Shownotes Transcript
Hello, acquired LPs. We are coming at you today with a very special episode with Gary Tan of Initialized Fame and, of course, before that, White Combinator and Posterous and has had multiple
a long and very illustrious career here in Silicon Valley. And we are going to talk about the evolution of early stage investing. Gary has seen it all. I think he started, you know, back in the early days when early stage investing meant a $2 million Series A at a $5 million poster. Maybe that was even high. Goodness, things have changed. So excited to have you here. Thanks for joining us and, uh,
We can't wait to dive in. Yeah, thank you for having me. Yeah, big fan of the show and it means a lot to me that you'd have me. Oh, well, likewise, that you would come on.
Let's just dive right in. We're going to weave in the story of Initialized along the way, but we thought maybe we'd start kind of way back in those prehistoric days of what life was like. Yeah. We've already done that on the Sequoia episodes. Not that far back, but when was it that you started Posterous? Was it in 2005? Yeah.
Oh, it was 2008, actually. Oh, it was 2008. I was later than I thought.
Yeah, what's that like?
He said, I'm so sure this is the right thing. You need to quit your job. He asked me how much a year I made. And I told him it was 70 grand. And he said, well, how about this? I'll write you a personal check from my bank account to yours. This is a zero risk opportunity. Quit your job. And I said, thank you very much, Mr. Thiel, but I might make it to level 60 next year. And I got on a plane and went back to Seattle. And that company turned into Palantir. Wow.
Oh my gosh. But I ended up joining a year later. They had hired away some of my closest friends who were way smarter than me. You know, Bob McGrew, who now runs stuff over at OpenAI and just so many smart people you get to meet in Silicon Valley over time. But yeah,
Once they hired away smart people smarter than I, I was like, I need to quit my job at Microsoft because in the moment when your friends are starting a business and you don't know anything about startups or tech or how these things are funded, you say, well, I have a real job and.
Uh, you know, and, and you say no. So we're talking about this with Kevin and, uh, Julia hearts on the event, right? Episode. Like I imagine you were right out of college. Your parents were probably like, if you even told them about this, like, Oh yeah. They're like, no way would they let you do this? That seems unsafe. Yeah. Yeah. The immigrant mentality for sure.
Gary, that's an amazing story. And it is absolutely one of survivorship bias, because I want to share my story is that I had a friend who was starting a YC company. I had just moved to Seattle and I was about to start my job at Microsoft.
And this friend lobbied and lobbied and lobbied to come and get me to co-found the company with them. And for years, it looked like a huge mistake that I said, are you kidding me? I'd have to give back my signing bonus. I just moved here. This person told me something very similar that they would help definitely pay back the signing bonus. So it'd be a zero risk thing. They'd pay for my move. But as years have gone by, that company sold for exactly the preference. Yeah, totally. And it would have been a completely, it would have been a wash. Yeah, it's tough.
For a while, I was like, wow, that's one of several examples in my life where I really blew it on joining something early. But sometimes...
Not that my choice was the right choice, but unless it's Peter Thiel calling, you know, the story doesn't always end the way that yours does. Yeah, these things are crazy risky, right? I often think about, wow, like he was willing to pay that much upfront for an engineer. But, you know, now the rest of my career, even as an investor today, is now actually sort of the inversion of that, which is now I realize actually it's the software engineers and designers and product people, the builders who...
the future. And that's why we're able to do early stage at all is that we look a lot more like them at that stage. And so they'll pick us. And on the flip side, because, you know,
I can still code a little bit and I still do design. I'm probably better at marketing now than I was 10 years ago. So you've diversified your skill set. Yeah, that's right. So we look more like them. Right. So then that's like kind of the cool thing. And, you know, I think that fits with the overall series. Right. And it's like we're talking about, you know, the traitorous eight guys.
sending real typewritten letters across the country to, you know, financiers, right, who are totally different from them. And then now what we're talking about, what you guys do and what we're doing is we're not different. You know, I think that time was for venture capitalists to say, like, we're set apart, we're different, right?
We're in this ivory tower. Yeah. Yeah, the ivory tower is different. There's actually a ritualistic aspect that I was talking with Jeff Lewis at Bedrock about. He has this theory that is really interesting around there is something to be said for I'm walking up the steps of Sequoia and this is what...
you know, legends before me did, and I could be a part of that, right? And so now it's Zoom. So if anything, now it's flipped. So now it's about the one-on-one conversation that you can have right here,
That's why you have the rise of influencer investing. And that, you know, I know we'll talk about it later, but that's part of the reason why I think YouTube is so important for me anyway. I'm like investing very deeply into it because I think it's a very interesting innovation in the course of how ventures are created, actually. VCs are historically take a long time to catch on, right? I mean, YouTube was founded right around this time that we're talking about, right?
And here we are in 2020 and people are only just starting to catch on. Gary, you talked about your time as a builder and we're going to put a pin in this influencer investing and definitely come back to it because I think it'll be a nice way to round out the full story. So take us through founding Posterous, leaving Palantir, how you raise money for that, how you went about getting enough proof that there's a there there to invest more of your time. Yeah.
There's nothing quite like seeing a super early stage startup for your own eyes. I actually am always, I've always been really thankful for my time working with, you know, Stefan Cohen and Jill Lonsdale and Alex Karp, like just the founders of Palantir, being able to build software from scratch. But, you know, the more subtle, interesting thing that I feel like I learned was,
how important it is to basically continue to hire people way smarter than you, actually. The cult making and the myth making of the startup very early is really underplayed. I don't feel like people talk about it enough. And Palantir, I think, remains very good at it.
The only cult that was stronger than our cult was the Facebook cult, I think. And so, but it's, you know, interesting to see, you know, years later, that's a, you know, an order of magnitude bigger as a company, which is fascinating to me. It's like the, you know, I think that that actually is directly proportional, like how strong your cult is will result in how big your company ends up being in
Assuming you're in the right market and like 10 other things that, you know, you need to survive. You need to be one of those survivors, right? Like a lot of things have to break your way, but...
What's an example of something that was done at Palantir to help build that cult brand? Honestly, I think the simplest thing was even just trying to get the smartest, most capable, hardworking people, which sounds really stupid simple. It seems like everyone should do that. But honestly, like people just don't.
When you think about hiring, the mistake that a lot of founders make, and honestly, I made this mistake at some level too when I worked on Posturus was, you know, who can I get, right? And that's the wrong question. It's like, you should start with who is the smartest person I know, and it doesn't matter who.
where they're at, right? Because if I get them, then our self-fulfilling prophecy becomes destiny. And if I don't, then it doesn't. And I'm not doing myself or them a favor by not going after them. So we would just go and like people would pass out yellow legal pads and we would force everyone to step away from their computers. And it'd be like, write down the names of 20 people who are the smartest people you've ever met.
And it's like in any walk of life, right? Like it didn't have to be engineering or design or whatever. It was just who are the smartest people you know in your life? And then, you know, we take it into a back room and cross-reference it. And then those were like our hit list. It's like, let's go get those people. Like we're going to take them to dinner. We're going to take them to lunch. We're going to meet them. We're going to chop down the tree. I'm going to go get them. That mindset leads to doing things like what Peter offered too. I mean, that's like, I can't believe I've never thought of that before. But like, you know,
yeah, you were ungettable. You were at Microsoft, but like, well, what if you just offered to, you know, personally cover the gap in your salary? Like it didn't work for you then, but a certain number of people that's going to work with. And if you're not in that mindset of like, okay, I don't even going to try to get this person. Well then like, you don't know, but once you're like, no, I'm going to try and get them. Well, what can I do? Yeah.
