E229: Inside Industry Ventures: The $8 Billion Firm Backing 650 Venture Funds

How does an $8B venture platform turn a 650-fund network into a repeatable co-investing edge? In this episode, Jonathan Roosevelt, Managing Director at Industry Ventures, explains how the firm evolved from a pioneer in venture secondaries into a platform combining secondaries, co-investments (directs), fund-of-funds, and tech buyout—with AUM “a little over $8B” and 25+ years in market. We break down why Series A/B/C co-investing requires a different lens than seed, how believability guides which GPs get a “stamp” for later-stage deals, and why customer calls are ground truth when underwriting mid-stage businesses. Jonathan also shares how asymmetric information and inflection points create true co-invest alpha—and when to ignore comps for N-of-1 companies.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  The customer is the ground truth.

• 0:01Speaker 01

  You have to be willing to bet against those people who've done the almost impossible at the earliest stages and then say, yes, but these other questions aren't being answered in the way I'd want them to be.

• 0:13David Weisburd?

  I think a lot of investors don't go to the customers as ground truth and don't see that as the leading indicator in whether the business will be successful.

• 0:20Speaker 01

  It shocks me how few people really do the customer calls and do it in a thoughtful way. To me, the question is, if you define integrity as, are they being honest with us? I think, I would like to say 100%, very close to that. But there is the question of being honest with yourself. And there, I think, is where some of them fail the test. N of one is special. N of one is obviously rare. And you can't get too caught up on valuation. Don't miss companies you really believe are N of one, are really special. I think a lot of VCs make the mistake of passing on great opportunities because they see it as expensive relative to comparables that aren't really comparables, because the comparables aren't the N of one.

• 0:59David Weisburd?

  So give me a sense for where Industry Ventures is today from an AUM standpoint, also in terms of number of funded investments?

• 1:05Speaker 01

  Yeah, so we just celebrated our 25th anniversary. Been around since 2000. We now have AUM of a little over $8 billion and it's divided more or less equally between secondary, which is what we're originally known for, and co-investment, as well as a small fund of fund component and a tech buyout component.

• 1:22David Weisburd?

  Tell me a story of how Industry Ventures got into co-investments in late 2010.

• 1:26Speaker 01

  So Industry Ventures started as a secondary firm in 2000. In 2007, with the introduction of Roland Reynolds, who I think you've talked to before, we introduced a pure fund of fund with this thesis that seed-stage dedicated managers would outperform the larger bulge bracket, you know, cross-sector funds. And what happened is by luck, with Chris Sacca being the sole institutional LP in that fund one, we stumbled into the realization that all of these smaller fund managers are going to share a common problem, which is their capital constraint by the time their companies get to the Series A, if not certainly by the Series B. And Chris, through his own generosity and opportunity view, introduced us to great

• 2:11Speaker 01

  companies like Stripe and Uber, which we, not through genius, but through luck and faith in Chris, we had the luck of investing in. And then we expanded that opportunity across all of our managers.

• 2:24David Weisburd?

  So you came to you with opportunities, you saw the entire market and then you're like, this could be a thing, this could be its own standalone business.

• 2:30Speaker 01

  Exactly, exactly. And so that we started to do that, as you said, 2010, and then we built out a dedicated co-investment fund for LPs who wanted just that component.

• 2:42David Weisburd?

  So these co-investments in your context are called direct investments. So tell me what it means to be doing direct investing within a platform like Industry Ventures?

• 2:52Speaker 01

  That's a good question. We started off as a secondary firm, as I told you, and the mindset of secondary is quite a bit different than the mindset of direct, right? Where you're, you are investing in, in great assets, but they're, they're really de-risked. They're much later stage assets. So to be on a direct investing team that is focused at an earlier stage is a, is a culturally different, right? We are taking a lot more risk there. And, and it works out, I think, at Industry Ventures because we have the humility to listen to each other and recognize that we're looking at things through a different lens. But it's been a, it's been, you know, really rewarding to introduce the mid-stage

• 3:35Speaker 01

  and earlier-stage part of venture to a firm that's been historically later-stage.

• 3:40David Weisburd?

  So you have a co-investment opportunity come to you. Is that exclusively from the 650 funds? And tell me about the life cycle of that. How does an opportunity come to you and what's the first steps?

• 3:51Speaker 01

  Quickly on the 650, 250 of that is our primary checks in seed-stage focused venture managers, seed, series A-stage focused venture funds. And the other 400 or so are through our secondary team buying LP stakes. So of those 250, seed-stage focused, series A-stage focused managers, 100% of our deal flow is coming on the co-investment side.

