Andreessen Horowitz Part II
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I need an m one that we cannot have this very quiet little background noise that hums that we have to remove in our audio that annoys me to the anthems. Ree, there is a million reasons I need to know one. Mac, but this one is clear and present. I can't wait september.

Wait you, wait you, wait you. Who got? Easy, you is you you sit me down, say, welcome to season nine, episode two of acquired .

the podcast about great technology companies and the stories and play books behind them. I'm been gilbert and I am the cofounder and managing director of seattle based pioneer square labs and our venture fund, psl ventures.

And i'm David rosenthal and I am an Angel investor based in seven S. O.

And we are your hosts while listening ers, welcome to and resent horror ds part two we last left mark and ben in their instant message conversation in two thousand nine, with the famous first words, we had to start a venture capital firm. And I was thinking the same thing.

Yeah, I think that conversation was actually IT was actually two thousand and eight.

Two thousand and eight. That makes more sense.

Launched to no nine takes a little while. We can do IT. We can do IT, but takes a little while up a venter. M.

raise the money. You don't just like snap your fingers and have three hundred million dollars. Well, today, listeners, we will cover the next eleven years from the firms founding to today.

This is the story of the VC firm that basically changed everything in the whole landscape, super high valuations, massive fun sizes, criticism for both of those things, becoming the investment firm and the media company popularising. The message that former Operators make Better VC than career investors do. I mean, David, reflecting back is pretty crazy that a sixteen is only eleven twelve years old. Well, yeah, they became a big dominant force so quickly. To put that in perspective, they were founded two years after the iphone came out.

Ah, that's right. That's right. Pretty good time to start a venture capital home.

Perfect timing. Well, listeners, two things to highlight, if you like the show. One is our slack.

And when I say slack, I do indeed me in the company that sixteen z made three ish billion dollars investing in. Do me in tiny back. Oh, sorry, I do me in tiny back.

You're right. We've got A A great discussion of these episodes. Uh, crypto investment ideas, all good stuff with the community of eight thousand super smart people like yourself.

Join that, acquire that, F, M, slash, slack and the limited partner program. This is our members only community where we drop special for subscribers content. The most recent one was with kyle salmoni, who is the cofounder and managing director of multi coin capital. We talked with him about how to manage a crypto fund and how it's and managing a Normal fund, which different this show what was his line .

was like because they're a head fun and a venture fund all doing cyp dis like. Well, the demand cation is if time the liquidity is more than like six, nine months or so. We put that in the venture front oh wow.

yeah, whole completely different universe. Uh if you want to listen to that, uh, or any of the other lp show episodes or join us on our next upcoming zoom call with L P, S, you can click the link in the show notes or go to acquired data. M slash lp, okay, listeners, now is a great time to tell you about long time friend of the show service now.

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Yeah, so learn how you can put A I agents to work for your people by clicking the link in the show notes or going to service now 点 com slash A I dash agents right？ Well, listeners, as usual, the show is not investment advice. David and I certainly hold equity in some of the companies that were going to talk about on the show. So please do your own independent research. None of this as a investment advice, is for informational entertainment purposes only.

And one other disclaimer disclosure I do have a new investing vehicle that I am super excited about is called kindergarten ventures. And IT is a Angel fund that i've started with my body in nat manning, who's the C O, O of kedo, a great company that we've talked about a unch on this show. So as I said last time, a few of the entry and horror GPS are small.

L. P. S in the fund. I don't think that, that has had any influence on have been .

keeping the honest .

uh yeah every banging onest here. I mean, i'm going to be pretty lot or of interesting here, but I think I would have done that anyway. But you you can keep me honesty.

Well, David, congratulations. Uh, exciting. You are moving from Angel to super Angel in the two thousand and .

eight parolin the right.

Very cool.

And just like bad mark. Originally, it's not just about seed investing really. It's about in a large part of the great folks on acquired. We invested any stage, any sector. We are currencies.

Alright, you're starting to spoil stuff. Take us in. You're standing exactly like one of the tent pole theses of .

the start of entering horror and goes time. okay. So as you said at the top of the show, we finished last time with the ben horowitz not gets off the obvious recruiting call from degree oni at square, he hangs up and he, I am mark, I am. I love IT.

So you may be wondering, like, huh, why are they starting a company? Why are they starting a venture firm? Well, venture was something that market least had supposedly be been interested in. Background has first kind of early days in the valley, he says to the wonderful writer, ted friend in the great new york peace that we are going to keep referencing today.

He says to him about ventura capital, quote, I always thought the entire venture thing was incredibly cool, going decliner perkins with the high ceilings, the markers on the wall of all the great companies, the IPO ed, Larry ellison, walking through. And at eleven A M, the biggest buffet you'd ever seen at a time when I was eating a subway IT was the closest thing to a cathedral for nerds. Not some way to talk about the the venture capital industry. So as we talk about marketing, panel courts have been doing there super Angel investing thing. You know, this wasn't entirely a hugely but as many, many people would point out to them and of course, as they knew themselves, building a venture capital firm that is going to like lead deals and beat out other venture capital firms to lead deals is a very, very different proposition than being an Angel .

investor yeah I mean, in this Angel investing, they were doing, and we should say mark and banded thirty six deals together over just three years, a deal a month with their own money of, I think, about two hundred k of a max checks size. They're pretty much not leading rounds. So they already don't have the dynamic of you know needing to be the one to set the terms and come in that is about to hit them in a big way of a total difference between coming in as a participating versus lead .

investor met also having now made the opposite journey. IT is way easier and way more fun not to be a lead investor, but that's a whole another story. But like we said, it's a pretty interesting and definitely contrarian time to start a venture firm.

Here we are, you know, late two thousand eight, early two thousand and nine, of course, what's going on, the financial crisis. And so you know most other VC, and if not vcs, certainly the L P, S, they are all like tuck in their tails and three ashin their portfolio. Hoo, right now, you know this is not about deploying more money or starting a new from like scores.

Literally just done the R I P. Good times presentation. You know it's kind of crazy to like think that, oh, we're going to go start a new firm right now.

Yeah, wild. So here they are. Obviously, we've talked about the last time the big d is that they have that there is no bubble.

They're kind of all alone in shouting from the rooftops here that, hey, like things are actually great. And silicon valley, this is not like the outcome crash. The financial crisis is actually only gonna great for silicon valley startups.

And of course, they are right about all this, but pretty much nobody else saying that tag would write in the new york a piece later that a sixteen z was designed from the begin to be a full throated argument about the future, of course, the time when nobody also was making that argument. So you've got this insight. They've got the interest in V, C.

And the drive to make that happen, to go build a firm, the market in reason. And ben horowitz, but there's still just too, dude. And if you want to pull off what they wanted, pull off, they're gonna need to hold a lot more than that.

So they go to see who else but their old friend, handy rack lift. And andy, by this point, of course, had step back from benchmark. And he's teaching a stanford G.

S. B. And he has just made the jump to become an entrepreneurial self. He has founded wealth friend.

But of course, knowing andy, there is nothing that gets him more jazz than the idea of, in the words of hot Marks, that he uses a correct non consensus bet. And that is obviously exactly what bad mark are trying to do here. So andy tells them is great.

I love you guys, and I love this contrarian bet that you're making. But you want to be in the upper island of V. C firms, and you need a strategy to break in.

And you see we did this a benchmark about ten years ago when we started benchmark, and we've talked about this a lot on the show. But what we did a benchmark was we counter positioned against one of the two major in comments at the time, which was liner perkins cinner. As we talked about, there was the corrective approach to venture capital.

All of our companies work together in different ways that sort of like they're like a mesh network, and we sort of sit in the network as the. Provider, but they work with each other in all these different ways.

Yeah and like on the one hand, that was great. But on the other hand, you know certainly some of the clients entrepreneurs felt like they were pressured into doing deals and working with other cleaner portfolio companies didn't really make sense for them. So what in the adventure rank did is they said, there is no pressure from us to do anything else.

We are going to treat you as sovereign tes and help you make the best decisions for you. So that was one. The second piece of the benchmark counter positioning against liner. Maybe this is the most important. The thing about climate during a payday was IT really was john door and we to do a whole episode and clar itself and storied history even before john.

But like the glory days, IT was all john, you know, all their big coins from nescafe to amazon, beyond IT was john that source them? And john was the reason why the entrepreneurs wanted to take liners money. But the thing about how IT worked that wasn't talk to about a lot was john would source the deals.

He would be the face of clients, the reason everybody wanted work with them, but they need farm out the board seats to other partners and even associates. So how do you kind of position about against that bench? Like, well, this is great.

We're going to be a small equal partnership. All the partners here are gonna great people you want on your board. You know what you're getting, somebody from benchmark, you're getting an equivalent maybe not quite an equivalent, but they talked about like an equivalent to door and your partner is actually gonna sit on your board. So then if you're beat mark, you need to start talking about how important IT is, who your board member is.

right? Sort of this, like all about the individual, you form one trusted relationship. They aren't promising to do anything for you that you we're gonna like staff up for your company.

We're not gna help you with pr. We're going to be the best financial investor and board member possible. And you're going to have this really tight one to one relationship with someone that you really, really want involved in your company totally.

And I think it's worth doubly underlining this because obviously, IT is super important who your board member is, and the right advice from the right board member can make a huge difference today. Would would we just take this for granted? It's like your efficient water, like, oh, yes, of course, the board member that you have from adventure from a super, super, super important that wasn't the case. And you could actually ask the question of this, is that the truth period? totally.

We're going to talk about a lot of things on this episode that andry and horowitz introduced into common startup wisdom. This was the one that benchmark intl. Ced in the common start up wisdom.

yep. And the reason they introduce this, the start of wisdom, was specifically to fight against client works.

IT was a strategy. Credit IT worked .

really well for them. Exactly, exactly. So then, of course, the last piece of the bench park counter positioning related all of this and all working in concert together, was liner is this huge farm and know it's got lots of tears of partners and lots of people there and lots of politics and lots of functions that aren't investing partners.

So eventually, this we're going to the opposite. We're going to be a small, flat, equal partnership. So we're all going to get on board in a way that politics had a bigger firm like clients would sometimes make difficult course. There is a lot of luck that goes in the building adventure capable firm as well. And probably the most important thing for benchmark was that they made that early investment in ebay.

And like all of this strategy at all, this counter positioning, sure that helped put like they got ebay and nothing else kind of mattered after that, and that helped them a cent to the top of the venture capital heat. So no, okay, back back, like they started new all this. And to hearing this are Mandy, and they are like, uh, okay, well, what are we gna do? And you know, remember, of course they love andy, but they hate benchmark.

yeah. And we should say, like the way the benchmark establish these tenets that they hold true, the way that and dress horwitz is about to. It's not pure marketing, at least from what I can tell in all the research. IT is a self examination of what are the things we hold to be true and then what are the subset of those things that we can make a really loud marketing message about that we were gonna to do anyway, but play to a massive advantage for us.

You, so they are like, well, we like this kind of positioning thing, but in marker, who are are we going to counter position against night liner and probably not sqa. I like we talked about on the last episode, you're onna, come at the king you not miss and and IT seems like really hard. Maybe we should counter position against benchmark our .

body and he's not there.

No, it's like of the old saying you had to die here. You live long enough to see yourself become the bill in right?

Oh, and on that note, I know you're about to talk about this later and so I won't disclose how mark the existence of the fund. But in the first sentence of the interview that he did announce the fund, he literally said the sentence i'm crossing over into the dark side that's .

actually great because I cut that from the quote that I was going to that's the perfect, perfect. So much later then would actually just say, point blank, he was like, yeah, we were always the anti benchmark. Our design was not to do what they did.

Of course, he is referring to them telling him that he wasn't see you material. But also, just like in general, what we're gna do the opposite of what they do. So now the question becomes, okay, you know, american know what they are going to do there? Onna, counter positioning against benchmark.

How do they do that? Well, the obvious first thing is we on fire founders here, and we support Young technical founders, help them become the best CEO that they can be. And we're not going to do what David burn tried to do tough.

And I love the way they talk about this because clearly is something they deeply believe having both been computer science undergrad and gone on to become founders of companies. The way that they sort of describe IT is without a synthetic network, without a network of what in recent hylas would become a technical founder, doesn't really have a chance of becoming a professional C. E O.

Th Epace o f t he c ompanee g rowth i s g oing t o r equire a C EO n etwork, a CEO sort of understanding of how to organization build much faster than someone can develop those skills. So the thesis behind developing what would later become platform at the entire V C. Ecosystem platform teams, was really mark benching.

So how can we synthetically create or simulate all the tools that a real professional C. E. O has if you are a technical founder, if you are the innovator? Because their core belief, they believe that the innovator should be the one who is running the company. And if that is true, oh my god, there's all these problems that now we have to like help .

them fix totally. Well, now think about how this all fits back into these various V C. Firms strategies. So what was liner strategy for overcoming this IT was the correct you, you know, great.

We're going to take all these founders, all these Young companies, and how do we turbo charge them into being real companies and building their networks and doing deals. We're going to have more work together and we have the best companies. And so that's great. Now think about the benchmark strategy, right of like where you going to a position against kiner, what do you need if you're the benchmark strategy, you need CEO who are growing ups who are capable of standing on their own running the companies because they're not gonna get a lot of support on that front from benched mark because it's just partners. So now IT starts to explain some of the behaviors here over the past few decades.

You show me the incentives.

i'll show you the behavior exactly, exactly. Okay, so they start thinking about this. So like, what are we onna do? Well, we want to raise a big fun that we want to be a big farm.

We're going to have a lot of management fees associated with that. And we mark, then you know we don't really need the management fee income stream we've made plenty of money in, were used to as being entrepreneurs, not VC. You do not getting high ongoing salaries, lumpy cash flows.

Exactly, exactly. So what if we take all these management fees and we staff up, we build a platform at interest and harrods. So two and a half percent of three hundred million dollars is seven and a half million dollars a year. That's a lot of money.

great. And classically, the when people say two and twenty, it's two percent on average for the lifetime of the funds. You can sort say in the back half, we're not going to be doing as much active work on this particular portfolios.

So we will take one and a half at the front end. We want to take two and a half to baLance IT out. But yeah, you're right.

It's like gossip. We're not paying ourselves, which we should say for at least the first two years markin pan did not take a salary. We got a lot of cash we can spend on stuff yeah .

on people and resources. So then you start talking about this, uh, dynamic. You start talking about the arrested, the venture industry, the market and benzene s as former entrepreneurs, if you've got these firms that are small partnerships, ts, not that many people, but they're just getting these huge managment feet three hums.

It's kind of weird then that these vcs are telling entrepreneurs, oh, you know, you should take like fifty thousand dollar annual salaries is which is what we was the norm back in these days, fifty, sixty thousand dollars as you're in all salary. And you know you should give us this bigger ownership, but we're going to make a few million year each, each render shine out of these management fees. Hm, interesting.