Yeah. And then it just compounds from there, right? Because smart people want to work with smart people. And I think that that is, you know, testament and credit to what they've been able to build over the years.
over the years like that becomes self, you know self-fulfilling prophecy and then Self-impelled because if you have a group of smart people who are very driven It's a magnet that attracts a lot more people even if they know nothing about the mission past about 30 or 40 people They started doing really awesome campus hires and that that is actually very very hard for companies to do I actually haven't really seen anyone do it that early tends to be in the hundreds of people by the time they are
feel like they have the cycles to do it. But if this is a, you know, 15, 20 year business, it actually is really smart to start on that campus hiring sooner. And then it pays off in two or three years when, you know, you got the
you know, Stanford section leaders for, you know, 106X and A and B. You have the best people from CMU. You have the best people from MIT. And like generation to generation, the software engineers know, like, I need to go there because the smartest person I knew from that year went to that company. You're surrounded by all these like incredibly smart people in this, to keep using the word cult at Palantir, like why leave and start a company?
Yeah. I mean, I've always also had this thing where I can't really follow directions. And so, and what I realized is that's actually sort of the founder mindset at some level, you know, at Microsoft, I just, it felt like I was caged and there were things that were obvious, but I was like nine levels too deep in the organization to make the call.
And then in retrospect, I probably the most successful people I remember from the Microsoft days were like amazing at hopping to like level five or level six or like
you know, they knew their POM, they knew their VP, those people would answer emails, you know, I don't know how they did it, but that's actually the advice I give to incoming like PM classes and Uber and, you know, Google and elsewhere. It's like, hey, this is an org like any other, right? And you just, you know, just treat people like people. And I think that I wish I spent more time doing earlier in my career. It was like, oh, all of these people are just human beings and they have
you know, wants, needs and desires. And then actually you as the youngest person in an org will know more about reality than that person who's been in a bubble for years and they want that. And so that exchange I think is fascinating. And so, you know, I think intrapreneurship is actually quite possible, but
it's probably as hard or harder than entrepreneurship because entrepreneurship, you just say, hey, well, I'm just going to do it this way. And so that was for me, inevitable. Even now today, it's like, I don't really care about power or control. But what I realize is when things are broken, I do need to make the call. That was in me like when I was 22 and 23 and 25. And, you know, even when I was a
dev lead for, you know, and I worked directly for the founders. It was like, even that wasn't enough, you know, cause I do have a very intransigent streak. And when I get something in my head, I must have it. And so people who are founders like that just sort of know that about themselves. I feel like. This is actually, I think the perfect tee up to back to early stage investing and how that's evolved. Like this, this cult idea of
I think, you know, YC really took that whole concept and started applying it to a community of founders rather than just a company. You were then leaving Palantir, going to start this company. Yeah.
How did you first hear about YC? I mean, you must have been applying in 2007 or 2008? I remember the moment when I heard about the Y Combinator cult because it waltzed in the front door on our first office at Page Mill Road. It was like a CMU friend of one of the first employees. They came by for lunch. Obviously, you know, you did the cater lunch things. Like, come on by. I think we were trying to recruit them, honestly. And they had just gone through
the YC batch. It was the talk of the office afterwards because they were like, ha ha, this Y Combinator thing, it's like $17,000 for 7%. What a bunch of chumps. That was like what people said in the office.
And then I was like, huh, 7%. I mean, that's not a lot of money, but they are their own founders and they did raise money afterwards. So that was sort of like the kernel, you know, and it was interesting to see the mockery, right? Because here's our cult in opposition to their cult. And, you know, anytime cults bump up, it's like, it's actually like mockery, it's war, right? So I think that that's one of the interesting things. It's like, that was my first interaction with the Y Combinator cult was actually like,
Oh, that's garbage. I mean, that was what my team said. Even like my other co-lead, he was like, I would never do that. And then that was enough to get my attention because I was like, oh, that's interesting. Like now today I do this all the time where it's like anytime there's a very strong reaction to something, there's something there actually. Yeah.
I heard about it and later I found myself applying to it. Do you remember who that team was that you met that day? I think it was Zumo Drive and they ended up selling actually. I ended up getting to know David Zhao. Yeah, he's a good angel investor now. And so, you know, it's just funny actually.
how these things work out. But yeah, I applied and it was really Paul Graham's essays that I started reading Hacker News and I found Paul Graham's essays. And then of course, once you own the media, you own a little part of, you know, the 20 million developers in the world's brain. I think Hacker News was actually a really powerful thing for Y Combinator and for Paul Graham. I mean, he had his essays, he converted into media and I
I remember that the essay that did it was the one that said, hey, Gary, you were meant to have a job.
And I was like, oh my God, you're like putting voice to this feeling that I've had for like my entire life. I've just been in a cage this whole time and I'm ready to be let free. And it's funny because years later, I ended up working for Paul Graham. And one of the big criteria that he and Jessica would often talk about when after we met a team, like in those 10 minutes of an interview, immediately, often we would ask, you know, were those founders animals? And what kind of animals were they? Yeah.
Which is just like this crazy heuristic, but you know, very valuable. And it's like, oh, like, you know, and that was the feeling I got when I became a founder, which is like, oh, it's finally my call. Like I have been uncaged from the systems that have like prevented me from doing the things I want to do. I mean, obviously you worked for Paul, you know him quite well. How purposeful was he about Hacker News and his essays being
being part of this? Like, this was so hard to remember now. I mean, we're talking 2006, seven, eight, so long ago in startup time. But he knew this, you know, that like, yeah, media gave you this direct pathway into, you know, you read that and you were like, Paul is talking to me. These are my people, you know, how intentional was that? I think it was highly intentional. I mean, if you read Hackers and Painters, his original book, which was his essays, I mean,
He, in a way, was trying... He had always been that magnet for people like him, right? I mean, you can... He could write about things that didn't even have anything to do with startups. And I thought that they really resonated. I mean...
I don't intend to speak for like that much of startup done, but a lot of us were nerds and so was Paul. And he wrote about that very eloquently, like secondary school and high school, that whole experience for a lot of people is like being babysat actually. It's like horrible crushing amounts of boredom plus like a social dynamic that,
you know, designed to like sort of torture people like us actually. Right. And it's like, are you serious? And then you zoom out a little bit and you're like, oh, actually. And so I think like that was,
a breath of fresh air because it's like, oh, giving voice to like a type of person that like was me, you know? And it's like, that's me. And I saw him go on to find success in a world that like, we want to believe the real world is like college, right? It's that we get to really expand our minds and follow what is true to us. And we're deep
deeply going down the rabbit hole of the thing that interests us the most. But the reality is you go into the world and it's actually like high school.
Maybe even middle school sometimes. Yeah, I mean, it's worse, right? It's like the American corporate industrial complex. Exactly. Yes. Yeah. More people work at big companies than ever have before, and there's fewer small companies. If you look back 100 years, and I'm going to be ethnocentric here, but say in America, people's performance...
professions were way more distributed, way more people worked for themselves or the local thing and not 500,000 people for the national bank. And so you go off into this world and, you know, you take people who are founders who are like basically fish out of water their entire lives, and then you give them a voice. And of course, you become the Pied Piper. Yeah.