• 4:15David Weisburd?

  So you get a co-investment. I'm sure every manager comes in and says, we like this. This is the best company. This is next Uber. This is the next Stripe. What's the next step? And how do you corroborate the opportunity and the information around the opportunity?

• 4:30Speaker 01

  It's an awesome question. I think the challenge that we have when we get a deal is assessing the manager's ability to evaluate a company at that stage. So typically, we're looking at a company at the series A, B, or C stages even, where the manager's sweet spot has been the pre-seed, seed, maybe to some extent, early A. I think that there's a different set of questions that they're asking than the questions that we're asking. And the questions they should be and sometimes are asking when they're handing us that deal at that more evolved stage, right? Their stage, their original investment entry check stage, they're really just asking two questions to simplify it.

• 5:14Speaker 01

  It's, is this a great team who can build a product that customers will want? So, great team, can they do what they say they're going to do? Part A. Part B is, will customers want this thing? And when we look at a company at the series A, B, C stages, we now have metrics around that. And we have to evaluate the metrics and ask a different question, which is, is this a great business? Not is a great team who can build something people want, but is it a great business? And we go back to the Warren Buffett quote around, it's really important to distinguish something that can be huge from something that can make a lot of money.

• 5:50David Weisburd?

  What do you mean by that?

• 5:51Speaker 01

  So I would take the airline business as a good example, where Warren Buffett is famous for saying, hey, look, if you invested in every single airline company, you would have lost an enormous amount of money. But it's an enormous, it's an enormous market. There's tons of customers for it, and it's not going away. So if you were a seed stage investor, you'd probably have been very excited about the Wright Brothers and what was to come, for good reason, lots of demand. But as an investor at the growth stage of it, you have to ask the question, can I make money in this thing? And I think the answer in airlines is generally no.

• 6:24David Weisburd?

  Just to double click on that distinction, so in seed, it's highly power law driven. You could argue all of venture is power law driven, but the seed extremely so. So if you get the team right and the customer demand, the expected value of the investment is astronomical. Versus at the late stage, you can't have 50% of your investments go to zero unless you really have a, you know, an open AI or you get extremely lucky. But if you're focused on building the right portfolio, you need to make sure that every one of those investments is also good business.

• 6:53Speaker 01

  I think you could have a 50% strikeout rate at the series, series B and still do very, very well. But definitely you want to have a lower strikeout rate than.

• 7:04David Weisburd?

  You're obviously in 650 funds, secondary and primary. Are there really funds that have a 50% loss ratio at the series B that are returning three, four, five X net funds?

• 7:15Speaker 01

  I'd have to push that to our secondary team to ask. I evaluate those 250 managers more at the seed stage and those loss ratios are, I'd say between 50 and 85%. And it's not unusual to have a manager on the high end of that loss ratio range outperforming the basket.

• 7:31David Weisburd?

  So we last chatted about your portfolio of 250 primary funds, 400 secondary funds. And one of the lenses that you look through that is whether the party bringing you the opportunity is credible. Break that down to me, what does it mean to be credible, bringing you a co-invest opportunity?

• 7:50Speaker 01

  Ray Dalio, you've mentioned, and I think you're going to be interviewing, I'm just, I'm excited to watch that.

• 7:55David Weisburd?

  Thank you.

• 7:56Speaker 01

  I think he's been written some awesome stuff.

• 8:00Speaker 01

  I can't remember his term for this.

• 8:01David Weisburd?

  Believability.

• 8:02Speaker 01

  Believability, thank you. I think of that in two components. One is do they have a proven track record? I think this is how Ray Dalio would say it, probably be more articulate about it, but a proven track record. But also on top of that track record, a process which is repeatable. So when we get a deal from a manager, we are going to want to know that they have a good track record around introducing us to companies at this stage, this series, let's call it late A, B, C stage. And sometimes we'll pass until we get to see the, hey, we should have done a bunch of these. So we want to see their ability to invest well at that stage.

• 8:41David Weisburd?

  So you're not only, you start tracking them, just like an LP would, and you essentially come back, it's not fun too, but it's a, it's a basket of co-investments two years later, and you're tracking, how did the first vintage do, which is the first couple of investments?

• 8:55Speaker 01

  Yeah, it's not to say we wouldn't do the first one they showed us, but if we miss it, it's very useful for us to track, and of course, we'll track.