So the next piece that they start they think about is of how they can counter position. So benchmark more so than pretty much any other venture firm even to this day. But lots of venture firm m felt the same way they had the series a priest approach and really this idea that still permeate venture to the day that the series a that's the real craft adventure that's the like, you know, the board is related to this board member thing that like that around is the sacred special around where the shoot either really gets polished.

so to speak. And to say why? Because in this very clear cut world, which we'd not in now, of these crazy names for rounds and incredible fluidity of rounds. There was not a seed asset class, there were no seed firms. And so the series a was your first professional venture capital institution coming in and writing a check in your company, taking a board seat, the first time your real governance. And before that, you have whatever cowboy would help you, as an Angel investor, get to something that looked venture capital funded able.

if that even happened at all. I mean, in many cases, the series of that was the very beginning because he needed a few million dollars to go buy servers into all that. But by the time we're talking about here in two thousand and eight, two thousand nine, the series a has really become this like catbird seat for the venture capitalist because they can outsource all the real early stage risk to the seed stage with way less capital, you know, have these companies get going.

And then once they kindly start to show product market fit and a lot of the risk has been removed, then the series adventure firms can come in lead around, and they're still all this, you know, how to hang over baggage with the around where it's like, well, it's the norm that whoever leaves your series a is going to get a huge ownership percentage in your company like twenty five, thirty percent ownership. And IT turns into this total by the answer for the venture firms who aren't really taking that much risk. So mark, Better like, hum, well, what if we say that in recent will do any round at any time? We will do seed.

We'll do lots of seeds and we won take part seeds in the seed investments. And you don't need that much capital. We won't give you that much capital and we won't take that much ownership. And they will do series is sure, but will also do serious bees and we will also do groth rounds.

So listeners who are not professional venture capitalists listening to this, a kind of sounds like, okay, cally, like they have a different strategy. They don't focus on stage. They just focus on lots of stages.

And for anyone who has raised a fund before, you will know how insane this sounds like, what venture capitalist classically pitched L P S is. Our sweet spot investment is this. IT is a company that looks like this.

IT is a stage that looks like this. IT is an ownership percentage that looks like this, that is a check size that looks like this. And it's a set of governance rights that generally look like this.

And we intend to do that twenty to forty times, and that is how we will construct our portfolio. And so therefore, there can be a bunch of different variations among the companies as they go along. It'll be winners, it'll be losers, but the all kind of start out like this.

So that's what you're buying. And by starting a venture firm being like, we're like stage diagnostic or governance agnostic, it's just sorry, sorry. What's the thesis?

Totally IT seems crazy. But again, they look out of the ecosystem and they like, wait, there's the super angles of which we've been them what do IT great?

We're cleaning up on twitter and facebook and linked in and singa, I think group on.

like all of these companies, we're in them. We're doing great at seed. Why on earth what we stop that? Then they look downstream past the series a there's a whole set of venture firms at this point time that all they do is they just ride the coils, es of scope, bench, american client.

And they say, what series is did they do great. We're going to come in when market up like two x at the series b will ride along and they do in great. So in just like you know, they like we can blow these guys out of the water, then they look across even further and they're like, wow, there's this whole other asset class out there.

There's so like i'm talking about like summit T A and silver lake, which is going to come back up now. Those guys, they're deploying a lot of capital. They're getting less multiple returns. But like the dollar returns that they're generating are enormous right now in .

pretty short periods of time with very, very protected downside. So like very low risk, low multiple, but fast return, big dollar investments totally.

And they don't even pretend to to offer any of the stuff venture firms pretend to offer. So like, huh okay, great. So this whole set of things, this we're gona build a big firm, people wise, we're going to use the management fee resources to build out platforms to help technical founder CEO become CEO.

And they would later call these networks like each individual function, you know, recruiting or finance or acquiring enterprise customers. They call these networks at the firm.

yep. So we're going to do that. We're going to not necessarily focus solid on serious is like we'll do serious. A series is a great but will also do seeds, will also do growth rounds because we think there's opportunity there and we can break in.

And then the governance thing like you sometimes will take board seats, sometimes we won't take board seats s but we don't necessarily need to. And maybe that'll help us scale. I would say all of that collectively becomes the counter positioning against benchmark.

You know, when IT works to varying degrees, like on the whole, IT works great. There are few specific things that don't work. So like the seed in the governance in particular. I think these are good ideas, and they work now. But at the time they started, invertase leave a pretty big flank exposed to old school VS here, which becomes the signaling effect.

And this became talked about for like five or seven years after this was an issue.

Oh my god, people are still talking about this like three, four years ago, which is insane.

right? So what is IT daily?

So i've been an marker going to go out there and do all these seeds and not take board seats. Well, the question then becomes, if they don't invest in the next round, in the serious air later, is that gonna send a really negative signal to the market of like, oh, well, and reason, how had had the inside information on this company? Because they did the seed and now they're doing the a in a competitor.

Does that mean that the original company that they ceded is no good? Other vcs, in private and in public, remotely attack entries and arts on this front. The reality is the most examples, cautionary tale about this. It's completely the office. And that is, of course, instagram.

instagram. Yeah.

uh, but IT is so great. So injuries, son, along with baseline, does the seed in instagram and then chooses at the series the most bone headed decisions of all time, to instead back competitor pick, please. Well, right.

because they ended up both being in their portfolio, because instagram started as burbling, pivoted into instagram suddenly entries and how, what has a problem? Because they have two competing things in their portfolio. And they are like, well, we ve got to pick one and wear pick and pic, please. totally.

So now what actually happens here? Like, oh, what you think you know, if you buy the narrative of the attack against international horns, of signaling effect, instagram, their toast. Far from that, they could raise a serious from benchmark for a that color benchmark.

Of course, we know what happens there and what happens to pick please, which is nothing exciting. The reality is the signal effect kind of works more against the VC firm than against the companies. But you know, take so David.

we've got this thing where the innovator should be running the company in recent. Horowitz is going to have all these networks that are going to augment that innovator and give them a CEO like the resources at their disposal. They can really be the professional CEO and the technologist who brought IT into the world.

They're going to spend a bunch of management fees to make this possible. They are going to raise a pretty big fun for the time. Three hundred million dollars. They're doing wacky .

stuff with portfolio construction. okay. So all this is great, right? They've got this great theory, grand unified theory of counter positioning and market entry strategy into the venture industry.

Ba o, but in these lake, you know, look, is this is one other thing, which is the reality on the field. I've done a bunch of research here, you know, since I joined the faculty of G S. P.

And I concluded, you know, with data approved what we all knew all along, which is that there's a very small finite set of companies that get started in the valley every year that actually matter. And IT is a blood sport to win the lead position as an investor in those companies. And you're fighting against benchmark in sqa in kiner, and you can count a position all you want.

But if you're going to go fight against john or and you're going to fight against built early and you're going to fight against maritz, leoni and all these guys and how you going to win, just like, you know the mixing quote, you've got your plan. You're going to you it's going to work until you get punched in the mouth and they're gonna punch you in the mouth. And how are they going to punch you in the mouth? Well, they're going to say things like, you know yeah mark and ben, like mark vince, the browser and that's great and what not.

But you know they haven't been they have not been born members. They have been professionals here. But the other thing that they going to say, and that's gona cut way deeper for you guys, is there gonna say that you guys don't have staying power, you know, is down, valentine.

What is said back in the day, obviously, about market said we are the monuments. What's net cape? What's obser? You know, you guys built these good story is good companies they're around anymore.

Who's using net? Nobody see you talk this big game. But where's your ebay? Where's your sister a, where's your oracle? Where your google, they aren't there. You want to work with us. We've got those monuments. So there's this great quote from the fortune cover story when they launched the firm, but there's this quoted there that says just five years ago and recent image was more that of a smart, amiable billionaire y boy who doubled ineffectuality at technologies fringing es.

He seemed more power and than bill gates than in the same piece this is the from the lots of interest and how it's like think about know who is placing these quotes there's a quote from Steve case somebody died up Steve case to like give a quote here. Mark is like iraq star who had his first album hit big and then the next ones were not quite the same. Wow, h brutal, right? Like they didn't punched in the mouth hard.

Wow, those are brutal. So David, you're implying that in this punchy in the mouth landscape is going on the journalist is doing research for the story and they just get connected with people who are gna from day one right to the gate, beat the crap at a market bent accomplishments .

yeah like i'm sure. American then and uh the great people they are working with on the P R side, which will get into in a sec. They weren't the ones that pointed pointed people to this quote.

The Steve case thing is interesting to given that mark reported to him for nine months as the c to a well told IT.

there's actually another sentence to the quote where really soften the blow. Something like people have a lot of respect for him that he's persevered or something like that. But the point like the damage is done here yeah so they're like, uh, we're going have to deal with this fortunately, they know somebody who knows a thing or two about punching other people in the mouth. And that is the other old board member from the loud cloud ops d days, the original O G hollywood super regent, Michael ovitz.

Yeah, so great. We've talked .

a lot about of its on the show C A A in the whole disney debate co, where he goes and becomes president, the disney and then we course talked about him joining the loud cloud board after that on the last episode.

But I think if andy was the, you know, the inspiration for the sort of high luting strategy of entries and harrow's Michael was the inspiration for the lake, okay, how are you going to get this done? So the quick story you know, on over its is he started in the late sixties in the male room of Williams Morris story, long term hollywood hotel age and and everybody started in the matter impact in the days, and the dynamic and hollywood was totally broken, like we're talking here about how the venture and start up dynamics were a little broken at this time, like hollywood was bad. The studios controlled everything.

They held all the power. They held all the creative decisions. You know, the talent and the artist, the actors, the directors, the writers.

That said they were, they were more but little more than endangered servants. And the agency is like Willy Morris. They claim ed to represent the talent. But they real they knew who the real customers were, which were the studies.

I don't know if we've talked about IT before on the show, but i've talked about IT before with other folks in the pioneer square labs, context of how start up studios fit into the landscape. But I love this equivalence between the hollywood and tech, where, especially in the old school days, you said to have the vcs, which are a lot like the studios, and there were three to five major V, C.

Firms with money, and there were three to five major studios with money that could Green late the movie. And then, of course, you've got the CEO founder who's a lot like the director of a film. And then everyone else, including the actors who works on the film, is a lot like the team of the and watching the way that the power dynamics evolve between these two ecosystems in parallel is really fascinating.

totally. So what of its does so here? A bunch bodies from William as they like, screw this.

There is going to be a Better way. They leave. They go start their own permit.

Exactly like Jerry maguire. Jerry mogue was actually about this guy at least stammering in the sports agent world. But it's the same story. So they think they're you start new farm and are going to focus on the talent, not the studios.

They are going to figure out how to deliver the power to the artist and the talent and take that away from the studio. So how do they do that? One, the package projects and talent together. And then they sell whole packages to studios and say we will sell the rights to you.

But by doing that versus like, oh, we represent this actor in new studio, you're making this project like nor we get the project and the artist on the project and we package IT, we're going to bit the studios off against one another, the financed at the highest pace. So how do they do that? Or they got ta connect up the talent.

They ve got to take the talent from being like each individual person for their own till like working together against the studios. How did they do that? Well, they transform what the firm from being, you know, each individual agent is a silo to.

We are a network. We're like a web network. They call IT the franchise.

And so anybody who's part of C A, A, you know, your job is to have your clients, but to get them to work with all the other clients of the firm that are represented by shared x, shared rox, and do that everybody at C A, A is a partner. No male room, no ball lake. We're all here. We're all together. This is about the franchise.

and it's really fascinating in like a business strategy context to zoom in out what they did. And this is a common discussion point on protector of like what is the point of integration within a value chain. And what I used to be was at the studio level because that's where the money would come from, and then they would get to aggregate all the resources together using their money.

And the fact that IT wasn't that competitive because there were very few people that they were competing against and they knew them very well and nobody wanted to lose their power. And when you start having C, A, A, say, actually, we're going to package all this together. The point of immigration shifted down the value chain.

One click to wear. Now IT was happening with C, A, A. exactly. And the important thing here is wherever the point of integration is, that's where you gain power. That's where you're able to become more than a commodity, where you're able to gain basically, you're able to create margin, where you're able to get more cash for something that IT cost you to assemble IT.

So what A, C, A, A, do they create the project? So like jessia park, lethal weapon, shoulder's list, these are C, A, A projects. These are not studio projects.

They pull them together. And then they they bit him out the studios. Since in elva said, all these studios bidden against one another, the Price goes way up, the dollars flowing, and to the space goes way up.

And the artist, i'll do way Better. Tom crude, have a costar barber string, even spiller g here. You know, within a couple of years, caa is just vacuum up everybody.

And so literally, the term that they use, that H, I think of its coins over become said about C, A, A in hollywood, about all this, is they become quite the dream execution machine. You're an artist. You have a dream. C, A, A is your dream execution machine.

Mark.

oh my god. So mana, mark, delia, craft, this is so great. A what Better what Better analogy to use than we're going to go build the jury execution machine in startups.

which happens to work particularly well because they are working with technical founders. exactly. You have the glitter, a dream and the ability to create the sort of core peace, a value with a core way, a for interacts with that and gets value out of the product. But like you can do all the other stuff, we are the dream exxon cut machine. You should come to us.

Yep, yep, they're just like a director or a great actor or a great writer. Is that so this part of last unwritten, but I didn't need to be a written principle at CIA, was take no prisoners and we're going to burn the old system to the ground of all of those people. And of course, then in mark of that, if those about the venture ecosystem and whether there .

is was written or not internally IT, certain ly became written externally in all of their communications, like they pulled no punches in talking about how the entire existing in comment industry sucked in. People were greedy, or we will pull some quotes later, but they were not shy about being critical of the .

establishment. So this is the punch back in the mouth. Like, great, you are going to punch us in the mouth, say that were you know husb rock stars who are one hit wonder like we're coming at you twice hard ah so that's what they do.

And they also you know basically wholesale copy the firm building approach from C A. A. So you know as you said, the platform and the networks that they build up, they hire whole bunch people.

They have a big def network to connect founders with large company customers. They've got an executive recruiting, newt theyve got an engineer recruiting network. They've got A A future finances like other venture firms.

And the eight that were associated with that two IT you need an acquired will take you up with the quires. And then, of course, probably the most differentiated and important last piece of this is they have A P. R. Network, yeah.

which they wouldn't say is the most differentiated. The most differently, I think they would say is like the executive briefing center in our ability to you know govan ized a set a fortune five hundred companies to become your customers. But in reality, yes, they are masters ful. I P. R.

Well then would say later at this quote later but here's the perfect spot for IT. He would say literally we introduced a new concept to the field of V C which was called marketing um and it's true nobody, you know no venture firms were doing this for themselves or helping their companies with P, R. And marketing before interesting herods. Well.

the interesting thing about why no venture firms were doing about themselves was the commonly accepted wisdom is that opacity plays to our advantage. I think most people didn't actually think through what they just thought. What have successful venture capitalist done in the past? And that was bio pike. Don't make too much P R, noise other than to claim you're win when you have IT. But you don't need to take these big positions and Debra and counter position publicly and and recent hits not only saw that as a thing they could exploit, but I came here for this marker ban.