Oh man, I remember sharing those like religious texts. Like I remember startups equals growth and stuff. There's so many that I would like, I think I assembled my own list at one point of like, these are my favorite of Paul's writing so that I could share them in a sort of like easily referenceable way with people. You had the acquired book club back in the day. That's right. So all of startup done period is also its own cult. So, and then we have our high priests.
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Since we're going to talk about the evolution of early stage investing here, I want to ground some truths and some numbers. So in this time frame when you're starting Posterous, could you have raised from VCs before going and doing YC? In retrospect, yes. And then I just didn't know, honestly. My co-founder, Sachin Agarwal, was the lead engineer for Final Cut. I think he actually built maybe the first version of the rebuild version.
So he's a world-class engineer, still a world-class engineer, great PM. And then for me, I had left Palantir, which, you know, the funny thing about Palantir is like leaving Palantir, nobody had heard of it yet. Like 2007, like it was like, oh, this startup, who knows, something to do with Peter Thiel, like...
Cool logo. Lord of the Rings. Like what's, what's going on over there. So, but actually that's one of the very interesting patterns I find when I left Palantir, nobody had heard of Palantir. Nobody cared. It was another 10 years until it like became a thing that people really paid attention to. And by then they were on a path, they had a thousand employees and, and,
making hundreds of millions of dollars, you know? And so, you know, that's sort of in a nutshell, like the magic that happens. Like Y Combinator was the same thing, you know, 2005, it was a fringe thing. Like if you read Paul Graham's essays and, you know, he spoke at MIT and Harvard and, you know, a few schools. And that was the very first YC batch. Were you in a California batch or a Boston batch? I was in the last Boston batch in summer of it. So I actually lived in Mountain View. No.
But I knew that. So this was 2008. And so we felt like our startup idea actually had a very short fuse because the iPhone was brand new and our idea was post by email. So and we both had iPhones and, you know, Flickr and WordPress and all of these other things.
social media services had posts by email, but it was like secret password at like flickr.com or whatever it was. So we figured out, it was actually my co-founder who figured out we can just do post at, and then you don't have to remember. And then it's just a brand, like it's postitpostures.com, easy. And then it was the, you know, I think Facebook and Twitter probably each had less than 10 million users still. So it was really like the proto era of social networks. So
It turned out that we were the way people wanted to post to their networks because it was easy to post photos that way And it's funny because I can point to the month posture stopped growing and it was actually The day Instagram was released. Oh wow, and so Instagram in the share page today We see it every day and use it all the time a billion billions of people use it every day but
On the day it launched, we were one of the checkmarks. It was Facebook, Twitter, Foursquare, and Posterous. As the share sheet official that Apple launched? Yeah, yeah. No, no. The one in Instagram. In Instagram, yeah. So today it's only Facebook, obviously. But back then it was like, you know, we supported like 20 other social networks. And I think we were, you know, the natural. I think we were top 10.
200 site by then. So... So you stopped growing when Instagram launched? It was that, plus we didn't share the database properly. I was a bad manager. Like, it's like a litany... You know, I mean, you know how startups fail. It's like a litany of different reasons that, you know, in the confluence...
Recently, I did a video about why planes crash, and it's a similar reason to why startups fail, which is like, it's not one thing. It's actually five different things that all come together, and they become intractable, and the plane crashes and kills everyone. Yeah.
So it's like one of many, this was like one of the mistakes or one of the things that we weren't aware of. This is the fog of war part of it. And, you know, Paul Graham would always talk about how, you know, if you're an engineer, it's like being a physicist, like, you know, what the next element on the periodic table will be. But in the moment, like we didn't understand, right. And I remember pitching benchmark this. So I sat across like
Peter Fenton and Bill Gurley raising our Series A for Posturus. And we had like 25% long-term cohort retention, which is like a little low, like...
You know, my friends at Mixpanel say like 20 or above is like you could be a top site. So we were like in there. You know, we didn't get, we got the meeting, but we didn't get the money, which is funny. Was this your first round after YC or was there a seed before? Oh, there was a seed. So yeah, I mean, that's the funny thing is like, you know, being two Stanford grads who were both engineers, I didn't realize it. Like we probably could have raised, but...
What's funny is it would have been just money. And what we got out of YC was actually the network. So, you know, the people who taught us how to raise money, it was like James Lindenbaum who created Heroku and like...
Josh Wilson at Freedom Robotics, who actually, like, it's funny, I funded him now. So it's funny how things come full circle, you know? And then the crazy thing is we got a lot of help from other people who were just like us at that stage. And so we got very tactical advice that was extremely secret, right? This is like now widely known, but like Airbnb, for instance, it was like...
I think that they were already thinking about this, but we stole users at Postgres. Airbnb was like the batch right after us. And I remember grabbing burgers with, I think it was Joe. And I was like, hey, we basically just steal users from elsewhere. We look at the APIs and we're like, hey, how do we get our name in there and become a utility for other people by piggybacking on other platforms? Agreed.
Of course, you're referring to the Craigslist offloading. I actually blogged about it once. And then he was like, hey, dude, could you just like delete that? That was you. Oh, my gosh. I remember reading that blog post. I didn't realize that you were reading that. No, this was like 08, 09. And then I think it ended up being like coming out much later. But the reality is like...
Like you have to go where your users are. And I'm glad they did it, honestly. Craigslist wasn't doing it. They weren't, you know, it was bad UI. And like, so I like the unbundling, right? And so it's interesting to just see how these networks sort of evolve. And it's like secret knowledge, right? I mean, that is sort of the essential, aside from, you know, believing X and nobody else believes X, it's also like secret know-how. And that's where I think,
probably what you guys are doing with some of the incubation that you're doing, like with networks. I mean, honestly, like what Angelus is doing and On Deck. And there's like just so many, you know, Spearhead, Angel Track by first round. I mean, there's so many different forms of this that are very powerful today that didn't exist back then, which is awesome. I think it's awesome. Like a thousand flowers are blooming around...
both, you know, the cults themselves and how to make the cults. And I think that that's like really setting the world on fire. Like all of that, I really applaud. So, okay, you're armed with this secret knowledge. You then raise a seed round at the end of YC? Yeah, it was actually Satish Dharmaraj, who's an MD now at Redpoint. And he was an angel. I think he had just sold his company. And so, yeah,
He had created Java server pages before. And then it was Bill Lee, who actually runs Craft Ventures now. Eric Han. So there was, I mean, there was like really strong angels who like probably would have backed us without YC. Listeners, you'll know Bill Lee's name actually from the SpaceX episode. Oh, yeah. He was the first guy off of the first Tesla, I think, in one of the documentaries. Like he has number one off the assembly line.
So, yeah, it was interesting because these angel groups were, you know, Eric Hahn had funded all of them. So, yeah, the joke was...
Eric and Satish were SMTP. And then Bill actually started as a founder doing NNTP. And so he was at Berkeley and they basically could have chosen like... Self-aware games? Is that right? He was news. He was doing news servers. And so how all the news server, the hosted news server service for all the ISPs, like I think that was his first startup that made him hundreds of millions the first time around. So...
