thousand person organization.
1:21:30
And there are people that have studied what it takes to be good at that their whole lives.
1:21:34
There's a handful of founders, maybe 30, that got to work with Bill Campbell to help coach them on what it means to do that, but it's it doesn't come natively. It's not for free.
1:21:45
And you have to want to do that.
1:21:48
And, you know, that's there's a personality type where that's very hard, you know, and I' I've had great conversations with Michael Dell.
1:21:54
He did for a while, thought he didn't want to do it, ended up finding a way where he could do it and be happy. And it's hard. That part's hard.
1:22:02
Um, and then maybe the last two things.
1:22:05
One, networks effects are real and they can be more real if you focus on them.
1:22:10
And if you're in a hot market and a lot and growth everywhere, it's easy not to think about them.
1:22:18
But you know are there elements of your business where the data you know exhaust or whatever where you're you know let's just say you have a thousand customers and then you get to 2,000 customers that 2,000th customer should have a way better experience than the thousandth.
1:22:36
And how do you design that in to your system?
1:22:38
If you do if you can figure that out and design that in it it'll have powerful long-term implications for the success of your company.
1:22:47
Um, what do you what do you think the way to do that is in the AI era?
1:22:52
Is that mostly a data question that you just want you just want your product to naturally produce more data that then improves the product?
1:22:58
Let's say you're serving a vertical or or an or a functional, you know, vertical.
1:23:03
If the learning of an individual customer becomes a learning for the whole group and everyone benefits, that's that's pretty powerful, you know.
1:23:12
Um, and and I think that's very doable.
1:23:16
I mean, there's some there's some AI companies in the legal space.
1:23:20
I'm not involved in any of, but like they're they're they're studying all the they're studying all the intake information that you would put into a lawsuit, but they're also studying all the precedent and legal case history.
1:23:34
And the AI is going to do X.
1:23:36
And if you've got a human in the loop, you're going to notice the failure points, and then you're going to improve the model.
1:23:42
And those kind of things could lead to someone that has an early lead having an even bigger lead in in the long term if if there's constant improvement of the model um that comes from the system.
1:23:55
Do do you think that AI reopens consumer as an interesting place to invest because it seems like it kind of hasn't been for, you know, since the mobile era when a ton of amazing consumer businesses were built that we really haven't had a lot of VCs focused on that capital going to that and that this might reopen that very lucrative part of the world.
1:24:18
There there there are people that um have studied some of the stuff popping in China that that that hints at this and I should probably do more work on that and be more knowledgeable than I am.
1:24:30
I would also say, you know, we had an early shot on goal with character which which traded.
1:24:37
Um but but there's two elements of the first wave of LLMs that I think make them not perfect for consumer.
1:24:43
One is voice being really good, which they're getting better at, and the second one being memory, and they're starting to get better at that.
1:24:53
I think they're doing it outside of the core LLM, but it doesn't matter.
1:24:56
And then they put it in the context window.
1:24:58
As those things improve, a lot of the negative feedback on the early character AI was that they didn't really get to know you.
1:25:04
And so the the efficiency or the network effect and learning impact and switching costs weren't there.
1:25:11
But it's not that difficult for me to imagine um exactly what played out in her which was a unbelievable movie for its time by the way.
1:25:22
But like I I think that will happen like I would be shocked if you don't see four or five companies pop up in the next year.
1:25:31
And maybe that's the contrarian thing that that we were looking for that we've wandered on to or you wandered on to which is um most of the work in in the US has been on the on the uh enterprise side and there there probably are some real opportunities on the consumer side.
1:25:47
Bill, it's so much fun to do this with you.
1:25:50
Maybe uh every couple years we'll do a state of the markets update uh since you're not doing them directly for LPs anymore and we'll do it for the whole universe.
1:25:57
thanks for doing this with me and and for all that you've learned, sharing it with us all. Yeah.
1:26:02
And I know I know the LP community pays attention to everything that you do, um, Patrick.
1:26:06
So, I would I I would encourage anyone that, you know, has feedback for me or that wants to correct something that I said or or anything to reach out and I'd love to engage and learn more.
1:26:20
Um, I I find the industry fascinating and I'm hopeful that anything I share is useful.
1:26:25
I'm at the I'm at the give back part of my career and I I'd love to be helpful.
1:26:30
Careful what you wish for, but we'll put but we'll put the bad signal out there.
1:26:36
Bill, thanks so much for your time. All right.