I was also saying to out of podcast that will link to in the show notes, along with a lot of other sources we did for research for this one brought up the fact that if you trace back the origins of institutional firms like venture capital firms, IT comes from the investment banks of like the forties and fifties who were opake because they were financing wars. There was lots of reasons about why they wouldn't talk about where their returns were coming from or they're excitement about the projects they were financing. Where's mark and ben? Are una bashed optimist about the future market in particular of just standing on the largest sewing x possible and preaching about how cool the future will be and how much Better off everyone will be, both on average and in every spot in the distribution in the long run. So let's bring that closer as fast as possible and be really loud about the future that we see and about the companies that were investing to build that and how much we believe in that and how unapologetic we are about that. Yeah, and that was just totally different than the commonly accepted wisdom of how venture capitalists should go to market.

Yeah, well, two things. One, I think the version of hiding the war financing of investment bankers that vcs, are we doing here? They are having the management fees come on. You're got a ten percent organization, half of which are assistance, and you're making twenty million across your funds and management for a year. Like I don't wana shout that from the roof tops, a PC verb.

or brag about how I put in two million and to work to own thirty to forty percent of a company. Yeah.

exactly. Then the other thing though, like the foot side, is if you are gonna, go be on a bashed about piling the table about what you're doing in the future if you're an entrepreneur who you think you're part of building the future now you've got a champion. This is great now. So there's one other person along these lines that they go see before launching the firm, which is the number one, hands down, best P, R person in silicon valley at the time market.

When workers at the outcast P R agency, so market IT cofounded outcast, and they had all the best clients, like all the best clients, facebook sales force V M, where and they worked with them from like the time there were nobodies still up through, you know, being huge companies, amazon, they did the kindle launch and still work made to this day, still work with the kindle team. So the story of how they get connected is market tells this on a sixteen cy packets episode. SHE says that one of the companies that marketing ben had been angles in wanted to work without cast, but facebook blocked IT and said IT was a conflict and wouldn't let out cast work with them.

So market just joined the board of facebook and he gets involved in turn to smooth to sell over. And he's like, wow, markets is really amazing. And I see a facebook like what she's still in there.

So he gives up an excuse to get a contact and for calls her up, you know supposedly to talk about this situation and instead brings her to the creamy. And palo alto sits down with ben and they just like talk the whole time, but how they're to launch a venture cavitation firm. Um i've got another project for you which is great.

So mark is like, okay you know like we work with venture capital farms like I can do this. What are you going to call the firm and like we're going to name in. And reason horis SHE is like that is a terrible idea.

You're talking to you with this big game about how you're going to be a franchise. You're not going to be about the partners. It's all about the entrepreneurs and that works.

And you're literally going to put your own names on the door like, are you serious and they're no, no, it's not what you think. We did a whole big branding exercise about this. We had a big branding firm. We did all this work and we decided we need to do this for two reasons. One, and the market and reason is a known quality .

he invented.

it's our brand. He's already brand. So we can draft off that to get going. And then once we get going, we transition from Andrea two a sixteen z which is a to z IT. Supposedly the story is I guess it's a probably true that people used to abbreviate internationalized.

I actually know it's definitely true. My first job in as fourteen was as a product test engineer at this medical printer company in cleveland ah and I did not know .

that that's also we're learning some bgl vd history yeah and I .

did some internalization work which you will needed to type that once before you're like, well, I never want to type that word again and that is a brief eat .

I A T N so people really do do this.

Absolutely and there's another one, I think its localization might be l something and l sixteen and and or l eleven and I can read, have letters but .

yeah interesting so they are like, well, it's perfect to know it's kind of it's a to and we're going to a to z at and or it'll do any round a to z. This is great. By the way.

you'll get a heads up that mark and ben are gone a step back from the firm when they actually formally change the name to A E. I was looking forward in this most recent visual refresh that they did. And like always at time, are they actually flipping IT to sixteen? But note, the official logo, as you'll see on the art for the episode, is still in records.

still interesting. It's gotta come, I mean all across the website, everywhere and all the media they do. It's a sixteen sixty. It's not an .

interesting horse yeah but you know it's still the unofficial al moniker.

still their baby. So there's one other thing, one other benefit about the name, which we know very, very well at acquired, they're going to be listed first in the phone book.

Yeah, huge advantage.

That literally is a huge advantage. You know any time that are reporters writing a piece about the talking about various metro capital firms, you know as much as not they're just going to altha tize stuff and who's going to come first and read in or what is .

gna come first? We happen to be just very lucky that pod gas clients are not terribly sophisticated and how they do sorting. And so whenever you described a show, I just displays them an .

alphatec order totally. Some markets like, yeah I whatever, find you guys have ve done a lot of justification to put your names on the door rationally.

rationally rationalize. Great you.

But what you need is you need to build up pipe and you need a cover story. So what do you want to do? What outlets you want to go on? Where's your cover story? You know, I get you whatever you want.

What do you want to do? So, february of two thousand nine, mark goes on. Charlie rose.

even fifteen years later, he holds up really well.

Yeah it's really good. So landing mark on the show when there's no reason for it's not like yeah a new company or anything like there's no in fact.

the fund is that uh, I between this from the acquire account last night, there is a some point where IT brings up a little like title tag underneath and IT is mark and reason I think is founder yeah founder ng. You like the founder of ng, like he was true at the time. But like did anyone care about ng?

Not really that the best you can come up with A.

We should be clear, rc, he is on the board of facebook like he is like involved in some like stuff that's going crazy. He's an investor in twitter and twitter is in like its third months of like vertical line growth. He's not just the netscape guy. He's involved in something that these companies that are part of a cultural foments at the moment.

totally still was a pretty big win for now. Cast to get about the shop. So um chilly started off and see you.

When we interview people like you, we always have to ask the question, what's the hardest idea there in silicon valley? What's the next big idea? Smart replies, well, maybe this goes off track from your question.

He's great at redirecting. He's obviously had some training. But I think the hottest idea is that innovation is actually alive and well.

Member, this is february two dozen nine. But look, there are a lot of people out there who are arguing the other side of that. So is already set enough like we are the champions of innovation, only we can save you. Then charlie asked him about rumors he's been hearing that markets starting a venture capital firm like a rumors .

you've been hearing. This is why he's on the show like generous of you to give .

him rumors he's been hearing from a market that you are starting a mental capital .

and you have to realize before you finish like, I was worth planting the seed. I watched this interview because I I was reading an article and I like, oh, this article says that he announced IT on the show. Like, I should go watch the charly rose interview where he announced IT and I started watching IT.

And like, I get twenty minutes in. And like, this isn't about entries and horror. Tz, and then I remembered, like, exactly where you open with. Obviously, IT wasn't a brand yet. He wasn't known for being an investor yet. And so if you're making the pitch to charly rose, if you need to have this guy on the show charlies throwing mark a bone by letting him mention his new project to govern IT on this show. And so of course, IT only occupies three minutes of a fifty minute interview.

some microbes with, as he said at the top of the show, yes, i'm going to the direct side. But then he says, so i'm creating a fu N. D.

And as you know, our claim to fame is we've actually been entrepreneurs, or by entrepreneurs for entrepreneurs, we've done IT. We've been on that side of the table for a long time. We know what it's like yet another way.

They're counter positioning. It's like, oh my god, s these professional investors out there, you don't want to work with them. You want to work with us because we've been in your shoes, which is now like the dominant dogma that VS feed to founders. And then just kind of uncommon.

like they were the first heard IT here. First on charlie rose, yeah, yeah. It's actually really fun. Y, did you get to the park later in the episode where they're talking of outlook, various new seed stage companies in silicon valley? And mark starts talking about this really interesting guy who's starting a company and he's proven demand for yes.

he describes like what we do at p sl, like the validation process of like driving traffic and having a brand and testing.

He just built a landing page. There's no product. Did you get to the .

part where he says who is it's Andrew chen become his partner ten years later.

So great, so great. And he's like trying to remember he was thing I think he's .

getting close to have IT around that's coming together good for him. And of course, like this is pre uber like hander hadn't .

even done the growth thing at, uh, so great these artifacts I love it's .

like when don valentine holds up the resume and IT turns out to be off lens like it's like that .

kind of reference. It's one of those moments totally. So the actual big cover story reveal, as we have said, I two thousand and nine cover story, fortune magazine markets, I think not Better foot in this one on the ground. I actually didn't see what the image was. Very.

very curious. Look at that. You talk great dan outs .

and Jason herods three hundred million dollar fund, which was very large at the time, especially for the first time fund. The piece starts off with the old net cape email story about a with that we told last time about been emAiling mark about the launch back at nets gave and mark relying like next time do the effect interview yourself if you yeah and then this is where the quote from mark of this is why I shall not run another company comes up which course like this is the perfect yes, we're starting the gic capital firm because I shouldn't run another company.

perfect. So the cover matters is like pretty hockey uncle sam gig, where it's mark pointing at the camera and IT says, I want you to get the future, David. All I hold that i'll see you can see here in the camera.

oh my god, that's so great. I want you to get the future. So present, given future would be the future for them. That's awesome. Okay, so couple minutes later in the article.

First, de entrepreneurs are sure to be attracted to Andrew sen drafting off the Andrews's and brand here, who expresses more kinship with founders than with his peers in the finance world. One blog post that markets written, titled the truth about venture capitalists raised the question, VS solis and repetitive capitalist, or surprisingly generous philanthropist. Two guesses which side of the a coin he comes down on in that piece. Talk about punching back in the mouth.

It's like, how could you even have listed the second one? If like, of course, is not the second one. yeah.

Has anyone .

in john doors life or down valentine's life ever accused them of being merely a philanthropist? Like, no, come on.

it's the readers of fortune to they do some for sure.

but not through sqa and kina. Perkins, no, definitely about.

I mean.

it's to value create for the world. Clearly, I believe that or I wouldn't in this line of work and you and are doing the and everyone listings. But like it's not .

philanthropy, uh, it's just so easy for mark to set up these string here. But the punches are flying in this article. We've already related this a little bit. So later in the piece, another quote, the Andrews and horwich strategy of investing in a masur y of startups could pose hazards. And here's a direct quote in the article.

If I were one of those guys whose company stumbles, will they they be marking them be there to help me or will they have time, says paul holland, general partner at foundation capital, a silicon valley venture firm. Where the pain part of IT comes is when you get up to the sixty or seventy investments. IT will be an interesting sure to keep track of all that bad idea to go on the record here. People think everyone's just find.

in a way to talk their own book, like whatever my strategy is a superior because X, Y, Z. Whatever they're doing is stupid because of X, Y, Z.

Yep, totally, totally. So IT lds, with a big flash there are in business. They got the three hundred million thousand fd at summer two thousand and nine. I think according to pitch book, the very first check, the rate is actually a small, very small check early. I think they hand even on a final clothes on the fund into, do you know the company ban is IT c not A C A abase company.

This is a very small check that they're right no, into a larger round a series sea that is LED by somebody else of a then this is like at the end of two thousand dates have must have been just like a first clothes on the fun, like a warehouse investment or something like that. And then very, very hot company. And of two thousand eight and second valley, not facebook, not sweater social media company.

link. Then, nope.

Dig, dig that com. dig.

I knew you, and I thought that was a personal investment.

I think IT was. But I think they are managed to get a little bit of fund money into their cc.

I was obsessed with dig.

So great. Kevin rose.

amazing. In the redit versus dig war, I was. So team dig is like a Better design that makes more sense. I watch dignity. I think every episode of the nation, I was .

always so great. Me too was the best. So that was the first. Then the first, like real, actually like large check round that they lead is a seattle company. F T O.

F T O. While doing research for the episode, I was on a bike ride and I rode past the P. D, O building. And I was like listening to some part cases with mark and and I took a healthy incident today that was like doing research.

And the irony is I was going to a giant game. And if I just go right at the same time, and when I get out of the uber, like a block away from the giant stadium, I get out right in front of interesting horror, new big side of T, I didn't notice there was a sixteen year in a dressing horror. Dds, I think IT was .

in dressing herods. It's in dresden. Herods, yeah, yeah. You know if they're put IT on the sign that the intention is for to stay around for at least a few more years.

at least a but .

yeah that the apt o investment, I mean, it's a co investment with both of our our former employer, madrona. Yep, and great luck I think too. Yeah and I think they had worked with Sunny in the past, the founder, and was in that loud cloud.

So I think Sunny's previous company had been acquired into that club.

But that was really emblematic of part of what the thesis was at that point is we've worked with these amazing people over the course of our we're gonna a network driven firm and they didn't have the firepower yet to be a thesis driven firm like now they're extremely this is driven. But at that point, IT was like, oh, discuss an entrepreneur and starting a company. IT was, I think, already a company in flight like absolutely we should invest in. We know very well, great employee.

totally well. So one of their other first checks, speaking of stage e gago stic, speaking of that, same to invest d asa, great, great indeed. Truly great people. I think this is one of their first, like five or ten investments. Rock melt, rock melt, our boy great friend of the show.

ria.

former obser V P of marketing future benchmark capital general partner eric Fisher.

a cool.

so funny that they let us around benchmark, I don't think, was an investor in rock.

Well, the other funny thing about that is that I was supposed to be a next generation web browser, and obviously, like mark knows a thing or two about web browsers. And rock man was like, know what if the browser had built in social characteristics and could bring in your. Your news feed and twitter and all the stuff right into the browser. So was like a sweet spot investment for our can then having worked directly with and also you know mark saying that seems plausible.

Yep, totally IT was IT was a great ideas. I've never using IT. I thought the brothers was great, was built on chromium. They know in many ways that was brave before. That was brave too early and before clipt, I was a thing.

yeah. okay. Do you know what what I was referring to?

Speaking of stage e diagnostic, you talking about there fifty a million dollar investment in september two thousand nine.

in the first year of Operations of the fund, out of a three hundred million dollar fund.

Just can put one, sixty.

fifty billion in the one company that ended up looking genius but voided. This caused a lot of curve for and criticism .

when they did IT. Boy did IT ever. September two thousand nine, fifty million dollars deployed alongside silver lake, the private .

equity firm slow lake tech.

private equity firm silver lake, who I believe the severly headquarters ers are in the same rosewood office park on til road that the andes and court are in. Maybe they talked about IT at lunch of the rest with one day we have been talked about the headquarters on literally in the rosewood complex on sand hill. I can get any Better than that note.

So yeah, fifty million dollars into the spin out of escape from ebay of the whole transaction, two billion dollar purchase of sixty five percent of escape from ebay worked out pretty well. But they probably should spend out paypal instead of escape. That would have a lot Better.

Hey, I mean, oh, well, they did eventually, but both of them ended up being really fantastic ideas. Both of them created a lot .

more value independently, wasn't part of early stage.

Investors often talk about how there's a minimum opperation percentage that they need to hit in order for IT to be meaningful for the the fund return, which is true if you're only delaying a very small percentage of your fund. But this is a case where they used fifty million dollars to buy one point eight percent of skype. So on the one hand, you're like, oh man, that one point eight percent like, gosh, we need own a lot more for this to be meaningful for our fun. However, since you are putting fifty million to work, that even if you got like a two x on that, which is not great by venture standards for a Normal early stage investment, but I mean, really is meaning to be helping to return the fund.