• 9:02David Weisburd?

  And by doing that, you're avoiding your own bias towards maybe the manager was overconfident, maybe they banged the table really hard, but that has nothing to do with returns. You're actually taking all that out, taking your own egotistical views on it, and you're like, what does the spreadsheet say? Are they good or not?

• 9:18Speaker 01

  Yes, yes. And again, it's not to say we wouldn't take risk with them before we have the spreadsheet data, but that spreadsheet data is really valuable to us. The second piece of this believability from Ray Dalio is, okay, do they have a process here which is repeatable, or were they lucky on the two or three pieces of data that we have here? And one really valuable way for us to assess that is to run diligence alongside them to see how they think. Are they talking to customers? Are they hearing, you know, are they interpreting it correctly? I think one of the biggest risks with a seed stage manager investing at the mid-stage of the market is that they, they're, they're really excited about this asset, genuinely. I don't think it's a lack of integrity to hand us stuff. I think they're genuinely excited about it. And sometimes that's drinking the Kool-Aid can happen,

• 10:00Speaker 01

  and you can be, you know, you can be obscured from the facts from the data set, and we want to see them run the diligence process, which, you know, is really mindful of the actual data.

• 10:11David Weisburd?

  Double click on that. So you're literally on the diligence calls with them, you're in their data room. How are you assessing their process? Break that down.

• 10:19Speaker 01

  Are they talking to customers? Are they? Do they understand the difference between a pilot, whether it's called a pilot or not, and something that is that that customer is truly locked in and excited about? Are they looking at, you know, things like gross retention versus N D net dollar retention? To really understand, is this super sticky?

• 10:41Speaker 01

  And are they asking questions about scalability, profitability, margin protection over time? So it might have a really attractive gross margin. But do they understand what's happening in the competitive environment? Have they talked to the to the customers using the competitor product? Things like that.

• 10:57David Weisburd?

  So what a typical series A, B and C investor would do? Are they essentially doing that kind of diligence? Not the seed diligence? A lot of people think it's absurd. The best investors at pre seed to do things like figure out the market size of those things. At Mike Maples and he looks, he looked back at his entire portfolio. And he found that the companies that actually did the very best were creating new industries, were more movements than companies. If you took that lens to a series B and series C, you might have an issue.

• 11:25Speaker 01

  Yeah. I mean, I think Facebook's a really good example of this. If I understand where you're going, where we definitely would have missed it. Right? There was no market.

• 11:33David Weisburd?

  It's not in the spreadsheet.

• 11:34Speaker 01

  Created.

• 11:34David Weisburd?

  There's no revenue.

• 11:35Speaker 01

  Yeah, exactly. And this one, I think great, great seed investors can can see around the corner. I think at the mid-stage, I think by the time, I'm guessing here, but I would imagine by the time Facebook got to the series A or B, there was just enormous user demand. Right? And there was something to trade on there. But I, from a, as a mid-stage investor person focused on the message, I'm, I'm pretty certain I would not have done Facebook at the pre seed. I would have missed that. There's no data to support that.

• 12:00David Weisburd?

  When we last chatted, you said that you find 20 to 25% of your managers at a later stage are highly credible, which is another way of saying 70 to 70 to, which is another way of saying 75 to 80 are not. But it's not an integrity thing. That's only one side. Now, there's a lot of money at stake. So I'm sure there is a non-zero integrity factor on those 650 managers. You don't have to nod your head. But on top of that, we talked about this. Do you, are you able to assess the good, a good investment at the series A, series B? I would argue very different skill set than on the seed level. That's probably the main component. Is there anything else that you're looking for in the managers outside of, you know, are, do they have high integrity? Are they able to assess? Is there a third thing?

• 12:43Speaker 01

  In terms of like, would we do a co-investment with them at the mid-stage?

• 12:47David Weisburd?

  Yeah, I guess like, if you think about the investment as two components, the actual investment and the manager's believability, is there anything else that would fit in that manager's believability bucket?

• 12:57Speaker 01

  I think you summed it up. I think it's, I like that believability quote from Redalio there. I just correct you on the 25%. That's a, in large part, it's small because we haven't done co-investments with the rest. So I don't, I don't want to

• 13:13David Weisburd?

  So there's only 25% that have gone through the process, that get the stamp of approval. They know how to do later stage. There's 75% that have not yet gotten the stamp.

• 13:21Speaker 01

  Yeah, exactly. They, you know, we haven't done a lot of co-investment with them, or if we have, it hasn't worked out that well.