So it's just funny. I mean, all of this is very nerdy and around literally the protocols, right? His joke would always be, oh man, I really wish I chose HTTP or SMTP instead.
much more widely used protocols. In this 2008-ish timeframe, raising a seed round was not going to initialized and going to like the, frankly, I mean, in the Northwest, it'd be PSL Ventures, which obviously I've got a big horse in that race. But like, it's not... There are no seed funds. It's not like there's 100 seed funds out there you go pitch. It's like these angel groups or super angels. Is that the right timeframe?
Yeah, totally. I guess the advice back then, which I feel like is still true, is like, if you're going to have a Series A investor, like have a couple or just have zero. That was, so we ended up having zero. That was the right thing for us. And it's so funny. You were thinking of it as Series A, right? Even though today, for sure, that would have been. Oh, sorry. So actually later, Satish became a VC and then he wrote, we were one of his first Redpoint Series A's. Ah, okay.
Which I think still happens now, honestly. I mean, we did it a few times for Initialized. And I think that that's going to continue to be something that happens. It's like you're going to have seed investors who are successful and they're going to build up their LP bases and they will do a couple rounds in a row, right? Well, Sequoia does it now. So why wouldn't anyone else? Yeah, totally. Did you know at the time that
Sequoia was funding a lot of YC? Or was that talked about? Was that known? I guess basically at some point, Paul and Jessica had put all of their personal money into YC and they knew it was working. Though what's interesting is even by 2008, when we were pitching people even for the Series A, but certainly at the seed, like we would go to the VC's offices and we'd meet with partners and
And they would actually just be like, "Hey, you guys are like Stanford plus like worked at Apple and this other startup. Like, why did you take YC?" Which is very interesting. Because for us, we were like, "Oh, well, we want to be like Dropbox and Reddit."
So it was just funny to see, like it was three years in and it was clearly like a multi, multiple multi-billion dollar companies had already been funded by Y Combinator, but the VCs that you would meet, like, well, they didn't read the headline yet. Right. And that's the other like trend that seems to happen over and over again is like the interesting thing that is happening is not being written about yet. Right. You'll find out about it in like two or three years or five years if you're lucky, but
That's probably good for us because like that's how we make our money, actually. It's like, how do we find the stuff before other people are onto it? That was always true. You know, it just takes forever. These days, I just see the 10 year overnight success all over the place. And it's like, you'll see. Yeah, there's and then it comes out of like the fundamentals. Right. It's like for Y Combinator, I was the customer. I was an engineer who could like build anything. And like that was the part of the community I wanted to be a part of.
It was probably six years. 2011 was the year that people realized that Y Combinator was legit. But that was the year, like, out of dumb luck, I ended up working there. Right. So take us through that decision. So you sell Posterous to Yahoo!, obviously not the outcome you had dreamed of based on early traction, but, you know, that chapter of your life is sort of closed. How do you make that call?
So Instagram comes out in 2010. We flatline. Me and my co-founder are having a falling out, which I've actually talked about. I wrote about it in TechCrunch. I've done a couple of videos about it. I should probably do one with Sachin at some point. We weren't really on speaking terms for a good number of years. We're friends now, but...
You know, that's one of the problems with startups is that they become so encompassing. They, you know, embody your ego. And then the problem is when things don't go right, you start looking for people to blame. And this is very common and it's almost uncontrollable, which is, you know, really hard. But it also helps for me now to be able to say like, hey, this might happen and, you know, be aware of it. Like maybe that'll help. Right.
It was basically either I had to go or he had to go because we just disagreed on how to pivot. Like it was clearly not going to work. And then I ended up going to work at Y Combinator instead. And I initially was just designing homepages. Like I just needed a place to pay me, I think $30,000 a year. I was like, you know, just literally like part-time contract work to like come in and help the companies. But I just loved, like got energized working with people and
talking with them. It's crazy because like these companies turned into great companies. Like I remember working with Joseph Walla at HelloSign and redesigning their homepage and like first time experience or like same thing with Goat today, which is like amazing, amazing marketplace, right? And Eddie and Daishin, they're like,
They were so stingy that they didn't even, they were from LA. They didn't even get an apartment in San Francisco. So they actually crashed with me at my apartment for like a month or something. And so it was just cool to just be around smart people who are making things that were awesome and fun.
When SV Angel and Yuri Milner came along and said, we're going to fund every single company at YC, I think Yuri Milner came in on, you know, an Anybot, one of these telepresence robots. He was in Moscow. Oh, I remember those. It was nuts. I think I was at DSP at the time, and I'll never forget. Oh, man, I was in...
I think it was called Sports Cafe. It was right across the street from the new GSB. And I used to eat lunch there a lot of days. And I'd see, you know, David Shaw, the football coach, and a bunch of people would be in and out there. And I remember one day they had clearly a football recruit coming through. This was like 2012, 2013. He was there with his family. Usually you would see Coach Shaw with these guys. But...
he must've wanted to go into tech because, uh, instead of him being there in person, he was there on an, any sports cafe. And that was the pitch come to Stanford. And like, you can be, it was amazing. Was that Trevor's company? So, um, YC's West coast office was split with any bots for a good number of years. So it was like awesome robots in the back and like dinner and like slop in the front. Um,
It was like chili, bad chili was the, I shouldn't bag on the food that much. I always thought it was fine, but that's like the inside joke is like, oh, you know, it was Paul making the stuff himself for like the first few years. So.
So when you joined in 2011, that kind of was the beginning of the inflection point. That was when VCs figured out that this was some place they needed to pay attention to because one, you're lucky, two, you're good. I mean, Dropbox people, I think, were like, oh yeah, they got lucky. There are a bunch of people who get lucky.
And then when Airbnb became a giant marketplace and a billion dollar company, then everyone was like, this is the thing. So it was very interesting to see like the number of applicants went up by a lot and
Honestly, it was a different thing. Like, you know, $17,000 for two people, not a lot of money. My YC batch in summer 08 was the least successful batch on record, even more unsuccessful than anything in 05 and 06 because Lehman died. Like we closed our angel around the day Lehman died actually. And so going from 20 to, you know, $170,000 was like a really big game changer actually. I mean, I think it really helped the companies really fundamentally. Yeah.
And for folks who don't know, the 17 came in on the same terms for that 7%, and then the rest came in the form of the convertible note, which would basically be additional deletion. Yeah, it was uncapped, though. So it went into the next round. Oh, wow. And so that was how powerful that, you know, I think it's been, you know, it's since been blended. So now it's like 7% for like the 120 or whatever it is right now. Huh, okay. Yeah.
And just with the amount of early stage capital that's flooded in, they've basically needed to do that to not look like a gigantic ripoff? Or how does that work?
okay, well, Yuri gets 75 and Ron gets 75. And then afterwards we added Andreessen and yeah. It was just Yuri and Ron that I remember when it was just on top. Right. Harsh actually, you know, negotiated it. So, and Harsh is a partner and he's back at YC now. Wow.
So, yeah, I mean, that must have been wild to have like you joined the cult, you go through it and then you're back as a cult leader. I was a priest, a very low priest. Yeah.
A hype man. Yeah. I mean, what were the conversations you guys were having? Cause I, to my mind, at least this was kind of the moment where all of this started changing. Seed funds started being forming, you know, all, all of this. And I think the decision on, on the part of YC, maybe it wasn't even a decision. Maybe it just naturally happened to start bringing in so many more companies and you had so many more applicants. What were the conversations you guys were having about that? Yeah.