Yeah, yeah. And they ended up getting what .

like a four x on IT, a three x and IT was quickly IT was just a year and a half and had up turning into one hundred and .

fifty three million for them. yes. So couple things on this one mark, that be the backlist.

Okay, what we what are we gonna here? And really, this is going to become a case study. So he helps broken a facebook partnership for skype. H, which I remember this member when facebook integrated sky.

yes, for video calls in messenger.

yeah. Man, huge. You imagine something like that happening today? no. Everything way. no. That was all mark.

And then he helps recruit tony bates to come in A C. O. Tony from cisco was a rising star there.

Then in a later fortune peace, that market would place another great one. Talking about the deal. The clinch was bates meeting with Anderson.

Quote, i'd always been a big admire, but never met him. Bates says of interesting going into the interesting horror. Its office was an experience.

They have this wonderful library in the lobby. And I looked for a couple books that were special to me. One was narrow matter by William gibson. I couldn't find IT. So that became a good opening .

to the conversation. Uh, and I think it's mark's personal library .

is the library in the city but you can to see the whole mic firm, the M O O wo together yeah and it's happening in public in fortune magazine.

in the press .

so great yeah .

there's another great little into the story, which is there's a blog post where ben hewitt said that the skype deal generated a tremendous amount of controversy for us. That controversy ended this morning. Of course, this is when the deal gets done.

Was IT nine and a half billion dollars that microsoft acquired IT for.

I think eighty nine half somewhere in the neighborhood.

Oh, no, I have that right. Still pretty, pretty nice. Quick return. Unfortunately, shortly after this, right around this time, I know I keep saying the biggest mistake in the firm's life, but the reality is instagram only got acquired for a billion dollars. Like there are two mistakes, one hundred, and screws up, not continuing the investment, instagram to instagram, cells to facebook for a billion .

dollars verses of, I don't know, two hundred billion, five hundred billion, some massive company inside of facebook.

So sad. That was march twenty ten. Fortunately though, also in early twenty ten, they make a great decision.

Do IT I just have a pause for one quick second and say instagram was definitely not their biggest miss ever. Their biggest miss ever. S definitely uber, right?

That's coming. donor. D, okay, yeah. No, we, you're right. Not the biggest miss for Andrea, but silicon valley y is biggest miss to the past fifteen years. Was instagram being sold the facebook a crew .

to facebook shareholder but not uh not the rest of venture ecosystem totally.

That's a whole another rabbit ld, that we've been down many times. So a great decision that they make an early twenty ten, is they lead the series a of actor, the identity company, which they would then on what, eighteen percent at I P. O, I think.

Yet they owned just a hair under twenty percent free money at the IPO before the new, the IPO cash came in.

So that and what was I P O valuation was six billion, sorry.

six billion. And today it's what is that? Thirty three billion. That of is continue to just be a monster.

yes. So and this is out of a three hundred million dollar fund. So at IPO, their stake was .

worth call IT one and a half to two billion. Yes.

I P O, in this one company. And if you've held to today.

which is unlikely given IT was a fund one for them and totally.

and i'm sure you know they have distributed over time, so they proud they captured some of the just as the thought exercise, what twenty percent of or fifteen percent of that's what five billion is eh? Yeah, not bad. Not bad. And octave, this is another .

one that like mark talks about publicly as we were totally laughed. Identity providers were a thing already and like microsoft with uh active directory like IT was owned. But the C E.

O of doctor tadd mynn had this like big theses around. The shift to the cloud means that there's time for a new provider. There's a room for a new person to come in and none of the income, but they are going to be able to react to IT.

And marco always talks about that. Like this is the kind of thing that we loved hearing when there is like a rearranging of the technology paradise that are used. And right now, it's just buy a small selection of people, but over time, everyone will shift to the cloud. But yeah, he said they were totally left that for doing the octo deal because that was uh, very against collective wisdom that that would be successful.

Well, two things, one IT even goes deeper, the nap. Because tim house, who was early not to keep guy, and then cofounder of cloud, cloud with ban, american security and everybody he invented, uh, l APP. The directory access critical. So they knew a lot about this. And then the other thing, you know, just everything you said that reminds me of the the classics, a quiet question in the why now why what was a great why now for at the cloud was changing everything.

There were like a lot of companies around this time. And even for the next five years were just saying, hey, we're gonna do a thing that already sort of a settled frontier and a very settled frontier in the on premise world.

But we're onna bet big on cloud and we're going to architect that in such a way that, like we're not even compatible with the unpredictable if they miss time, the enterprise shift to cloud, the whole thing would have gone under because there would have been no way to be. I'm taking specifically of like a snowflake, the cloud based data warehouse. You had to be binary in your bet and say, like we believe in this piece is at this timing and obviously without snowflake paid off, but you know with other cloud bets like loud cloud IT did not.

The timing was not the way now was not not great. Well, actually I was great. He was a good story that just didn't play out well.

So there are spending money as, let's see, maybe there are their VC enemies would say drunken sailors maybe would be a good term at this point. You we're still we're in like the early parts of twenty ten. They've done fifty male the escape.

They've ve done all of these deals. They're doing tons of seed deals on top of IT. It's a lot.

They are almost out of cash, you know, and they're reserving half the funder for follow on. So they only have one hundred and fifty million new money to deploy. So got to go as another front uh ah so this actually just came out recently.

I saw this in um I forget which publication this was in, but I could recently that then said in this a quote horrod said in a recent clubhouse interview that when the duo were raising their first investment fund of three hundred million, a big sum for a VC form at the time in d and Jason told him they needed to raise a second, much bigger fund right away. And here's quote in funding ing and in venture capital, strength leads to strength, Anderson said. According to it's so true.

It's such a leads to strength. It's so true. It's so funny and it's so true.

Have you read the Michael movin paper on persistent differential returns by .

asset class?

I have i'll put a link in the sources. But for those who haven't read IT, there's all this data to support the fact that like you look on one side of the spectrum, like hedged fund managers and if you're the top performing hedge fund manager this year, IT has almost no bearing on whether you will be a top performer five years from now, maybe not even one year from now.

But if you look all the way on the other side of the spectrum at venture capital and because he's a good academic, he doesn't presume to uh state the cause. He just states that there is a correlation, uh, that the top performing firms stay the top performing firms for a long time. You know here the top performing venture investor this year is very likely that you will be ten years from now.

And so or at least one of the top performing ones. And the sort of postulate is that, well, strength follows strength, that when you do the best deals, you then start to realize the fly wheel of getting the best. Entrepreneurs are referred to you totally.

This is everything that we talked to.

We spent the last and have talking about of, like, how are mark then onna break in this? Like, I think I remember, I think I maybe talked about this on an episode in the past, but that when I was a even Younger ripper snapp er just starting out in B C majora, I got a chance to get drinks with bill girly once I and I like so eager had like all my questions prepared you know as a little like i'd like a new book, the biggest one I want to ask him this like bill, tell me the secret like what is the secret to success in venture capital? And he just kind of link the video is like David, the secret to success in venture capital is success in venture capital.

It's so true you have success and that gets you more success. You don't have success. Good luck to .

Marks point here. IT also is true. And startups like if you are massively out raising everyone else in your category, like you're gonna able to kind of a keep that mindshare of the category leader, you're going to be able to recruit the best executives, you're going to be able to land those customers. So there is this, on the one hand, it's hype. And on the other hand, hype is a self fulfill propac's in a lot of ways.

totally atr. I mean, what a great incapable of startups to everything that is right. But it's also real anyway. So they go out somewhere ony ten.

And there is a second fund that one year after delaying an rt large three hundred million defund, there are is a six hundred and fifty million dollar second fund in twenty ten. This was nuts. This was like an adam bomb going off in the industry. Two reasons, a that is so much money, we know I was major. Na, the time we are investing out of a two hundred and fifty million dollar fund, and we were a twenty year old firm.

it's still pretty closely after the financial crisis yeah.

in twenty ten, twenty ten, th Epace l ike t he i dea t hat y ou w ould b low b low t hree h undred m illion d ollars w orth a f und i n o ne y ear a nd b e b ack a y ear l ater t o y our L, P. S. To go raise another fund.

This was crazy. You know, the established V C firms there are still coming off the hangover from the dark come bus where they stretched their ninety nine funds for like four, five, six years. You know, we did that special with how at altos talking about how they had a stretch of fund cut held, hong was IT like six, seven, eight years before they could raise their next one.

So this is just like wild, what's happening here and the press eat at all up. now. The other thing that raising now having almost a billion dollars in capital under management gives them is even more management fees to go out and recruit more people. So this is when they go back to market who's spin to still in a bang up job for them on P, R.

which we should say when you say a lot like this is sixteen million dollars of new fees coming in every year, or about fifteen. So like.

you ve got a budget. Wow, you ve got a budget. Have you leave? Outcast, enjoy and recent horrow full time. Now, this wasn't totally crazy because he had already sold out, cast to a holding company. So SHE had found IT IT cofounded IT.

But IT had been sold and they're just brought in a separate e so SHE comes in, you know full time joins as a as head of marketing firm and recent of no venture firm had a head of marketing before this. Uh, they also bring on jeff stump to run talent. Uh, they bring on geno farel, who was head of his death.

I think that as A G P now, interestingly, he had not obviously been in A C E O, despite the the motor of the of C S S G P here. But anyway, that works as well. So what do they do? You know, you've had the strengths.

They now have more strength. They keep the foot on the gas. They keep the flowing the money quickly. So early twenty eleven, this is crazy. I D like totally works out great for them, but gets piled in the industry at the time they take all this money, they start going and buying private secondary shares in pri po companies like facebook, twitter and groupon. I don't know how well group band worked out for them, but they deploy what was, I think, like over eighty million dollars into buying pri P O second diaries in these companies wild.

which they probably were investing like exactly the Operate limit of each fund in secondaries because they weren't a registered investment advisory yet. They were just a regular venture firm.

Yep.

that make sense, which is what twenty percent perform is what you can do into.

yep, twenty percent per fun. So twenty percent of six 5 would have been like hundred， two hundred and thirty million. So I bet they did.

It's like up to that give themselves a little breathing room that you come up to. eighty?

Yep, IT may have been more than eighty two. That may have been just facebook anyway. So then in April of twenty eleven, they lead a hotly contested series b for a low gaming company making a game called .

glitch tiny speck.

name of tiny speck. Mark had invested in the seed for tiny speck personally, and then in the previous fund entries and horror had put a little bit in in the a, that excel had LED. And of course, the head, the C. E, O of tiny's fac. He start buttons, fields.

start butterfield.

I know that name. So shortly after, like very shortly after, I believe andrey son invest leads this around the series bee start sends an email to the board quote, we've had this quote on acquired before. I do not feel that we are pouring gas on a fire here, more like pouring good whisky on a drug store heating pad. IT is unlikely to burst into fay homes, and he means that bursting in the flame is being good for the company, not bursting into flames being quite bad for this new and rein herods investment.

I'd loved dishonesty. Me, it's great.

Yeah, just do not keeping a real so he recommend you that they sort of figured out as bored and and I think, you know, Marks involved in all this. And right well, what else we going to do? We don't necessary want the money back. And you know they pivoted into.

by the way, this is why repeat entrepreneurs, like there's a lot of negative things about sort of like cereal and repeat entrepreneurs that get a lot of criticism and like it's not their life's work theyve already made money. There is a lot of like reasons to be a little bit careful, but this is one way where IT massively place to the companies is advantage that Stuart from flickr knew what bursting in the flames felt like.

You could call IT a escape pho city. You could call IT getting real traction or product market fit, or starting the flat, whatever is start knew what that felt like, much like marketed from his netscape experience. And this wooden IT is not IT.

No, IT was not. So of course, they pipit into this, uh, little front end that they'd built on on R C R.

I was like extensions on top of rc.

extensions on rc for workplace communication that they were using internally that called slack. They call up our our friends Andrew and and the crew at metal abb. Andrew now, of course, of tiny capital, get metal abb to design the U. I take IT to market this product. Can slack works up pretty well for everybody involved that .

I did and I threw out that three billion number earlier. A lot of these exit numbers are estimated since it's not like we actually know interest in horror as as returns. But we can back into IT based on what we think they own from participating in various rounds or what they owned ad IPO and when we think they may have liquidated, assuming that they held IT from IPO to the eighteen months afterwards to the sales force transaction, he would have been about a three billion dollar outcome. So very good decision for enders and horowitz to let store keep running with the money even though, you know, the game was not bursting in the flames.

Yeah, that's a couple multiples on that huge six hundred and fifty million dollar. How would they ever return that a boy?

And when you say, how would they ever return that, that's because that was the like knock on entering home at the time. That was the narrow was like, this guys huge fun.

Is no body return that around a cafe a little on these new guys? So twenty eleven? Boy, what schizophrenic here? Here's some of the investments that they made .

in twenty eleven.

Two member. shoot. Zl.

I do. Yeah, shoot azel job.

A great quote from mark. I forget where maybe is in the new york a piece, uh, saying that job bone is the new SONY.

I mean, such a unbelievable cool technology innovation that just.

yeah, yes, uh, later of camera member, oh yeah, yeah, yeah. How about this one? Fab dot com.

Jason oberg.

yeah who? boy? That was a flame out, unfortunately.

and there was a lot of other big name folks. Speaking of dig, Kevin rose was involved in that one. Two, all in fab.

Yeah, I bought some stuff on fab. They really merchandise. Yeah, I did do IT was cool.

but men weren't through a lot of money. But IT doesn't matter because also in twenty eleven, they bring on a new general partner that they bring on a few new general partners, I think, but one in particular, jeff Jordan, wow. So jeff, I believe, started his career in the disney, the famous disney strat planning group. I think he worked for mig women there.

Um I didn't really is that yet another that's quite the mafia? Yeah, told IT.

I think that's how he if i'm remembering this, right, I think this is how he ended up at ebay. And of course, in ebay he was north amErica G M. And then championed the paypal acquisition and ran paypal with 预备 well， pretty good. Then after that remember he left and became C E O of open table, who was open tables main venture capitalist and board member. So girly wow .

the bet no are of .

enhance um but jeff IT becomes one of the best consumer investors of the last decade at entries in the Howard.

He would go on to do the L B N B investment .

right oh yeah in twenty eleven right after joining. So I believe the first right after joining interest, wow, pretty good. Then L B N B, then inter card, then a firm.

A couple years later, many others. He's done so well that in two and nineteen, he actually became a managing partner. They made him a managing partner of interest, narrates the firm alongside mark han ban and scot Cooper, who's also a managing part. But more like the C O. O of interesting.

And I get the sense in sort of the four of them are like really the sort of stories of the firm at this point.

Yeah, get what you story. They're the four stewards of entries and horror. Ts, so quick week up this. And this is just a small sampling of the twenty eleven deals at eight in her or according to pitch book shoot as well. Job on bump, light, fab, airbnb, pinches, stripe like sera, tiny speck, facebook, twitter, what a collection.

wow. Also, they did stripe.

They did the seed they didn't need, but they're .

part of the scene. fascinating.