• 13:26David Weisburd?

  I have to ask, what percentage have integrity issues when they send you SVVs? Is that a real thing? And if not, why not? Because the dollars, the dollars at stake are real. This is life-changing money. It's essentially lottery tickets, a Series A. Any one investment could buy your second home in Florida. So there are real stakes at the table, if we're honest. What percentage of your managers don't have that integrity layer? Or may not even be aware that they don't have the integrity layer, but

• 13:52Speaker 01

  Yeah, I would say, you know, I haven't seen any managers send us a deal that they don't believe in. To me, the question is, if you define integrity as, are they being, are they being honest with us? I think, I would like to say 100%. It's very close to that. But there is a question of being honest with yourself. And there, I think, is where some of them failed the test. You know, and I think that's, that's not a bad thing. If you're a seed investor, you know, you have to see the glasses half-full. You believe in this team and you might be, well be right. The team is great and the product market fit may be there. But that, those set of questions don't necessarily make it a great investment for us.

• 14:28David Weisburd?

  Said another way, it would be very difficult to be a highly cynical pre-seed investor.

• 14:33Speaker 01

  I think so. Yeah, exactly. I think that's a really good way to put it. You're generally positive. You're generally leaning in and you have to make a mind shift, which is, I think, really hard for people to do between the questions you're asking at that seed and the questions you're asking later. You're going from a qualitative assessment, for the most part, right? Is this a great team? And will the dog want to eat the dog food? Sometimes in a market that doesn't really even exist yet, to a more quantitative approach. And if they did part those answers, those first two questions, that's pretty amazing. That's great. And it's hard to then say no, right? It's hard to...

• 15:14David Weisburd?

  It's a high cognitive dissonance to be extremely interested in something at the pre-seed and not interested at the Series A.

• 15:19Speaker 01

  Yeah, I think it's really hard.

• 15:21David Weisburd?

  Especially as they keep on raising and bringing in more capital. That's a hard, conflicting kind of dichotomy.

• 15:26Speaker 01

  And some of them are amazing. I think Founder's Fund is a great example of a firm. Kosla has done this well, too. Keith Raboy has done it as an individual investor in both firms. There are people, I think, but benchmark in this category, Sequoia has done it really well, who will invest at the seed and the mid-state and...

• 15:42David Weisburd?

  Are those firms or people?

• 15:44Speaker 01

  I think a little bit of both. At Andreessen, I think it's more people, like, right? Because you'll have an earlier-stage team and then they have to make a handoff. Right? So they might be a different person, but I think at firms like Kosla, and I'm not sure about Sequoia, but I believe it's Sequoia, too. It's the same manager making those early stages. I bet she was able to go and be honest with them.

• 16:03David Weisburd?

  What makes them able to do these seemingly contradictory investments?

• 16:08Speaker 01

  I think it's really, you have to be willing to bet against those people who've done the almost impossible at the earliest stages by being a great team who can build this thing that's really hard to build and get some product market fit, and then say, yes, but these other questions aren't being answered in the way I'd want them to be.

• 16:33David Weisburd?

  Yeah. And I think the least sexiest thing in capital markets investment is process. And yet, it is one of the most sustainable points of alpha. There's many different processes, even due diligence itself, the length of your due diligence, the way you reference, all these things are extremely correlated with good investment and good investing and extremely correlated with good sustainable returns.

• 17:00David Weisburd?

  So not all co-investments are equal in your mind when you see them. What are the two best, most low hanging fruit? When manager comes to you, you get excited. This could be something we want to do.

• 17:11Speaker 01

  It has to answer the question of what's special about this deal? What's special about the deal for us? We have to believe we have some asymmetry asymmetric information. We have to believe that the board member who gave it to us typically are our managers, our board members, or they're deeply engaged.

• 17:28David Weisburd?

  And that's important because then the quality of the information.

• 17:30Speaker 01

  Exactly.

• 17:31David Weisburd?

  So the way that I put it is that investing has an art aspect, but it's over relied upon. So let's say you have investment, two processes. One does three references and one does 20. The person that did three references is just handicapping their return. It's not because they're an artist. It's not because they have intuition. All these things are a misuse of investing and a destruction of returns.

• 17:55Speaker 01

  I agree with that. I think the way we think about it is we have to triangulate on that board information we got by talking to other board members, right? But we all, and we also have to get customer information. So by getting all that information from customers or prospective customers and from other people very close to that management team across, and maybe it's not 20 data points, but quite a few, the more, the better. That's good. So we can kind of, it's not that the manager, back to your integrity thing, it's not the managers intentionally, you know, they may not have all the.