So, I mean, Paul Graham built all of the first software and then Brett and I basically rebuilt it like right after him in sort of 2013, 2014. But it was always run by software. So even the first batches were like, you know, ARC. And so the interesting thing that I remember is that every single batch was Paul Graham built it himself. Paul's own flavor of Lisp. Yeah, that's his own flavor of Lisp. That's what ARC is, right?
I think every single year, they basically tried to keep the acceptance rate constant, like about 2%. I think sometimes it floated up above 2. Sometimes it was like 1.3, 1.4. But the rate of innovation will just sort of
It's just going to go like that. And if anything, as interest in it goes up, there will be actually more innovation. Right. The success rate is always going to be the same. If you select fewer companies, you're actually reducing the rate of innovation, which is the opposite of what we're trying to do. And so there is method to the madness. And actually...
You know, there were definitely moments where YC felt broken. I think like the batch that Coinbase and Instacart, both of those were sort of maybe a little bit too big. Was that 2012, I think? Yeah. I think there was one that blew up to like maybe 75 or 80.
And then that one was so big that the sort of transaction costs of like reloading who the person was and what their company was became a little bit too great. And so that was actually when Paul Buchheit, the creator of Gmail, decided, hey, let's try doing a little bit of sharding, which is like very straightforward. It's like, let's separate this out into groups and then let's have those groups, let's have group partners separate.
be the people who sort of work on their cohorts. And then there's more continuity and there's less transaction costs, which just made sense. And then... Oh my God, you guys took the Constellation software approach to scaling YC. Yeah, a little bit. I mean, I think they're still doing it, you know, like, you know, I think it was...
You know, Jeff Ralston and Michael Seibel decided to, you know, break it up into not just one day, but two days. So now there's like Tuesday and Thursday. And so the idea for scaling kind of continues. And I remember very specifically when the social network, the movie came out. That was... Oh, that changed everything for all of us. Isn't that funny? I mean, that's where pop culture really...
freaking nerd and you just like computers and suddenly this was junior, senior year I was in college. And like this thing that I've been doing on the side that was extremely uncool, which is like making an iPhone app instead of being social, everyone that looks at you and they're like, so are you going to do that? Like, that's what's going to happen to you. And like, of course not, but it made the whole world wake up to this. Yeah, totally.
Cult that was going on. That's our Eternal September. That was the most, that movie. It's over now.
We should have packed it up back then. The funny thing is, I think I was just talking with friends the other night who rewatched it. I need to go back and rewatch it. They said it was just as amazing in 2020. But I think the thing is, like, it was like Liar's Poker. Like when Michael Lewis wrote Liar's Poker, he intended that to be like lampooning the industry and like, don't go do this. And it had the exact opposite effect. Yeah. Pop culture is powerful. Right. And then I guess that just goes back to, you know,
It's all mimetic desire, right? Like we just see we're a bunch of monkeys and we basically just ape whatever we see. And, you know, my desires come from other people. Oh my gosh. Well, there you go. Facebook at its core. That's right. The most mimetic company ever. We'd be remiss here if we didn't spend a good amount of time telling the genesis of Initialized. Oh yeah. Very accidental. Yeah.
We're like caught up-ish here. I think 2012 was your first fund, something very small, like $7 million. Yeah, so Harge and Alexis and I were sort of the younger partners at YC. And it was actually Alex Bangash at Trusted Insight who gave us our first money. And so it was actually, I think Jessica actually introduced us. Jessica Livingston actually introduced us. And, you know, all of the partners were investing their own money. And we were just the younger partners. You know, Twitter hadn't IPO'd yet.
We thought, well, maybe we would just try it out. And we'd write 50 or $100,000 checks. It was actually Alex taught me a lot about LPs and this whole other world. You know, he was a little bit Y Combinator for my fund life because I think I really had no conception of the macro picture of how the world's capital was allocated and how
just the degree and like how much there was, it's like sort of staggering actually. You know, all of tech is maybe a hundred billion dollars, you know, maybe early stage anyway, but you know, the global economy is like $10 trillion, like trillions and trillions of dollars. Like we are truly just this like moat of dust on like just something far larger than
But the kernel of it, I read about, you know, actually working on hedge fund software for Peter Thiel, which was like, you know, Joe Lonsdale made me read The Dollar Crisis. You know, he made me read about like what happened in 1971. And today, of course, you go on Twitter and you see these graphs of like...
you know, working class wages flat and then like education, housing, asset price bubble. It's like something really did happen in that moment. And I guess that's why Bitcoin was so obvious to me when I saw it because you're like something weird is happening and it's water. We're just swimming in it. So...
So all that being said, like, you know, someone who had spent Alex, you should have Alex on the show because he's a fascinating character. Like he worked at Bell Labs. He's an engineer too. He went to Wharton for his MBA and then he discovered, oh, there's this whole world of professional institutional LPs who allocate most of the world's capital. He basically wanted to help them get into funds like us. And so he took a really big chance on us. He was like,
you're at the right place at the right time and you can deploy capital into companies pre-demo day and having worked with them for 10 weeks. So working backwards, it seemed obvious. On the other hand, in that moment, he was the one who was like, oh, this is, he gave us one of our first institutional LPs and put together like the first two, three million of our $7 million fund. So-
Because the important insight that you're talking about here is, sure, the $100 billion that exists in our early stage universe, even now when there's tons of money that's flooded into venture capital, it represents sort of this line of dust around the edge. And on the other hand, the NASDAQ is a $10 trillion market cap exchange and $3 trillion of it was funded by Sequoia.
And so like these companies that are just this little dust, that's why this ecosystem is so magical. My thesis or Y Combinator's thesis or your thesis, which is the world is being remade by technology. And there are just a few people who, you know,
What's funny is like, I'm still operating by the principle that like it's all nerds, but you know, actually there are some jocks in there too now, post social network, you know, and that's how it is. Well, and now with like, you know, no code and everything, like it's, it's just been so democratized. And that's a great thing. I mean, the reality is like, I look around and I didn't realize there was so much money, but I sure did know there were so many problems. And then, you know, coming up,
just your friends, the people you grew up with, like they're all the people who can build. And so it's like, don't tell me that there's too much money chasing too few people and too few good ideas. Like go outside. There's like a billion problems that could only be solved by people. And then don't tell me there aren't enough smart people. Like if anything, the people are just trapped in these systems and, you know, basically machines that don't allow them to fully realize their potential and solve the problems.
So how do we fuel this whole machine and make it better through money? You know, I realize that's both like highly capitalist and highly technological utopian, but that is like what I deeply believe at my core is this is what the world needs the most of. And so properly applied capital allocation, plus like finding the best builders in the world. I mean, that's one of the reasons we do this show, right? Like we tell these stories. Yeah.
That's the thing I believe that like, I actually now realize like, I'm a weirdo. You know, you guys are weirdos for believing this. Like we are weirdos, but that's fine. Like I'm fine with that, you know? Well, non-consensus and right. I think you've probably said it a dozen times on this show, but you have to be non-consensus. That's right. The younger guys within YC, you and Alex start thinking about
We work with these teams, we know them. We're getting these amazing team, this whole cult with NY Combinator. We should have a fund. Had Paul and Jessica thought about this before or? I mean, they, you know, quietly invested and. Right. They were just doing it themselves. Jeff Ralston. Yeah. And so we just wanted to write checks of, you know, 50K to, you know, 100,000. Like there were kind of like there is just other people's money.