Yeah, man. Slegge percent is not batting average. But ban, you've already alluded to, already spoiled the biggest mistake in the history of endresen hardware that they make in twenty eleven. I was going to ask if you knew what I was, but obviously you know what IT is.

which would lead a subsequent success, like a multi billion dollar success.

But yeah, uber fall of twenty eleven. Uh, this is brutal. Brad stone does great reported on this in the upstarts entries north is is in line, specifically jeff joran, man, could you imagine what a monster year in art for jeff Peters?

Airbnb all in the same year, his airline hand shake on a deal to lead uber serious being, of course, who is uber s serious a investor benchmark benchmark can bet girly and you know got this huge fuel between the firms. But like you know the girl y was on jeff spot like they're great. Thanks for each other.

We're we're going to going to make the piece here hand check deal. It's all done. Jeff is gonna a lead IT hot street is gonna ue Marks involved? Everybody's shaken hands on a deal at a slightly over three hundred million dollar post money valuation for uber series b CD.

This reminds me of the burger episode when Warren by burger, ah.

no, it's brutal. God, it's so brutal. So somebody and brad kind of implies in the upstarts s that I was mark himself starts to get cold feet about the deal.

He takes travis out to dinner and he tells him at dinner, they still want to do the deal, but they can only do two twenty post, not three or five or three ten or whatever I was supposed to be. That's a pretty big circuit. IT gets worse.

Supposedly, travis was still gonna the deal. He really wanted the end in horror. Ds, to be believed. He, like all the marketing had worked, he was gonna do IT. But then the actual term sheet arrives. And in the actual term sheet, they must have really had called me like they they didn't want to do this deal.

This is half passing your way and do a term sheet right here.

This is limping across the finish line. If i've ever seen IT, they put a huge new option pool refresh in there, which of course, would delete the existing shareholder and and particularly the entrepreneurs even more. And that's the straw that breaks the camels back. Travels is like he he very politely tells them he's not going to take the tertiary difficult travis fashion note, schrott earth big gc big and he said, menlo.

that ends up doing the deal o.

who was supposed, according to brad, the stocking horse for the deal on valuation. They come in here like, oh yeah, we'll do, what do you want over a three hundred post? No problem. Uh, which ironically is the entry and horowitz playbook, bashing them on right and dress and horror.

Ds has conditioned as all that we can pay fifty to one hundred percent more than we thought for deals. And not only will we win them, but that may actually work out for us well in the future.

And they worked out real well for menu, not just her. Uh, so sad for Anderson. Great for mental.

Of course, they would go on to invest in lift. And me go look at my my best gas data here. I think they owned about six percent at I P O. And so if you think about like when the lockup we've ended to be about a sixteen billion dollar market cap at that point, like they ended up with a billion dollar of stake of lift at the time that they could liquid IT.

And you know, if you want to get really nerdy about this, we covered this, of course, on our lift in uber episodes back in the day. You know, at this time, well, this series be is happening. Uber, a black car company like nobody's doing. Peter, Peter red, nobody. And IT wasn't until twenty twenty thirteen when left would be the one that would pioneer take the homophones playbook and due true peer to peer right sharing and that to an injuries and invested in left, they say, you know.

the future and then uber launches zuber ax and the wars on .

exactly don't really want across the travel's colonic.

but just to be like super crisp about this, it's a huge, huge loss. Like sure, lift ended up being worth sixteen billion dollars. Uber at that point was worth eighty billion. yeah. I mean, we would have been a completely different fund dynamic if they were a new different set of lift.

Totally here to last men, twenty eleven. What a frequent year for tech period, but also for and recent horror. Do you know what else happens in twenty eleven?

Oh.

literally right before the uber deal goes down, which just makes us all the more mind bending that mark would get cold feet here. No software is eating the world.

Oh, my guess that's when you .

publish the ipad August twenty eleven right before the deal goes down. Yeah, I pad in the wall street journal. crazy.

I mean, the piece itself like it's kind of a masterwork of arguing this, there is no bubble disease. I mean, at this point time, people still think like, you know tech is over valued. You know we're still in the shadow of the financial crisis.

You know mark talks about in the peace. He says this is a quote. Today's stock market actually hates technology, as shown by the all time of low Prices earnings ratios for major public technology companies.

Apple, for example, has A P E ratio of around fifteen point two, the same as the broader stock market. Despite apples immense profitability and dominant market position, I M increase today. Apple's p ratio is thirty two and a half, microsoft thirty nine. Amazon is sixty nine. The market did hate tech or just didn't recognize tech at this point time, which is faster .

because those companies did have unbelievable growth margin profiles and continually high growth rates for public companies. So IT is um I mean not as high as they have now like it's crazy to watch all these company ties continue to grow the rate at which the accelerating even today, even later in their life. But yeah at that point, he's totally right that investors in public markets hadn't really realized this about tech companies yet.

The other thing that he sort of sharpens his pencil l on this point later, I don't think he makes IT as directly in the software is eating the world thesis. But he now argues the computer costs are just going to zero, like truly, it's going to asymptotically approach as zero. And so at some point, if you have infinite free compute, which we should say like that does require continuous innovations in energy because IT does take lot of energy to do stuff.

And that's the big non cyp t ou. But is let's make the assumption that compute asthmatically approaches a cost of zero dollars. Then truly, software can just continue to the question becomes, what's the interesting thing that you can do a software even if you have to have to do a lot of computer to do the thing that you wanted to do?

Well, the thing is so cool that I didn't put together until you doing the research for this episode member. Last time we talked about the mike moritz line that I don't think is public. I think it's kind of more like an internal service coi saying that um every successive generation of technology companies should be in the order of magnitude bigger because of morals law, because the cost of computer declines.

That means that you can address every successive generation can address in order and to more industries, more people and does the outcome should be bigger and every funds performance should surpass the last. It's the same argument as software eating the world. It's exactly .

the same .

argument compute cost declines. And mark says in the peace, more and more major businesses and industries are being run on software and delivered as online services from movies to agriculture to national defence. Over the next ten years, I expect more industries to be disrupted by software, with new world beating silicon valley companies doing the disruption in more cases than not. Ha, not exactly .

what happened. The only thing I will disagree with in your comment is that every success of generation of funds should be that much Better than the previous because as we've seen, even in the earliest stages, Price goes up. And so your entry point continues to be higher and higher even though, as you're pointing out, your exit value or the addressable market of every single company continues to be great. great. A software .

company is like you make in the entire angry and .

horo it's argument. Someone gotto make IT here on this. I ve, I ve optimistic program.

So great, so great.

And also then there is this question of like will that always be true? Like there's three billion people on facebook. Now at some point, if you saturate the entire global population with compute at their fingertips and you take up twenty four hours of their day and you have one hundred percent of their value creating activities, A K either jobs running on software, like at some point, especially because the populations not growing, IT would seem that you no longer have an order of Maggie de greater addressable market then in the previous year. But we're play very far from that horizon, an order made in more than .

the previous decade. Well, I think that IT looks like now that cypher is gonna the next answer to that, right? Like what is the next value of mos law accelerating and decreasing? You know you said like lot energy who .

all calling IT here on air.

Well, I think entries and this has been calling .

IT for a while.

Twenty thirteen. Uh, okay, the back to that. So after software eating the world at the end of twenty eleven, in january twenty twelve, they go out there is fund three, one, a half billion dollars. Oh my gosh. Get to add.

you thought we were big before I watch this.

Watch this. So that one in a hf billion dollar fund, get this was seven and a half percent of all of the venture money raised globally in twenty twelve. Well, one fund, one firm. Wow.

that's wild. Isn't that crazy?

It's interesting .

because it's basically like in a lot ways in recent horror, was just slightly out of step with the growth of the rest of the venture ecosystem. And they took advantage these like arbitrage able moments where like the one that you were talking about, where they realized, wait a minute, there's actually less risk in series a than there used to be because there's all these seed investors.

So therefore, we should invest in series a because we kind of get paid too much and equity for the rest that we're taking. Or more appropriately, other people are getting paid too much equity for the risk they're taking so we can Price higher. And they're of doing IT again here where this is really like two years before the race is really on in raising massive, massive funds so they can kind of play that to their advantage too. yep.

And what's the other piece? The arbiters here. It's the summit. It's the T A. It's the silver lakes. So you know, the raison wanted a half billion dollar venture fund, seven and half percent of all venture, you know, money raised in twenty twelve, but a big portion of that isn't going to venture in the same way. So pretty quickly after they raise the fund, they do at the time you like this, not hundred million dollars series .

a in github gub, that's right. I was like the first real capital that good habit .

raised had been bootstrapped all the way. Yeah, yeah. Was the first real captain? Wasn't a service. This was the type of deal that a generation earlier, you know, summit insider server, like her.

whoever IT would be doing. And this was like the largest quote, quote.

series a ever, a master ful P. R. And branding of this is a series a. There is no way and held, this was a series. But anyway.

I think they bought ten percent of the company or something.

Yeah, I think even more, I think he was a seven .

fifty post money .

valuation for tested more.

I do know that they would end up making a billion dollars on this in this the ultimate sale to microsoft in twenty eighteen.

yes. So that almost returns the whole fund, right? I mean, this is how that type of investing works, is like very low downside, you know still pretty high ups. I mean.

they ten x that money, right? yeah. Again, going back to before a tenets actually not interesting to in the early stage investor, you kind of need to be in that a hundred x territory to make the portfolio math work for that to be the big winner in the portfolio. However, if you're investing a hundred million dollars out of your one point six billion dollar fund, then like that hundred million ten axing, very impacted for the fund.

Very impactful. Yep, totally. So later in two thousand twelve, critics on joins the farm. And Chris, of course, was see a very, very well known new york entrepreneur, venture capitalist. He started site advisor, and then hunch, which was cared by ebay.

He had started found their collective, the seed VC firm had had been part of best mer earlier in his career. People I remember, because I used to live in new york, people really identified him with, like new york french capital. He's like going to silicon valley.

Join Andrews horror. This was big news. And shortly after he gets there in twenty thirteen, he leads a series .

b coin base.

twenty five million dollars in coin base at a one fifty post. wow. Oh, man, really overpaying for .

that one hot fifty post. What is this thing even do? crypto?

Here's the kicker over the years, and dress and heritage would keep buying shares from other investors, so other early investors are selling shares s including USB and and others. And address some is just bian bion, bian bion man. And this is like ventures, a power law.

We're talking about so many great outcomes here like this one, Doris. Everything everything else at the D P, O. Entries in oro. It's a stake earlier this year in coin base is worth in eleven billion dollars. Oh my god, that's seven x that entire wanted a half billion dollars fund like, oh my god.

thank god for the investors in that one point six billion of our fund that that coin base investment was out of this fund instead of one of the smaller funds. Because returning at one point six billion dollar fun, no easy feat. But if you have one eleven billion dollar return in there OK, yeah, this is the whole .

like these outcomes are bigger than you think. There is no bubble. These valuations are not just justified. But like the crazy places we're paying now, we're getting the deal wild is while they invest, all told, in seventy six new companies in twenty twelve. In twenty thirteen, they had another ninety seven new companies, including left and page duty, which is going to be another great win for them. Robin hood, they only do the seed and Robin hood, I think I don't continue until I think that's right.

I think and until like twenty, twenty or something and they .

did IT with the growth for oculus. By the way.

all this great data that we're finding from our friends of the show at pitch book, just an awesome resource for digging through this and figuring out who participated.

Not around to so great for episode data. Bricks is in twenty three team, which is still private, but that can be a monster for them.

most recently valued at twenty eight billion. They let the seed round and have participated. And I think every round sense, I bet they on a ton .

of that company, yeah, can wait to see that as one. I just love this evicted. We've got so much great stuff, and we've got to so much funny stuff too. Uh, enfance, that was twenty thirteen.

How I forgot they were in benefits.

They were the big ones in enhance. They were. They were holding in that bag for sure. Clinker member clinker.

one of my G.

S. P. Classmates spent his a summer clinker hidden, go back full time that was good choice. And then the picker, this may be my favorite part of the whole episode. In two thousand thirteen.

They band together, a band, brothers, three market, tears eends up, being called with google ventures and liner parkins to create the google class collective. This is the most ridiculous thing ever. IT wasn't a fund.

IT wasn't like a like crypt to fund to the bio fund that were going talk about when I here. IT was a collective where the three firms said they were going to share google glass related deal flow, but no actual commitment to invest in. What .

that's an incredible P R. Like to be. What a plant that story is, is impressive work because like that's a non story that I agree to share deals with other investors all the time. That's a long story.

So there's huge press, well, there's an event, big tech round, peace, money, quote from mark, injuries and in the tech ranch piece you put on glass and you say, yep, that's the future. Yeah, that's the future. Mark can't win them all.

can't win a mall. I do legitimately think augmented reality, both visually and audio, is the next bag compute platform.

No total. yeah.

But was google glass? no.

H there's okay. We at the photo of dell maris from google venters and john door from kiner and mark in reason wearing where the google glasses imposing on sand hill. Oh, I got what a classic photo is.

great. Despite all that, things continue to go pretty well. In a twenty fourteen, mark gets really into twitter. He tweet something .

like IT was over one hundred times a day.

Despite being an Angel investor in twitter, he had only tweet twice before twenty fourteen. I remember thinking that was ridiculous back in the day that like all these people who were talking about how they invested in twitter and ba blah had never actually participated on the platform. I think Wilson was the only one who like actually was active on the platform. But then for whatever reason, in twenty fourteen, mark decides, hi, i'm going to get really into this. He tweet like twenty thousand times in six months wild.

And he was like the best person to follow because like if you were interested in mental models and expLoring fuisz ideas, like IT was a bef table of that yeah.

he actually, people, of course, also creates press. And everybody wants to know why he tween so much. Like it's a great and he says in some of you, he says he loves twitter because, quote, reporters are obsessed with IT. It's like a tube and I have loud speakers installed in every reporting cubicle around the world. So great, uh, march of twenty fourteen, they close another one and a half billion dollar fund just little over two years after fun three, they want them to have .

billion deal fund. So asset under management here .

about four billion. Yep, they do instinct. They do read IT.

They do magic leap. They are do all sorts of stuff. Interestingly though, th Epace a ctually s teps d own a l ittle b it. They stop doing quite as many seeds during this time period. Theyve now since stepped back up the seeds, but I think maybe they started listening to folks about the signaling talk of entrepreneurs were actually listening to the signaling effects.

IT was resonating with people. Me, David, like to recall a conversation we had when you were starting your venture firm in.

One was that teen.

This was part of the thesis. You were like what no one wants to raise seed rounds from the series firms because of the single risk. So we're up your play seed firm, and I think that makes a lot of sense. And and that was the professionalized of the asset class of seed happened because of that .

of the signal effect. Yeah, yeah, totally. It's just so funny. It's completely disappeared now.

yeah. Well, in so many ways, everyone has followed entries and horowitz is lead and truly, every way. The one that we're describing here is kind of struggling a little bit on what stage is the right one for me and how much do I need to stick to my netting and you know, how much does signal matter? yeah.

So okay, in twenty fifteen, finally the new york is comes out. It's so good. It's so okay. You gotta go .