• 18:24David Weisburd?

  You know what a great gauge of managers believability is? It's what money, what is your GP commit? I found that as a way to create integrity in myself, which is I'm super excited about this investment. Great. How much am I putting? 1%. Why? Why aren't you putting 10?

• 18:41Speaker 01

  Right.

• 18:42David Weisburd?

  Oh, that's a good question. Let me think about that. Why? Maybe I'm not as excited. Maybe I'm hyping myself up.

• 18:46Speaker 01

  Yeah, yeah.

• 18:47David Weisburd?

  It's a great way to be honest with yourself, the GP commit and asking yourself questions. Why? And why not? And that, you know, that's, that's obviously, and I do think there are people, unfortunately, that do see these as, see relationships as short term, see these as lottery tickets. And I would argue that some don't have integrity in my, maybe you guys weed that out in the diligence process before you invest, but there's certainly, there's high stakes at play and there's certainly people that are pushing investments that they don't believe in.

• 19:16Speaker 01

  I'm sure that I'm sure that that's true. Yeah.

• 19:19David Weisburd?

  So I think your process is really fascinating. Again, not the sexiest thing, but I think it's really cool. So a seed manager comes to you. Let's say it's a series B investment. You're on the call, but you're also starting to essentially like an FBI informant, you're starting to triangulate information about the company. Tell me about that.

• 19:37Speaker 01

  Yeah. Um, how we how we triangulate it.

• 19:41David Weisburd?

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• 20:34Speaker 01

  It's an awesome question. And I think it's it's it's an asymptote. I don't think you can get to ground. There's always going to be a lack of information at the end of the day. So we have to be comfortable with that. Right. To get as close as we can, we will we will we will triangulate with other managers because it's typical that we'll have overlap in a deal. So we can talk to multiple managers, multiple people.

• 20:58David Weisburd?

  650 managers is a significant market share in the entire ecosystem.

• 21:02Speaker 01

  Yeah, we're going to find we're going to find multiple points of information around the quality of the team in a company. We're going to talk to customers or prospective customers depending on their stage and try to understand, right, what's, will the dog really eat the dog food? Is this? And who else are they talking to? And if these customers are really valuable to us, if they ran, which is interesting with customers. If you just ask the CEO to give you a list of the customers, obviously they can't give you the best ones. You've got to do, you've got to get your own customer base. You want to talk to customers who ran a great process, looked at all the competitors, all their options, and really did their homework, and you can assess that on a call with a customer. Well, who would you talk to? What was your process? Did you talk to companies B, C, D, and E?

• 21:46Speaker 01

  Or is it just A because they're your buddy? You got to, you got to sort through all that. And when you get-

• 21:51David Weisburd?

  Because that's not scalable. You could only have so many buddies that-

• 21:54Speaker 01

  Yeah, yeah, but we do see that all the time, by the way. There's a bunch of-

• 21:57David Weisburd?

  And it's a completely legitimate zero to one strategy. It's just not going to turn into a $10 billion company.

• 22:01Speaker 01

  Exactly. So we want to know that you have customers who ran the process. They believe that you have a sustainable advantage over the current, current nature of the competitive landscape, and you, you are sticky in some way. And, you know, we can assess that relatively easily. There is now the question of what are you hearing on these calls? Which we found really interesting, I found really interesting. You might be on the same call with, with somebody else on our team, and come to a different conclusion from that, from that customer or other board member.

• 22:35David Weisburd?

  So that's next level. So not only do you have the same, you have multiple points of information on the customers. You're, in this case, you're on the same exact call. Two people at industry, two highly educated people on the call, highly experienced as well. And they hear a different thing on the call.

• 22:52Speaker 01

  Yeah.

• 22:53David Weisburd?

  A, what does that even mean? And B, what do you do?

• 22:58Speaker 01

  Was that customer really excited? Or because there's, there's this conflict of interest when you're on with a customer. For the most part, they want to make sure this company gets funded because they're a customer. They want to make sure this startup doesn't run out of cash. So there's, there's some- Some subtlety sometimes to the way the question is asked and to what they're giving you and you might come up with, you know, if you're, if you're just on a phone call and you're not getting the body language from it, that can be tricky. But you can be on a call with a customer and believe that, you know, they're super excited and, but the other person not, not pick that up. So that's tricky and I think the best answer to that is have more calls. All right. So you keep adding more data points to it, but that, that will happen of course.