And we were like just sort of seeing if it was good. And it turned out, you know, we found... I feel good about Instacart because I definitely flagged them and helped them get into YC about halfway through. Because that was like a 14 times pivot, right? It was like a massive... Oh, Instacart? Instacart was kind of that like the whole time. So... I thought...
It was something where like he had 14 different ideas. Okay. He sent me a six pack of beer using the driver app and, you know, he had the driver app and the consumer app working. He had thousands of, uh, you know, thousands with thousands of items with photos and inventory and price data. And, you know, I don't know how he did it, but he, you know, I think he had, did Stripe exist by then? I think it did. So you could put a credit card in.
And that's what, you know, he sent me a six pack of beer using his service. And it was operating with two drivers in Mountain View with the local Safeway.
And I was one of the first hundred people to try it. And it was like basic intelligence test. I mean, you're reading a thousand applications every six months at YC. And so it wasn't like we didn't see that idea. You know, Uber was out. Like I think Zimride was about to do their Lyft version that was actually just, you know, normal people in cars.
So it was a new idea. And the key insight was you could do it asset light and, you know, you could deploy a large workforce. Yeah, exactly. That was, you know, the year after, right? And so there was this broad idea
acceptance that that maybe was coming, but it was still like, we don't know if it's really going to work. And then it turned out like, yeah, it worked really well. If anything, a lot of the people who missed on it said, oh, it's been tried. It's called Webvan. And they didn't spot the why now, right? And that's why why now is such a crazy important question. Like we put it and highlight it in our memos. It's like, why now? What was your why now?
Well, on Instacart. Why that point? It was just literally 60 to 70 percent of people who had access to phones could have smartphones. And that was the first moment where you could actually have a purely mobile distributed workforce that was onboarded literally off of Craigslist again. There's probably a Craigslist thesis in there, but it's been out there for a long time already. Yeah.
We talked a little bit about the founding moment of Initialize. So you were only part-time at this point, right? Oh, we were full-time at YC. And, you know, that's why it was kind of tricky, right? You know, we had inside information. We worked with teams for 10 weeks. So it was pretty straightforward to know, like, these people are awesome and this is a real market. And so I really, like...
I didn't have any conception of how hard Demo Day is until I left YC because you are looking at like this list of hundreds of teams and you know nothing about them and you have to meet them. Whereas like when you're on the inside, it's like I met with every single team, everyone wanted help with their homepage. And then it's like the question was very simple. It's like,
Shoot, would I go work there? You know, and if the answer was yes, you know, meeting Brian Armstrong was it's like crazy, stupid, simple to be like, yeah, I want to work for that guy because he was a domain expert. He did anti-fraud at Airbnb. Great engineer. He built the first thing. He was obsessed with the Satoshi Nakamoto white paper. I had bought Bitcoin off of Facebook.
you know, Mount Gox. And it was a disaster. And I was like, this is an obvious need. So yes. And it was like totally undersubscribed because I went for a walk with Brian recently and he was like, yeah, I don't know. He, you know,
One thing we didn't do as well back then that I think, you know, is still a really difficult thing is like, how do you tell a YC company what their valuation should be at demo day? And there's always these like conspiracy theories that like YC partners are just trying to like get it up as high as possible. But the reality is like, these are like rational, self-interested actors who also like maybe you're doing it for the first time. And like, you know, it's Lake Wobegon up here. So, you know, even...
You know, Brian was sort of like, I didn't really know. And this was before the safe, right? There was no, so. This was a note. Yeah, I think the note was still what people did. The founders would set the terms. The founders would say, I'm raising a note with this cap. Yeah, I think like, I think it was, you know, in the mid teens and it was really high, right? And he didn't get his full fill, honestly, at demo day. And that's like credit to him because it didn't matter. I thought the lesson for some time was if it's hot, don't do it.
And that was also wrong. Actually, that's actually also wrong. And why was that wrong? It's not that things that are hot can't be good. It's that if it's hot, it's not necessarily good. Right. It's actually like not an indicator. Yeah. And that's the problem, right? It's like if you have very little data and then we're social animals, then we think that we read signal into things that are random, right?
And so that's the danger with things getting hot. Is that like, really? Like, I mean, it's weird now because like when we were nobody investors, like,
Yeah, it was just very bewildering to me that people would be like, oh my God, they are investing. We have to invest, right? And then now they're doing that to us. And I'm like, well, I mean, this is just a guess, guys. So, I mean, I'm not complaining because it's good. It lowers the cost of capital for our companies, right? And all of these things are great. Let's just give you a moment to flex here. So just for people who aren't as familiar with your work, you know, that first fund was 7 million. I think your most recent fund was 130. 230.
230? Yeah. Okay. And you've funded companies such as? Coinbase and Instacart in that first fund, Opendoor and Cruise Automation in the second fund, Flexport also, Patreon in that second fund. Right. So not shocking to any listeners now that people would take Signal from when you are participating. Yeah, totally. Which is, I mean, I appreciate that. I don't know. I mean, but the reality is like, even now, like...
We do not have a crystal ball, even though this is like the opposite of what I should be saying on this channel. But the reality is like, we're just trying to be rational human beings that just, you know,
I actually really like how Matt at Benchmark talked about it, which is like, this isn't about like seeing things that aren't there. It's about seeing things that like are in front of us, actually. Seeing the present more clearly. I think it said venture capital is not about seeing the future. It's about seeing the present very clearly. Yes. Thank you. I am notoriously bad at verbatim quotes, but that was general idea.
It's so true, though. The second fund was in 2013, right? I think. Yeah. Yeah. And so we were still working at YC and then just like people would come out. And honestly, I also have really underestimated how easy it is to just write a 50 to 200k check and
And then that second fund was 40 million. And so we learned the hard way that, oh, percentage ownership matters a ton, right? I mean, that fund is going to be great because I think there are going to be six or seven unicorns in that, like in the end, and it's still going to be a great fund, but just not as good because it's a way bigger fund and
we didn't 5x the size of the check, right? Yeah. I mean, it's just math at some level beyond that. Yeah. So Gary, why does percentage ownership matter? Because this audience is full of founders who have never been on the VC side of the table and who have heard from a VC, sorry, we're not going to be able to get there because we can't get a big enough chunk of your company. It's like a lot of founders are going to look back across the table and say, the price is low now. There's going to be a huge multiple. Why do you need to own so much of it?
I guess at different stages, it's different reasons. At that stage, what I realized was LPs are still sort of looking for things that look like Sequoia or Benchmark from like the 90s.
So there is a little bit of still cargo cult thinking in LPdom. And I, you know, I think it's changing. There are, you know, people like Alex Bangash and Trusted Insight. And there are like institutions that are sort of coming around to the idea that seed is its own asset class and it can be done in a different way. Because people are still thinking like seed is like being a series A investor and you have like
X number of partners and you can sit on X number of boards. And actually, at the early stage, it's totally different. I think that those rules shouldn't apply quite in the same way. But all that being said, it's like, until you have the DPI and this is top 1%, top 5% returns, which I'm blessed to have now, but
You know, in the moment, it's actually like raising a fund is hard, right? If you talk to any VC, it's, you know, it takes years. We're lucky it took like, you know, when I left YC, it took us like nine months to get to a first close and then, you know, hit the hard cap in a year and maybe two months. So, and that was short. That was really fast, actually. Yeah.