IT tomorrow's advancement.

Uh, tad friend is such a good writer and this is like, you know once every a couple years in new york, ker is like we're going to do a profile on an industry and they talk about this on the on the sixteen cy pancakes and like I think it's the episode with market, like the opportunity to have the profile and venture capital in the new yorker to have mark entries and b like the health peace for IT. Uh, it's so great. I just okay.

Can I read a couple lines cause do O, O. So first of the piece starts off with a levana of mix panel, which course was a big country and investment, and talking to the founder. So how does he, about his experience raising venture captain, but not, he says, this quote is so good, mediocre VC want to see that your company has traction the top VC want you to show them that you can invent the future it's so funny and it's so true um it's just great.

Let's see and dress and horror. It's model their brand strategy not on the industry is elite but on Larry ellison s oracle. And it's aggressive marketing during the enterprise software wars for one investor in their funds, prince in universities chief investment officer Andrew golden.

IT became a running joke. How long IT would take other firms to complain of that injuries? And horowitz, in the early days, IT was within two minutes, he says, here you get, this might be my favorite part.

One morning, as I SAT down to breakfast with Andrea arrival, VC sent me a long email about a sixteen sees holdings. The VC estimated that because Andrew, since firm had taken so many growth, positions, its average ownership steak was roughly seven point five percent. It's actually eight percent, which meant that to get five to ten x across its four funds, you would need your aggregate portfolio to be worth two hundred and forty to four hundred and eighty billion dollars.

How could that possibly be? I started to check the math with Andrew on. He made a jerking off motion and said, ba, we have all the models. We're elephant hunting going after big game.

哦， my god. A that arrival.

VC would take the time to type out a long email and would take the .

time to have themselves or an analyst go model out a different firms, average ownership. Are you kidding me?

So great is so great. And and model out close to be within a half a percent of the actual time and way to me.

So that is actually an interesting question. So they would need what we are, the numbers of how much market cap in aggregate would need to be .

created two hundred and forty to four hundred and eighty billion dollars of market cap.

See, you got coin base at what is IT one hundred .

right around the .

cool hundred. You got robo ks at forty five. So that's one forty five.

You get ot at thirty three. That's around one seventy. Yep, you got slack at twenty four. No.

i'm like that. Let's take up to two hundred. One to two hundred. You got A B, N B. That's another handy right there.

Yep, you got interest, which is another forty five.

fifty year, three fifty.

So like you can see sending that email being like, uh, good effect, luck. And like you do look at the companies they invest in, you're like, yep, they far surpass that. And like we haven't talked about inter card or data bricks or Robin hood or and of course, these are smaller positions.

But yeah yes, uh, it's so so good in mark's response makes a jerking off motion with this that says where elephant hunting we're going after .

a big game that has to be the first time that was printed in the new yorker in the new york IT must be.

uh, okay yeah. I mean.

what the interesting thing is the whole industry seems to massively give whiplash from some new disruptive entrant, often who's writing bigger checks and has a bigger fund. And the first reaction is, oh my god.

complain about them. See tiger today?

exactly. He was in dressin horror tz, and then IT was soft bank, and then IT was tiger. And like at least with Andrea horror ts and IT seems like enemy information that's not public.

But like IT seems like with soft ing vision fund, one like strategy worked a heck a lot Better than than people thought I was at least a lot and in the media was reporting. So I don't know. I suppose that next time my mejor reaction is to be like all these new guys, they don't know what they are doing and they're like being irresponsible.

They're blown us out of the water like maybe think twice about just complaining and figure out, okay, how do I actually need to adjust my strategy? Because maybe this is gna work. Uh.

you couldn't teach me up any Better. Here back to the new yorker article is, quote, sixteen s services model made a strong impression on c antil road cook and rison caused us to up our game on the marketing side, said square capitals, the onion. Younger founders pay attention to media and we don't want to be d positioned. Sqa hired an in house publicist and to new marketing specialist to compliment the four IT had. And most top firms made similar moves, even if they primarily believed that a sixteenth's services or simply a marketing tool uh, so doug, so sick a like where I going to be deposition like, yes, this is a good innovation we are .

going to adopt yeah, it's a bill gain in that way.

Yeah totally.

I can't wait until power to talk about this one is so interesting to me that this caused effectively margin compression in the venture capital industry .

ownership compression.

No, I literally mean margin compression in how affordable .

IT is to be a general yeah .

like get hard to run lean as a big firm because you kind of need all this stuff to be competitive and that stuff is really expensive. It's a big team. You can just take home ten million dollars in fees .

every year even if a team totally and .

so you end up with this fascinating economy. It's the same thing that happening in the media ecosystem where like there is no more middle, if you are gonna be one of the few who succeed and you're big, you got to have a big as cost structure b and recent harvard z is the new york times of venture capital. And simultaneously, IT will be true that there is this long tail of people.

They are like f that big cost structure. I'm going to start kindergarten ventures and take my small amount capital and like no team and want to play a completely different super niche game. And there is some room in the middle, but there is not the room that they're used to be in the middle.

yep. And you know that the industry is found that out painfully over the last ten years.

Yeah but this really interesting thing of like I took a long time, I took thirty years or forty years of venture capital as a profession for the arbitrage of profits to go away from general partners.

So flips idea is coin both on the the staffing in the services side of things, but also on the deals and evaluations from and just like the support yeah IT just like beats me over the head. And you know, maybe this will sound by a tord interests to hour, but i'm not trying to be a really dislike doing this research thinking about the last ten years. There is no bigger winner in all of this. The entrepreneurs, oh, for sure, oh my god, like you used to be giving up twenty five, thirty plus percent in your company series easy and getting like two million dollars for that and like somebody sitting on your board doing something. Maybe you absolutely right.

I was talking about the margin compression in fees. Now let's talk about the margin compression in returns up. Everyone's cost basis is higher because there is way more capital competing to go in. So therefore, new ownership percentages are gonna less for the same mana capital that you want to.

to put to work well. And even on the feet side of the entrepreneurs, they're just getting a lot more. You can argue all you want people do about how valuable these various services are and what not. But like, I think it's pretty valuable that somebody and and horror is in the lead. But now the whole industry is out there just like banging the drum about how great startups are and like how great their portfolios are.

And like, if you're entrepreneur, why would you not want somebody champion you? And in a way, that's going to be so hard for you as a founder of a small company to do, you're not going to go get a profile in new york. But in reason is and they're going to talk about how awesome of you are yeah.

that makes the most sense for these things where IT doesn't make sense for a startup to have that competency in house. So having access to a fraction al resource of that competency, who's a specialist and one of the best in the world that that and really highly paid, who you couldn't ford for, how sort of tiny yathrib company is, which all startups are, IT is an unbelievable boon to get that. So not only are you facing less solution and getting more capital than you ever used to before, but you are also actually getting a far superior product to what you use to get.

This sounds like a captain read from from last season. H, I love you. I love IT one playbook game I want to highlight here, and i'll talk about this again at the end. But any time your name is on your competitors lips, you're winning like you're winning like IT doesn't matter what they are saying yeah if they are talking about you good, bad, ugly and different, you're winning. You just keep doing .

what you're particularly when they are the most successful and combat of all time.

So okay, after that, later in twenty fifteen, there is a two hundred million dollar bio fund, june of twenty sixteen there is another one and a half billion dollar court fund, twenty seventeen there is a four hundred and fifty million dollar second bio funds twenty eighteen first three hundred million dollar cyp to fund LED by Christians in and new G P K D hn who interestingly, I didn't know this about kd, told you in the research, did know her background was before SHE joined SHE was a federal prosecutor at the D O J and SHE LED the mount gogs case well, do that coin base for recruit heard to join the board of coin base after the mount box to vocs.

They like, look, we're coin base. We're like doing this above board where they were right way to do this. And so that's how Chris met, came and then he came in.

The endresen superman captain was so different in the rest of the dara a because system totally, let's see, twenty eighteen also. And twenty eighteen, they launched the cultural leadership fund, which got a lot of leg blow back at the time. And I I think was pretty misunderstood. I think it's actually a pretty good idea. Twenty nineteen, they split the main fund, finally into separate funds for early and growth, seven hundred fifty million for early, two billion dollars for growth. And then tony twenty, just one year later, they are back in the game with one point three billion dollar main early fund, seven, three point two billion dollar growth fund d two seven hundred and fifty million dollar bio fund d three five hundred and fifty million dollar cyp to fund two thirty six billion dollars in total, across the sweet of funds raised in twenty.

Strength follows strength.

dang. And then this year, of course, in twenty twenty one, they added another two point two billion dollar gypt of fun 3， bringing total capital under management, just a hair under nineteen billion dollars. All right listeners.

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We can share this in the slack. It's a great set a date on the firm. They did a little under a thousand investments in a little over five hundred portfolio companies total.

They've produced one hundred and sixty exits, twenty of which were companies going public. There's now twenty two GPS with the addition of of a new new york bed. G P. The first time there's been someone outside of bay area IT. As A G P.

another friend of the show.

David habor, and David, as you mentioned, nineteen billion heronry and assets under management, eight network teams, two hundred and twenty people now work at the firm. So to give you a sense of like they've got twenty two G P S, but that means that ninety percent of the people who work at the firm are not G P S. So have got a big investment team.

But obviously, these network teams have grown meaningfully. And I also was talking to some folks, they did a lot of hiring outside of the bay area during covered. So as much as they were sort of one of the champions of the area for life, and if you're serious, you invest here in the best companies are credited here, blab, blow. The last year is like really changed that. And not only they investing in more places, but they actually have staff in more places and have adapted the culture and the processes eternally to be hybrid.

Then also, we debated, including all this in the history, in fact, uh, I think for a length, if nothing else, but also to do that, right, we're going to do a different venue to talk about this. But they're also .

built a media company .

yeah alongside all .

of this yeah absolutely yeah. There's a whole sort of forward looking view of a future looking view. One might say yes, I was trying to avoid, let's call, lower case future looking view, not only of the media company but like other things that they're doing that transcend being a venture firm with value added services. And I think as mark recently pointed and he had agreed, invest like the best episode on this hp two point o and there's definitely a lot more that will talk about there probably in the future episode at some point.

Yeah, think that. Sorry, what to do IT. So yeah, let's interesting.

herts. Oh yeah. Wait, there is one more piece to talk about. So there's this great saying in venture that is also a my merits phrase he's just so he's so good um which is that the apples take longer to rape in the lemons.

Of course apple L S being a double onto a meaning like good companies but also you know apple gains great case. So good they started having some success. So April twenty seventeen, success on the like distribution front act I P O march twenty nineteen left I P O about twenty twenty pager duty penter's during two thousand thousand is the slack D P O, december twenty twenty. Airbnb, january twenty twenty one. A firm, march twenty, twenty one, robo ox, which within a year they turned around like a fifteen acts on that .

yeah here I actually calculated that. So there are initial investment into robo ks, which I think is out there late stage fund, the growth fund somewhere between one hundred, one hundred and fifty million IT was a hundred and fifty million dollar round at a four billion dollar valuation.

Who so great, big shadow to how? And our friends at altis .

totally means they are probably about two and a half percent of the company at IPO, which of course, is a forty five billion dollar market cap today. So pretty quick turnaround for that hundred, one hundred and fifty million in the one point two billion dollars.

yeah. And then the big one, April twenty twenty one. What's that seven years after the initial .

investment in base coin.

base dam, eleven billion dollar stick that and recent horror ds has in going base.

which I think isn't even Better outcome or it's about on par with what sqa had with airbnb. If i'm remembering right from our episode there.

yes, sounds about maybe a little less. I want to see the go ahead like a fifteen ish percent taken, A, B, B, thirteen, fifteen and something like that.

But I I seem to remember this like ten to twelve billion dollar absolute dollar return that could be.

but every be treated up to around one hundred billion. I think I might be back down a little bit now anyway, we're splitting hair here. These are pretty good.

in any case, one of the single greatest venture capital returns of all time. Yeah, her dark. Well, we're definitely gonna get to greeting and a little bit of math.

It's native, but I think it's interesting this order to review this. But let's do some analysis first. So let's take our narrative section. What's the bulcke and what's the bear case on Andrew and horror ds moving forward? Let's start with the ball.

I think we just pay at the both case, what OK. okay? Uh, bull case, I got two ball cases, one crypto. I mean, if you believe crp to is the next.

I wrote two and you just got the first one.

Okay, next bull case I would have i'm curiously you to have this as well. A sixteen z has been pretty adam in lake, I said about like bay area. And a particular about western technology companies is that invest in they haven't touched china, india.

Is that arrest of the world? No reason to think that their brand couldn't extend. So that feels like a Green suit for them. There's the two of the top.

my head. I like that. I didn't have that. The second one I had is this sort of H P two point o notion of, you know, in the old days before existed a start up ecosystem where you could get funded by venture capitalists to go and pursue your idea.

You would try and rise up the ranks of an hp, or all of these companies as an executive, to go in and invent the future. And hp was the one hundred percent owner of every division. He was the one hundred percent owner of every division of their company.

Obviously, taking minority positions is different. But can you sort of be more of the hute packet ard in their hay day if you aren't the majority shareholder of these businesses, can you still find a way? And now we're drifting in the liner perkins territory a little bit.

But can you find a way to both provide the services, find synergies between portfolio companies and really like. Find leverage from your own scale such that you can find economies of scale across the different companies. By that, I mean, does everyone really need their own totally separate finance team?

Like at some scale, probably not the same kind of thing. You see an industry cancElliere ation when one company buys another. I'll be very curious if they sort of transcend the we help you out with part time resources thing in their networks to see if there are some way were like actually some part of the fundamental Operations of the company are happening at the venture level.

interesting. It's kind of like an maybe sound like an actual fulfilment of the you, the C A, A dream execution machine thing because the C A, A package like to asic park, you know the packages is that they were putting together the town and know they went like part of the reason C A, A had to exist as like you're not going to pull together a lake. I don't know.

I don't know what goes into making a movie, but all I assume there's a lot of stuff that studios used to do and that C, A, A. Was able to bring together into a package and then be like, no studios, you are just financiers now totally. I wonder if this is part of what's informing this H. P. Two data strategy.

yeah. I mean, the thing that I wrote down is that the biggest case is that the firm is actually unrecognizable in ten years, that there sort of the start up platform, they like an idea platform. And I am not being specific about what that means because I don't really know. But maybe the right term is that they're like to start up dream machine, which actually lends itself more torto studio.

They would seem like just based on all the work we've done psl starting twenty seven companies like I do wonder if they will shift earlier and start being more of like a you literally are a person with an idea and we have an ability to sort of take that and plugged in in. And the cool thing about the studio is we have that machinery built for like the first eighteen months. And i'd be curious, a lot of people talk about seed to IPO as an investor. IT will be interesting to see if in recent horror concert of become the start up dream machine all the way from idea to I P L.

yeah, yeah. Well, or you could just go raise a whole lot of money and you could be the next, you know, disruption in the industry.

The great point, it's really like that mark and ben kind of have no sacred cows and like whatever, they're very experimental. They're very willing to change things. And like IT wouldn't surprise me if some point in the near future they stop talking about IT as a venture capital firm because they feel that it's a sort of broader set of activities.

Well, clearly, they are already sort of go in this direction with the media company.

And yeah all that yeah yeah. We also totally skipped over cyp, to which I think is okay. But can you give like one or two sentences on how they're different than other firms with a land start cyp du?

Well, in one respective is just simply that they were there first and early. And so they've been part of like these big ones. Other firms have two, you know USB being primary among them and and then native cyp ta firms like paradigm, multi coin and and all those good folks.

But you know to the extent that success breeds success, is going to apply in cypher early stage ript to investing as IT always has in venture. And Jason has been there, right? Like climbs, dang salona yeah big.

Like like everything interesting there there. So I think that's a big part of IT. You know the other piece of IT is like it's different doing that and they've built the machine I need to do IT in a way that other traditional venture firms have not.

I think if I understand the history, right, I think part of the reason why they created a separate fund for crypto versus doing IT out of the main fund was because of this, the same things that trigger needing what secondary is needing to be an R I. A. I think if you do too much token investing in a court fund, you would need to register and be, you would lose venture capital exemption. So while other firms were registered as our to do secondary aries, which of course centuries and also does, they are like a well, go do this first with cypher o funds and then now for the whole firm to be able to buy tokens instead of equity. So I think this is going to take a lot of firms .

a long time to catch up to that. And the Operations of things of staying a breath of the things you can do in the U. S.

Verses international like takes overhead. And they've invested that overhead. They've figured out what the necessary infrastructure is from a regulatory perspective to do crypto investing with L P. dollars.

Yeah so we talk about the bear case.

yep. okay. So here's my biggest one. We have been on an unprecedented, unbelievable bull run in tech that started the same year that entries and harvest was founded. They've never Operated in a downtown market. I am not saying it's not onna go well, but like their strategy has aligned perfectly with the economic landscape while they been Operating in IT. So IT is untested, unlike all these other firms that have needed to uh if you believe the a extensive haters who say have no Price discipline, will that come back to haunt them during the you know one or two funds from the vintage years of whatever downturn comes at some point in the future, IT could hit them a lot harder than IT hits other .

folks yeah you don't .

have to debate that. I'm just saying.

yeah no yeah cost mark.

that would be the knock. The other bar case I was thinking up is like they basically over extend themselves in trying to get too creative and imagining what this H P. Two point o could look like and they have like a great very profitable business on their hands where they have really dominated an industry and like them trying to turn that into something entirely new and different may actually not work.

I gotten also say for uh, firm and people that are so good on branding, marketing and what not calling this strategy, hp two dito, you might want to rethink that one. It's like, I don't know that hp is something you really want to associate with these days well.

And nobody I mean, there's just not that many people alive and Operating in the business world right now are leading companies in an aspirational way who are aware of the hp that mark talks about. Yes, they're only aware of the defunct PC manufacturing.

You want to say amazon to that? great. yeah. But anyway, I think a big one that I did. I have no view one way the other way.

This, whether this is happening or not or at risk of happening, would just be that as you turn this into a big firm, it's already a big firm. Politics are gonna start to creep in, right? Like this happens.

This happens in organizations. And Frankly, probably politics have been the downfall of every venture firm that has reason and fall. And to varying relative degrees.

You know, there are all sorts of reasons, right? But you break IT down at the end of the day, it's people is about, that's the problem. And the bigger you get, the more opportunities there are.

The bigger you get, the more time that goes by, the more opportunities there are for that. And so maybe some themes they'll start to get exposed and other firms can now come along and yeah to die here or live long enough to be the world. I guess they've been the world in their whole lives to a certain extent, but at some point they're gonna .

the villain of entrepreneurs. In some way they've been the underdog to like theyve had this tail wind of feeling like to fight the man. And you're right, like they're the man.

So they're the man.

Yeah yeah. I guess one of the thing I was thinking about this, speaking of tiger global and what's going on in hedge funds coming in till late stage financing and now even early stage financing, those folks are beating the drum of gore financial investor.

And we're going to give you the cheapest available capital, and you can use that capital to go and build on relationships and hire people and do all of things you need to do that like VS kind of a bundle of both advice and relationships and capital and worth a selling your pure capital. There are some set of entrepreneurs who are gonna do that because they are very experience. They have their own relationships.

They don't need the services that firm like sixteen z brings to bear. The question is where that belief spread were more and more people, even if their inexperienced and could benefit from the the set services that a extensive offers, if they're like actually the most capital, the cheapest Price sounds great to me. And I actually just one of these company, these competencies in house.

which is hopefully we've painted along the way here, was a key component of the entering home strategy. Like there's all the stuff, there's all the services, everything about IT, but also they are offering the best terms of the highest Prices, right, very long time. And if there are no longer doing that, you know, I think is a very valid argument that prizes .

what matters IT, sort of like Andrew and horror, had a different underwriting model on future than the rest of the VC is did. And so far, because we've in this bull on this whole time, IT has proven to be right. So everyone else who is being too conservative in their sort of valuation models and basically underwriting of what future markets could look like was wrong.

And that's why Andrea Harris could both be the best product at the best Price. But IT may prove to be the case at some point in the future that the gas and the tank runs out on software is eating the world, or that we go through a little extended hick up where people stop believing that for five years and the money coming after you drives up and L P. Are difficult to raise from. Like i'm just imagining a little bit more capital crunched environment where like you can be both higher valuations with more money and a really expensive broadside services.

yep. Now I mean, in the log run, like obviously, I think we all know what side we fall on.

like everything that depends on your time horizon. And if your time horizon is infinite, then yes, see you and I being the optimist that we are, we're like looking at this spirit like the .

tough against make you're .

so spot on about the .

underwriting thing that they were just undertake differently than everyone else. And more correctly, the then yet from the new yorker article with the competing VC.

right? The point of that competing VC was like. This is crazy. The math doesn't work. Their underwriting is wrong. Yeah and sixteen years is like on that thing that you said was crazy where you like, the math doesn't work because the numbers are too big. We think we can hit those numbers and they did.

Yep, and they did.

And by we like tech companies broadly that .

we invest in. Yeah, well, I think that's the this is an exactly a narrative onto where the other maybe it's a narrow at the industry is whole. We made this point on the first episode, but I want to double, triple, underline, underscore here.

We're telling this whole thing and there's so much drama and it's so fun. It's like entries in to the underdog in the disrupt there and there's all this to feeding and what not. This is all just great for everybody.

It's just fricking fantastic for everybody like the fact that the new yorker is writing about tech. It's great for other v it's great for startups. It's great for entrepreneurs, is great for pockets given me. It's great for Andrea, great for benchmark.

for falls up. Yeah which is a great leading to power. So I think this is interesting. I think that they had a source of power that worked really well for their first call IT eighty years, and now they have a different power.

And remember, for folks that are new to the show, power is the thing that enables a business to achieve persistent differential returns, like how can they be sustainably more profitable than their nearest competitor. The first one was clearly counter positioning. We've used at several times in this show to describe the way that they positioned themselves in the press verses other folks versus in combs.

And i'm going to use in a little bit more specifically in this case, which is they literally did things that other people could not do because their business models did not allow for IT. If you were to go to G, P. Epic firms and say, in order to bet on the future correctly the way these other guys are, and we need to staff up like this overnight, we only to stop taking salaries for the next three years oh, and we all make over a million dollars year in salary and have personal lives and burn rates that have accommodate.

And you know that even before we start getting our Carry, the chances of that happening immediately, rather than over the next five, eight years being, you know, forced to, was like zero. And so there was that moment in time, much like how a caa was able to do IT in the agency world, where they literally took a different business model. And did I think that the in comments couldn't copy.

which was genius .

you to totally genius.

The other one was brand totally.

And that's the one that will last for the future. All this high pollution stuff is great and all the value at as services are great and all the networks are great and the executive briefing center is great. Let's not forget the business that we're in here, which is deploying capital and getting a return on that capital.

Now that is a commodity. Capital is a commodity in the way that commodity industries s look, is that they're pretty much undifferentiated because the vast majority of the value is available from a near exact provider substitute. And so what differentiates a commodity from another commodity brand.

com pathy baby? Um there was actually a great quote I get where I almost put in the script and I didn't have an talking about the injuries and benchmark thing and they're like a secret like watching copp. I you don't do a Price for i'm truly i'm just sitting here sipping truly .

it's like watching a game of chess play out too because IT is simultaneously true that having a great board member IT can be game changing for your company. Having this set of services can be game changing for your company like I just watch not to tote around horses like some of the folks that were able to bring in the portfolio companies through asset p sl, recruiting them, trajectory changing for companies.

And i'm sure like i've never worked in injuries Normally. I'm sure that works in speeds there. And so like even forget all the other services, like if you have a great recruiting mechanism, game changing for companies and also IT is true that the primary value that comes from raising capital is the capital.

The brand piece is also interesting to and you set of about lake, you know and they just ripping a little more on the coconut sy thing back to the benchmark Prices. And Jason, benchmark brand, we are the craft venture capital firm yeah and decent brand we are the friend eyes it's just like com empty right like you know coz you do whatever you know, coca cola classic with the polar bears and what not impecunious like the taste of a new generation IT IT works like there is different segments that .

they address like IT works yeah, it's finally well, we're talk about power. We should also talk about like when you talk about profits, you know like persistent differential returns, you should literally talk about like pricing power in forms that was reported that injuries and horowitz takes thirty percent Carry.

And so it's interesting to see that like their returns and their market perception has literally turned into them being able to Price higher than their competitors. This is L P facing you when it's them versus other venture firms. And they can say, yeah ah you're gonna a worst deal with us and you're going to get with other people, but it's worth IT. So you'll take IT and they do this is the .

hamilton tell my definition of brand power, right? Is like you can change a higher Price for the same product.

Yes, it's why people .

pay more for a tighe's diamond. And uh, no name's diamond yeah. So the brand .

thing is multi cited. It's your brand entrepreneurs and it's your brand L. P. S. yeah.

And the entrepreneurs sion, that this is you get into the round, you get into the round and you get A A large generation delicate in the round.

Yep, right playbook. And we've done a lot of this already, but there's a few few that I want to head go for, right? So just to review all the things that we're like unheard of or uncommon before a sixteen sees started doing them. G, P, S, as former founders rather than investors, huge team of experts, which is now known as V, C platform, calling everyone at the firm a partner blogging, which other than like brad fell and freed Wilson doing transparency versus opacity and content marketing more broadly like that, didn't really exist in adventure, paying huge Prices to blow your competence out of the water and just offer much higher valuations and bigger checks.

It's crazy yeah literally nobody did that .

yeah and existed at some extent and isolated ways but like no one just said, like effort. We're doing IT over and over over again because we're underwriting the future differently than you .

are yeah and not really like people would be like, oh, I can't believe i'm because I entered the industry in twenty ten so and dry them was there over to still lar early days IT would be like, oh, I can't believe the Price that x firm paid for this you know we offered a six pre and they did an eight pre. You know like nobody was a step change.

Nobody said, like what if you raised eight? Yeah and then we'll figure out how to value that. And unless the venture firms investing in cyp du, I think U S V, probably a little bit of credit for I think they were earlier in some ways, but not nearly investing as many dollars and for sort of as long a period and building a brand with crypto community the way that Andrew son has gone on to. So you look at those, what is that six .

things I I would have seven, two of like P.

R, yeah, yeah. I I guess I put that into like the content marketing brand building. But you're right, it's a different function of marketing. So those seven things that like you kind of a take a face value like that part of the job, that's what IT is to be a venture capital firm, which like just weren't things a decade and a half ago before injury. Horowitz made that a part of what IT takes to do .

this job yeah I can argue with that.

is literally their playbook was to change the requirements of the jo B2Be don e for eve ryone els e in the ind ustry was wil d. On that note, there is an interesting thing that i've been thinking about, which is, like everyone, the common knock was that they were overpaying to buy name brand for themselves to sort of like buy their way and the winners, which first of all, even if they did that, IT actually is a creative to their L P S.

Since their l PS. Would benefit from being investors with in this name brand fund in the future, assume that they were going to continue investing in subsequent funds like IT actually was a good use of the capital even if their Prices were irrational because great. Now in the first year when the fund was deployed, yeah, we might overpaid for some deals, but now were in a top three franchise. So awesome.

And the first fun ended up being good.

right? Would anybody argue today that they actually paid too high evaluation for anything they did from two thousand and nine to twenty fifteen? Absolutely not.

yeah. What are the coral area? This a playful theme I wanted to make if we made this point on the last episode, but I don't think we have talked about that yet here.

This is just so silly and I I didn't quite get this perspective until being outside of the institutional venture industry and now is establish to me, it's so silly. Why would you ever argue publicly argue as a venture firm, that valuations are too high? Like who's your customer? Your customer is entrepreneurs.

That would be like saying, like a politician running and being like, taxes are too love. We need higher taxes. That is my plan for and not only that, but the specific other competitor of my initio from the other party who's running the problem with their platform as as they want lower taxes. If you an entrepreneur listening to this, you like, uh, I like lower taxes.

I like evaluation, right? Yeah that's a great point. Yeah take a different thing I argue about if that's .

your your side feel that way all you want but like don't argue about that.

right? Yeah speaking of like things that are specific to institutional V C, like we discuss on our V C fundamental episodes in the the L P show, there is an investment process that has to happen because there's a lot of partners. So you need to figure out, like we raise this fund, like we got these twenty two people.

Is that crazy? Is twenty two now? But even imagine a smaller partnership earlier on, five, six, seven people. Like how do we make decisions to invest this fund? I, well, an interesting thing that they do is they do not have a consensus based approach.

So I think and this is according to the information which is linked to and sources, any G P can pull the trigger on any deal on their own. So they can say, like i'm going to back for this, the way mark describes IT in some podcast is that they assemble a red team to basically either the way we've talked about this A P sl. And I I think have talked about an lp episodes in the passes like to have a foil.

If you're advocating to turn a project into a spin out, someone should kind of be the the bare case on IT or your foil mark cause the red team and is like we basically staff someone with the responsibility of going and trying to figure out why this a bad investment. Because if you don't have the consensus of the partnership and you put your name on the line, sure, we can. We should do that investment maybe like it's a good non n consensus bt, but also you should have to go argue with someone who's going to present the other side of the case and is like we figure out this out because ban is is my red team, like I I can come in and be super optimistic, think about something and then is naturally good at because, you know they fight like dogs, like he's nurse. Good at presenting the other side of my arguments, and we decided to institutionalize that in the firm, which I think is really an interesting approach that both forces you to be diligent but also allows for non consensus bets.

interesting. Yeah, I like that in theory. I wonder in practice how much IT actually goes because like you and I know like these deals happen in like days if not hours is like you're .

lightning speed.

It's just interesting.

I at least in theory, and like great to talk about on .

podcast yeah great to talk about on cast IT makes total sense though that they can be a consensus to and farm with that people like you're never gone agree on IT anything yeah.

especially at th Epace t hat t hey're d oing d eals n ow b ecause o f t he p aste t hat t he w hole t hing i s w orking n ow.