And it's hard, right? And so you are sort of constrained. By and large, the large pools of institutional capital are not the types of institutions that embrace doing things differently. And so this is... Yeah. And the DPI results are still from 20 years ago. And so I think this will change in the next 10 years. But for now, people are still going off of what they know is true. And
Again, it's the long time scale. It's the 10 year overnight success, right? This will change, but, and it's perhaps changing right now. And honestly, AngelList is doing a big chunk of it. You know, I respect the hell out of Naval. Like he is pushing forward the state of the art because he is recognizing that the world is absolutely like chock full of capital. And like, you know, we have a fully institutional LP base and they are awesome.
awesome, right? It's awesome to have an institutional LP base of like the top universities, but it's being able to unlock an entire other tidal wave of family offices that didn't have access. That's, I mean, honestly, like 500 startups and Dave McClure and Naval with AngelList, like all of these are sort of unlocking that. Like,
Dave was the only person who would get on a plane and meet family offices in like all parts of the world, right? And I think that's under-recognized, actually. It really is about access.
And the world is full of money. And, you know, now the miracle is not only happening in Silicon Valley, it's happening all over the world. And this is actually the core story of venture, early stage venture in the past 10 to 15 years is like, it used to be all of us trying to copy what Sequoia did 20 years ago. And then today it's like, hey, we get to bounce our own ball. We get to find our own markets, like,
The only rule is still like, you know, what do they say? You got to put moolah in the koelah, right? You still have to like get the PPI back, right? That's a DuBose quote, yeah. Yeah, I mean, I agree with that.
Can you define DPI for us? It's a distribution for paid in capital. Yes, that's right. So, and that's the actual multiple that you would get out. So it's like there's TVPI, which is total value of the fund. That includes the markups. But distribution means like that's like, nope, you have realized this exit. Yeah. You can't eat on TVPI is the thing. But yeah, your endowments cannot actually, you know, pay for, you know, salary or buildings or anything that they actually use.
you know, with TVPI, they just get marks. The marks are actually even more dangerous. So, you know, I do empathize a lot with, you know, the LPs because it's a very bewildering time. Software is eating money right now. People are starting to say that incumbent businesses in, you know, the public markets that do not have tech at the core of them maybe won't have future cash flows in another 10 years.
That's starting to happen. So which is very like the opposite of what I thought, you know, when Twitter IPO and, you know, I gave the money to my wealth manager, I was like, get me hedged. And it was like, it was like 2013. You know, it's like the stupidest possible time. It's like there's like easy 10x in tech, you know, so I want to offer a devil's advocate position to
the notion that you're constrained by the number of boards. You were basically making an argument that an old school way of thinking is that you have a constrained number of bets you can make in a portfolio. But if you look at things like 500 startups, where you're making very small investments, having very small ownership stakes, the sort of more negative way to phrase this would be spray and pray approach, that that can produce great returns too. I mean, it's not the approach we're choosing. So we've been very explicit about not doing that.
Yeah, I wanted to ask you directly, how PowerLaw distributed are your returns? And if we look at initialize two or initialize three, there's data on initialize one, so maybe we'll go with that. Like how much...
of the returns come from one, two, three companies? For fund one, it's like 70% Coinbase and 30% Instacart, right? And that's like, you know, we got 2x DPI and, you know, I think 11 or 14x. I'd have to double check what the TVPI on it is, but it's like, we're really happy about it, but it's also easy because it's a small fund.
And it's reasonable to say that like the rest of the companies basically contributed no cash return to the LPs. Yeah, and it's tricky because there are some things in there that did hit billion dollar status and then just got wiped out like Zenefits. Right. This is the difference between TVPI and DPI. That's the TVPI versus DPI, right? So the TVPI can go away. And to bring it back to the beginning of the episode, like
This is what happened to the company that I decided not to join, you know, when I decided to keep my job at Microsoft for another couple of years. Paper markups are not liquid. Yeah.
So yeah, it's tricky. I mean, I think going back to the spray and pray argument, it's tricky. I'm like, you know, SV Angel is one of the best investors I've ever seen. And I respect the hell out of it. And I actually think their numbers are amazing. And they don't take an institutional LP base at all. Box Group is another that I think is doing it really, really well. And they don't have percentage ownership. And I talked with David Tisch recently, and I'm like,
yeah, he's doing an amazing job and blazing a different trail. The other thing is like you can get ownership as long as you're in it. And that's the other way to make it work. And I think SV Angel is a good example of that. They've made an incredible amount of money on SPVs. And I don't know as much about how Box is doing on that, but I suspect they are also doing amazing at
having access and then just doubling down on the winners. Right. And it's not that different than what we were doing when we were first starting, you know, it's like, you just have to have the relationship and be in the right pond to,
And, you know, the rest sort of takes care of itself. Like you said, it's access. Yeah. So you spin out initialized, you raise $125 million fund three, right? And then... Yep. 125. Yep. That was the risky one for us. I mean, that one was the, you're not going to be at YC anymore. And it's a much bigger fund, like jumping from 40 to 125. And then 225 and then 230 for the most recent. That's right.
this whole early stage landscape looks so different, right? Like you were one of the first, I mean, there was floodgate and baseline, you know, probably around the same time, maybe a little earlier than you were started, but like, yeah, I love those guys. They're really respect what they do.
They're so great, but like such a small group. Now, you know, you throw a stone in San Francisco and you it lands at the doorstep of it. Yeah. Yeah. I'm an LP and a bunch of them. And, you know, they're my friends. You know, they have their own funds and I got to support them, you know. And I guess at the same time, the big funds, which for a while kind of abandoned seed, they're now back in force, at least that I see like they're leading seed deals all the time.
How do you navigate this as a founder these days? Oh, I'm excited. I think it's great. You know, honestly, because what's funny, and this is like maybe a dangerous thing to say, but I'll say it anyway. It's like, I made all the money that I really care about. And it's actually not, I don't need a lot, you know? And then the scary thing about venture is like, if you spend enough time here, you'll start finding people who like will never be happy with like any amount of money and power. And
To me, it's like, this is the most growth mindset industry that exists on the planet. And so just like, let's make the whole world a lot bigger. And I, you know, the cool thing is like the world doesn't need me to believe that it's just happening on its own. Honestly, it's like all of the people we talked about, whether it's Paul Graham or Naval or, you know, so many people, they're actually just like, they're coming at it with, they're bringing more capital. They're bringing more smart people. It's like, not just Y Combinator. I mean,
whether it's Alchemist or like, so, I mean, there are so many really great places, what you guys are doing in Seattle. I mean, it's just amazing to see new places. I mean, EF, like Entrepreneur First, like they are minting companies that are great today. And so I think the whole market is continuing to grow. And the most dangerous thing in this market is, and you meet investors all the time who act like this, is zero sum.
They're like, oh my God, I hate those people. They're like crowding me out. Like they're increasing the valuation and you know, the post money is unbelievable, absurd. Nope. You know, this, this is going to end in tears. And I'm like, you know, what I realized at some point is like, you will always sound smart. You will be the sage when you are negative. People want to hear it. You will always have an audience when you are like, you know, the perma bear, right? But perma bears don't make money.