Yep.

the last one that I had that I just thought was interesting that we didn't talk about on any of this, but mark talks about a lot, which is he doesn't really believe in pivots or the notion of like fAiling fast or the lean start up.

I'm amenable to this argument even though I do a ton of testing of ideas that like the big innovation throughout history are made by true believers who just kept trying like there's something like the filament of a light bob was like Edison on's two hundred hundred attempt at creating and it's like IT may not be the right decision for you as an individual to keep brimming your head against to all, but it's good for all of us as a society that there are a lot of people who are willing to keep running at something almost illogically. So in a way that is potentially not in their best interest because that is where the true breakthrough is come from. And if everybody is is always like looking at data from the first sort of test, they're like ah starting working, let's try something else. Then like you don't get the breakthrough innovations.

Yeah that makes sense. I mean, I think like both of these things are true, but certainly we didn't like test acquired. And if we had test is acquired in the early years, we ve probably would have been like, well, that's not work and .

very well totally. But passions, projects, passion leads you to do things that aren't necessarily economic and that at some point you sort of look around and you're like, wow, value creation has happened.

I love that image.

hopefully not set in that sterile of language.

But yeah but I like I am I am going to use that with the starts from here to feel like guys, value creation has happened.

Well, I was talking actually with a portfolio c year other day about how I really believe from doing acquired now that and that we talk with Patrick ony about this that like brands just take time. People don't love stuff quickly. They're sceptical of new stuff.

And so a brand is like it's time, times, absolute number of people who are familiar with the brand at times the of how much they care about the brand. sure. You can get the confidence on the second two factors to be very high, but IT sure helps to have a lot of time because you know multiplies through.

So just looking back at acquired and a sixteen now, has this going for IT too? IT is remarkable even if the product doesn't get any Better. And certainly the product for us and for what they offer has gotten dramatically Better that time existing in market. Continuing to bang your head against the wall and keep doing your thing and being true to IT, even if it's irrational decision because IT may not pay off, the passion can allow you to stick IT out long enough such that a brand can be built.

Well, there's also like once you get a brand like that, mean, I guess this is the point of seven power's like any of the powers. Once you achieve them, you're just like a whole lot more robust than you use to you. Like think about the first and recent fund and the skype deal.

If they had lost money on that man, history would have been different totally. That could have torpedo O, D, everything. you. Now they read a couple hundred million dollars check into something and IT blows up in their face like like a, let's take up like jury still I don't club house like, well, work well then, you know but let's a for a minute that just play out a scenario where goes to zero l and they lose a whole bunch of money on IT won't matter at all, literally no impact. Tory.

that's such a good point.

are simply like early is required, right? Like first couple episode, if we had just like something really bad and I have and we really would have quit, but not that I want to do this at all but like if we have a bad episode, there's something like that like we're .

probably ly going to be find yeah, I don't know, man. This is like my constant paranoia because it's such a .

big risk to dedicate IT feel a little.

Listening to a podcast is a risk because we're like totally off topic here. But this is something I like super fired up about. If an articles boring, it's fine because you give IT roque and then under a minute you're gone.

If an episode sucks, you're like, oh, I just dedicated an hour, two hours, three hours of my life to this thing. I'm not going to trust these people to produce things that are high quality anymore. I'm gone.

And so I I know about you. I constantly live in fear. And like, i've gotten gressier on if this thing is not of the quality bar in which we said every single episode we release is a risk.

It's funny like I think my level of OK, so what you think my level of nerves going into every episode has remained constant and steadily increasing for the six years we have been doing this totally. Here's more on the line every time, every time yeah uh, well, that was a digression totally.

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Yeah, fanta is the perfect example of the quote that we talk about all the time here and acquired jeff basis, this idea that the company should only focus on what actually makes your beer taste Better. I E spend your time and resources only on what's actually gonna, move the needle for your product and your customers and outsource everything else that does not. Every company needs compliance and trust with their vendors and customers. IT plays a major role enabling revenue because customers and partners demand IT, but yet IT add zero flavor to your actual product that IT takes care of.

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there are so many stories that doesn't continuing the riff on the tangent of the pocket. We were worried we are going to run out of stories after, like ten empires.

Well, we did run out of good acquisitions.

That's that's true. But my god, this stories everywhere and in our community now I could desist. The best fire .

spinning are grading. So listeners.

you know.

we are not all peace in and recently orus. And if we were, we wouldn't be able to disclose their returns. That said, thanks to our great relationship with the folks at pitch book data, we are able to pull a tony stats on when they invested, at what rounds, at what valuations were able to scan as ones of all these companies to see if they owned more than five percent at IPO what they own.

We do know how much money they've raised, and so we're able to do some napkin math. And here's the napkin math that we've done. So we looked at the proceeds from their top ten liquid outcomes. And that may not mean theyve actually liquid into their position, but that they could have.

So that is it'll all just run through a very quick because I think we said some of the numbers are earlier, but um it's worth higher in again OCR a was a billion and a half to two billion back to and recent horwitz coin base, eleven billion, the granddaddy of them all airbnb, we estimated around three and a half billion based on an eighty five billion dollar market cap. They have IPO in the last six months, so it's reasonable to think they would start liquidating that position. Now we think that they own about four percent. There are a sub five percent shareholder, but are of course.

on the board. They let the series B I think they put sixty plus million into the series b so yeah.

a lot, a lot of capital there. So probably three, four percent of more than there lift. They generated about a billion dollars out of page duty, half a billion slack. We think about three billion, assuming they held all the way to the sales for steel eighteen months later, penis, a billion and a half. They own ten percent at IPO, which was, I think, like a fifteen billion dollar market cap, but has three x stance.

So depends how much they held.

The right could been higher row blocks, a quick one point, two billion get hub, a billion in a firm, somewhere between half a billion and a billion. Again, all these things are estimated. But if you just look at those company and think about distributing pretty early, like a assuming that they didn't hold actor all the way until IT, this were thirty three billion dollars that IT is today.

These company is probably generated about twenty five billion in returns. So an interesting thing to do is to then look at that divided by the A U. M. Of the funds that they come from, just to say, what's like the worst case scenario for their multiple.

that ming no more value from anything else.

which is simply and not true and and will revisit some of the things that still could bear fruit after we just do the some quick math so that you look at their total essence under management. Eighteen point eight billion. But like a lot of that doesn't contribute to any of those companies we've talked about.

So subtract out the early stage from from twenty nine onward because none of those companies were from, you know, those haven't matured yet. So that's two point two billion of the nineteen. Then you going to take out their most recent late stage fund from six months ago with just three point two billion.

Then you take out at least cyp to funds two and three, and maybe you even take out cyp to fund one, which is only another three hundred and fifty million, but then you're pulling out from all of that, another two point eight, seven to three billion. Then you take out all the biotech funds, which is one point four billion. You really close to ten billion dollars to attract out.

And you could maybe even argue that one or two other more recent early stage funds to take out as well.

But to make this like again, all nap and math really easy because we're just time to figure out like did IT work? Is that going to work? Is that showing signs of working? Let's just say there first eight billion dollars we have some data on.

And then the more recent eight billion dollars jury still out, we don't know yet. Time will tell. And so if you look at that sort of first eight, well, that created at least twenty five billion, which is a cool three x and you're not even counting.

And this could be a monster data bricks, which that could these worth twenty eight billion? And IT wouldn't surprise me if a sixteen z owned like twenty five percent, they invested very early, and they've been investing every round they could own like seven billion of that company at the current valuation. Again, I don't know, but this would be a reasonable estimate.

Inter card IT would seem reasonable to think they own like two billion and that Robin hood small percentage because IT was only a seed investor and then something more recent in the growth round. But like you also have like Robin hood, oculus flat iron health overflow, instagram, which is so funny, they they generated seventy eight million out of instagram, which was a nice return at the time, but sort of doesn't matter in this overall analysis today. So that twenty five billion number, that gross three x is even before all these other companies that definitely contributed and before all the other ones that you may have returned capital may have done well, but not coin base. Well.

well, this one more dark course too, which is I live in the gypt to funds and maybe some of in the early core funds, thereby packing in in and either.

oh ha ha, oh, interesting. I'm almost a hundred percent year.

at least bitcoin, if not bitcoin either. They were buying in a bunch of these funds.

well, depending on when they were by that game changing for this whole, depending on much capital they put to work for this whole analysis. Yeah, the reason that I want to resort to do this np in math is to basically say, okay, we know with the first half of the capital that they raise ed in their life, at the very worst case, they had as good to return as anyone else in the top cortile of the industry. So at the very worst case, IT didn't not .

work ah there's no this is not enough yeah they were able .

to do a hard thing which has burst onto the scene and break into something where there is really persistent returns via over your decade over decade and compete with the very best of the best. And do we actually have the data to tell you if there you know the best in the industry to compare them to aqua?

It's too hard to do, but IT also doesn't really matter. Would be fascinating to know if they are Better than to Better than matchmaker, bit like during the bulk game.

you know yeah and this also, I think we can finally put to bed that leaked data in twenty sixteen is that the data was wrong at all. But like the conclusion of all people's analysis, know for the brand that they have interest and horror is way under performing. Gosh, h they're only at a two x or two points of that and you're like, okay, we don't know yet. Coin base if you had analyze coin base in twenty sixteen, would you have been able to determine that it's going to whatever gigantic multiple IT was on that fun just from that one company? No, there's no way you won't been able .

to the apples take a longer than lemons to have. And that was, I kipt over that this curve for time, but I was a wealthy journal article that was so clearly a hit piece planned by rival venture firms. Where did a bunch of quotes from like, L, P. S. And stuff that like there, you know, the interest and returns were, I think the headline of the article was something like, despite bluster or whatever, entries and returns are average.

yeah. Well, I don't have much more to add, and I Frankly, I guess I would throw an a on IT with the plus sort of being if we ever got cleaner data. But for what a chAllenge IT was to break in and chAllenge the incumbent in such a short time frame, it's remarkable how well they've done that.

Spot on. Its an a only reason it's not a plastic like a pluses. Facebook buying index ree, i'm in getting five hundred billion dollars of value for one.

We just don't know enough yet that maybe could end up being that in the future, but it's not that today. But no way this is less than N. A. Who else did this?

Nobody y's done this. And just to put some numbers like omand, I guess that the first eight billion of capital in these funds that we're sort of calling in bounds for this analysis returned somewhere between twenty five and probably forty eight billion.

It's so good, you know, and it's funny. Like the other naval gazing aspect to venture and investment returns that people talk about all the time is like the multiple and like the I R R. R, is an efficiency of capital and like only having the best companies in bob, just the magnitude is like at the end of the day, what really matters .

is the magnet de here. Yeah, the absolute dollars.

the absolute dollars like they generated what let's make IT easy, let's say, thirty billion that they're returned on, eight billion invested as twenty two billion dollars that they've generated named me. Other firms who have done that, there are a few, but there are very, very few who have done that.

Get interesting like a good multiple means you are right, but a great amount of absolute cash returned means you are three things you are right with conviction. You had access, you had winning access to be a meaningful participation that capable and you effectively did the work to obtain the capital in the first place to be able to deploy a large enough count of IT to generate a large dollar return. You've got to be good at a lot of things, and you gotto be convicted .

and right in them. yep. And I think large institutional L.

P, I could tell how they think about IT. right? Like, you. Like yeah great you ten x fund find if it's a fifty million dollar fund and you ten x and you return five hundred million like clap i'm proud for you, you know bit like i'm not jumping out of my see but you you know you return me twenty two billion like now i'm just put out of my seat. I don't care what the multiple is alright.

Well, um kasha feels good to come to the end of the two partner.

You want to do car outs? Yeah, let's do some car outs. I got two first. They're sort of, uh, quite I Carry out.

The first one is quite I Carry out because I ve already had this author as a recent, previous carvel, Arthur c. Clark. So good I was on the a theory, an episode.

Maybe I had him as my carvel O G super O G science fiction author. I have since continued to read this stuff. And I read, childhoods end if you red childhoods and no, oh my gosh, this is so good.

You've got ta read this book. You know, the movie independence day. Yeah, the will Smith movie solution.

So great. So independence states based on childhoods end, but it's only based on the very beginning. Like the beginning of childhood end is what independent day was based on.

But then the rest of the book takes a very, very different turn and its super mind bending and really cool. Can't recommend enough. Let's number one. Number two is specifically for you and I have a car bout for we are both huge M, K, B, H, D markets, friendly fans. Yeah and. I think this most recent video, he just launched new channel, uh, youtube called the studio channel with the video, you're gna love this because you are such a gear geek studio tour, M K, B, H D studio tour and like, oh my god.

it's so cool and he's got great gear. I got to go to check that out.

I was watching. I was both like john on the floor and I was like, well, I we are such amateurs quired like.

he is a listy of red cameras.

Let me. And like, wow video is I have so much more respect for what youtube is do like audio is easy. We're playing in on easy mode here.

Ah it's so much harder for sure. Okay, cool. I'm legitimately adding that to my to do this right now to go watch that after alright, mine is continuing my recommendation of the superos and god fellows, the godfather.

Somehow I have never seen the godfather trilogy like that. I just escaped me. I know i'm like going back and like actually watching all these.

You started with the superior s and good fellows without having seen correct good father, know whatever path leads you to greatness. The point is .

you get to greatness, yes. And greatness IT is god. IT is so good and like, one is so like good and raw, and two is so artistic and wealthy through and the method of storytelling, flashing back and forth between the two stories I think some people complain about, I loved IT. I I get dineros best performance ever. It's definitely algenib s best performance ever.

And three, three exists.

Three, I turned off. Actually, I didn't watch three. I watched kota. People is Better than three is like a red shot. There's some stuff this we shot reedited. And like maybe if I had fourteen years between two and three, then i'd be OK.

But because I tried to watch them back to back, I was like allergic to the nine theism of kota that where I was just like this is unwatchable. I think if the hair cuts alone, I think Michael collier says more words in the first ten minutes of that movie. Then in the entirety of two.

I believe .

that I ve just .

no subtle hear from so .

good that the .

horsehead .

ah it's beautiful.

just great.

right? Well, with that, listeners come join us in the slack, become an lp. All those links are in the show notes.

If you like this episode, share with a friend you could share IT on social media have been nice, but actually like the one to one stuff Better. We're all about slow method. High touch growth here are required. And so if you can put your person all someone that you think would really appreciate IT than that you should share IT with.

We love social media shares, of course, but it's kind of hard topic just post on social media like you should listen to the three and half hour podcast that is part two of in recent horo. It's you kind of GTA like really convince someone. So if you love this, tell you friends it's like when .

I get an event bright invitation to go to something versus when a friend text me and like, hey, you should come over for .

this you know yeah exactly. It's totally different thing.

All right listeners, i'll see next time.

see the next time and we we got one more piece is who got the truth live on spotify?

Go check IT out. You can listen to IT here for the next two minutes and then go listen on spotify.

Young spell berg.

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What is more 你 to know you。 Easy, you wait, you wait, you who got true now? Easy, you busy, you with you sit me down, say we are no.

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