And so I would rather be as like big tent as possible. And it's like every geography in the world is having startup activity today. And that's beautiful. I think like people can escape, like basically working at like a big company is a little bit like going to work in prison, you know? I don't know. I mean, it's...
I mean, it's not that bad, right? But you're really, you really embrace that. I don't know. It's true. I mean, that's my lived experience. You know, it's probably different than other people's, but, you know, I have to just like, it's just true to me. And I want that freedom for everyone. I believe in the individual who's a builder, who can change.
run their own destiny right to be but they have to do it all is a tricky thing right like it's not enough to be a great engineer because that's like being a great cog in one wheel right like you have to be the you know machine builder and that's so much harder like you can't just be good at design you can't just be good at engineering you've got to be great at all of it and it's so hard
All right, I'm going to get super esoteric for a minute. So let's take social media companies as an example. There was an explosion of, you know, Facebook, Instagram, Posterous, Tumblr, these companies that eventually consolidated to very few, if not one. And
you know, between 2011 and 2019, let's keep rolling funds out of this. We had probably two, three, $450-ish million seed funds get started and raise a fund one. So are there dynamics at play? Like are there winner-take-all dynamics or network effects that are going to lead to a consolidation in seed investing the way that it did in sort of your previous life?
with blogging or do you think that capital allocating capital is a different thing yeah there used to be a lot more accelerators yes and no it does feel i can't really tell it feels like there are as many accelerators today that are being started it's just that you know they peter out will there be a consolidation the reality is like i hope not because in the end it's kind of
There's this idea of the Series A crunch, but the thing is, at that point, it's just one of the metrics, right? I think Seed gives people a chance, and then that's all they're really entitled to at some level. Actually, entitled is the wrong word, because people aren't actually entitled to it at all, right?
They shouldn't be anyway. And maybe that's what people think they are entitled. You know, people do feel like maybe they're entitled to money now, which is brutal. And that's scary to me. You know, if you look back over the, this whole period of history, we've been talking about all these step function changes of like, why is he get started? Um,
there are all these, you know, all these companies, 12 a year or whatever that are getting started. Well, that's way too much. Like you can be bearish on that. Then YC starts taking, you know, a lot more companies like, oh man, 70 companies a batch. Yeah.
No way that's going to work. Like, you'd be bearish on that. But there are multiple billion dollar companies in that one. Right, right. And then it's like all these seed funds start, you know, all this capital comes into the space. Oof, man, way too much capital coming into the space. That's not going to work. But if you look back on all of these cycles, like...
like they all worked, you know, their power law dynamics to each of them, but like they all worked like net, a lot of value was created by all of these expansions. I mean, I think there will be new series A firms, there will be new series B firms. And I hope, you know, I think that the seed firms will grow up like, you know, we've grown up from writing 50k or $100,000 checks, and those companies turned into unicorns. And they allowed us to create a firm that
I look at what First Round has done and I respect the hell out of Josh. And one of the first things he did was he took me out to dinner and he was like, so you got this $125 million fund. What do you need to know?
I'm like major, major respect for that because like that's most growth mindset thing. And, you know, he didn't have to do that. And, but he's even today like that. And so I'm like big tent as heck is like the right thing. This is the most growth mindset thing in the world to be doing. And then it comes back to the founder, right? Like, can you make a flywheel that works and does it solve a problem? And it's not like there aren't enough problems. There are a ton of problems, right? Right.
And then I'm so long on software that I think we're just scratching the surface. Like even today, you know, because we funded Instacart, now what I realize is like we might be able to integrate software
the whole supply chain in a way that's never happened before. We funded Shelf Engine, which is like grocer to distributor. We funded Silo, which is distributor to grower, right? And then Instacart. And then like even within the store, like we funded Standard Cognition, which is cashierless checkout. And all of these things work together. And I'm like, I didn't have a thesis about this. My only thesis was like really good engineers are going to go and remake all of the planet, right? And, you know, I think we're scratching the surface on it. So...
So all of the other stuff about like, oh, are there too many seed funds or too many startups? It's like, look, it's up to the founders, honestly. Like, hey, I was a founder and like, luckily we did end up making money for our seed investors anyway. But, you know, I screwed up so many things and
Even when you screw up, like, you know, I got to buy a house in Noe Valley because of, like, my screw up. So that's the weird thing, you know? I mean, it is crazy, crazy privilege to work in tech. It's crazy privilege that I never acknowledged before.
that we can build software and experiences that, yeah, I mean, it is privilege, right? And like, that's why people hate us. That's fine, right? Like people hate tech today because it's scary. It's like pushing the world in ways that are like,
Unintended, right? Being a builder is totally like having superpowers where you can get leverage on your abilities to achieve things that humans previously couldn't do. And you're right. Like that being able to wield that, particularly when people get sort of things like soul control over their company, it's scary to the rest of the world. Yeah. Yeah. I mean, startups that become...
tech giants, they are basically autocratic dictatorships, right? And then they hold very deep. But, you know, the lucky thing is we get to fund the next thing that arms the rebels and, you know, fights the good fight. And, you know, the hard part there is either you die a hero or you wake up to find yourself a villain, right? But the cycle continues. Well, I think it's time for a social network part two. Yeah.
Well, that is a good place to leave it. Gary, before you run, tell us about what you're doing on YouTube and close that thread from earlier on the influencer investor concept. Oh, God. I feel like, you know, standing on the shoulders of giants, almost certainly. I mean...
whether it's Paul Graham's essays or, you know, Mark Suster's, you know, Fred Wilson, you know, this was all new, honestly. Like, it was the ivory tower. Now it hasn't been for a while through blogging. And I think that direct access to people is very, very powerful. You know, I met Casey Neistat. He came by the Initialized Office and I
I loved meeting him. He's a really, really engaging person. But then to see how our interns interacted with him was fascinating because it was like they had been friends for years and years. And he'd live streamed his life for years and years. So they actually were. And so I find it very powerful to be able to just spend 10 minutes with people every single week for as long as I decide to do this, see where it goes. Because
helping people with this. I don't know. I get very depressed thinking about the state of tech and capitalism and all this money, but I realize there needs to be the power for people to create jobs and to create new products and services that solve problems. I still believe in that, right? And as much as there's Black Mirror out there, I do think that there is a space for someone who
I don't know, can help people just get to where they should be. If Paul Graham, you know, were to do video, like, I'm never going to do what he does. Like, you can't imitate it. It's like, it's so, I'm going to do the Gary Tan of YouTube and then we'll see what happens, you know? And I hope that it leaves behind something that's more powerful, more valuable to founders. I'm trying to tell my personal story and it's like, honestly,
I've been trying to be as vulnerable as possible. Like these are the reasons why Posterous didn't make it. And honestly, we could have been it. You know, we could have exited for a billion like Tumblr or we could have run the table like Instagram or, but you know, I could have been a contender, but like, let me tell you about the places where I didn't get it right. And here's where founders don't get it right. And my job is not just money, but also to help you get to that place where I want you to go, where you want to go, which is
you know, the promised land to get to a billion users, to make a thing that really matters. And I, you know, that's a tech positive capitalism, positive message that I don't know. I just believe I want more of that, right? I think the world needs a lot more of that.
Well, I'm uplifted. I feel much better about my next meeting. So Gary, thank you for coming on and joining and spending the time with us today. Thank you guys for having me. We'll do it again. LPs, we will catch you next time.