• 23:41David Weisburd?

  Just like references, oftentimes it's what they're not saying.

• 23:43Speaker 01

  Then the follow-up question though is, well, okay. I happen to know, you know, you have these other five managers. I named the names, now force rank them for me because otherwise you're, they're all going to be the best.

• 23:54David Weisburd?

  I love that. And also it allows you to maintain confidentiality because you're not isolating the manager or isolating the opportunity. At the risk of saying something extremely obvious, your version, when I asked you about ground truth, you went to the customers. The customer is the ground truth. Will the customer buy the product is the leading indicator of that. I realize that's extremely obvious, but I think it's important because I think a lot of investors don't go to the customers as ground truth and don't see that as the leading indicator in whether the business will be successful.

• 24:23Speaker 01

  Totally agree with you. It shocks me, it shocks me how few people do the, really do the customer calls and do it in a thoughtful way. You can't just take the basket of customers the CEO gave you for all the reasons I mentioned before. You've got to go and find your own customer base. Um, you know, then there's a great third-party services, uh, Gerson Lehman Group, and Tegus and all these others that will do that for you. There's many. Um, so you've, you've got to do that hard work and you have to make sure they ran a quality process because at the end of the day, I think the customer is gonna speak, right? That's the, that's the best.

• 24:58David Weisburd?

  What do they say on a reference? A seven is like a two and eight is like a four. So you need a nine or 10, I think, basically for it to, for it to be a good reference.

• 25:06Speaker 01

  Uh, from a customer?

• 25:07David Weisburd?

  Yeah, a customer, anybody, any reference. And eight is a very low signal and a very negative signal.

• 25:13Speaker 01

  And eight, yeah. And I, I always sort of take it to, well, how much money are you going to spend with them? What's between? Now and actually making the decision to write that check, what has to happen? Get very specific with them, with that customer. Okay, what, what, what remains on the product roadmap before you write that check? What will get you to not reengage with that customer, to drop that customer? You know, which other competitors are you talking to if they offered you A, B, and C? And start getting in, rather than have them do a one to 10, they're usually going to give you a nine or 10. Get into what has to happen to sign up, what has to happen to resign, what has to happen to drop? Get as specific as you can.

• 25:49David Weisburd?

  And there are some obvious investments that you make. I'll use that term. I don't know if you would, but super oversubscribed pro rata where you know the lead. Let's just call it Sequoia Founder's Fund in their right strike zone. How much diligence do you do there? On or off the record?

• 26:06Speaker 01

  Yeah, yeah.

• 26:07David Weisburd?

  And just tell me about those opportunities and how do you? What lens do you go through those opportunities?

• 26:13Speaker 01

  Yeah, it's an awesome question. So you sort of to rephrase it, like, how much weight does social proof carry? And how much lighter diligence process will you run if you run into a very high social proof situation? We've learned, and maybe this is our own mistakes. We've made money with Sequoia Investments. We've lost money with Sequoia Investments. The same across the board.

• 26:34David Weisburd?

  No one's 100%.

• 26:35Speaker 01

  Yeah, no one's 100%. I, by the way, I think they're amazing, but I think we, we, we're pretty good about social proof may be a good indicator as to whether it should make the top of our funnel and we should start a process on it. We have limited resources. We have to find a way to kill things quickly. So social proof can be valuable there, but it stops there. After it's top of funnel, we have to run a proper diligence process.

• 27:00David Weisburd?

  It's so interesting you say that because one of the most underappreciated for GPs raising from LPs is there's essentially two main drivers that are driving whether they invest. One is, is this one of the 10 out of 1,000 funds that they're going to take a deep dive in? Are they going to do diligence on it?

• 27:16Speaker 01

  Right.

• 27:17David Weisburd?

  Which is what you're talking about. Sequoia co-invest, you're probably going to do diligence on it, I'm going to guess.

• 27:21Speaker 01

  Yeah.

• 27:22David Weisburd?

  And then there's do, are they going to make the decision to invest? Now, both are extremely important, but the first one is extremely underrated. And people assume that whether it's LPs or secondary funds that It's essentially meritocratic, for lack of a better word, or it's an AI that's unemotional, that's relationship doesn't matter, all these things. And yet, those things matter. And I would actually add, those are highly rational things. Why? Going back to your thing, which is, if you have 20 to 25% of your managers that are really good in this Series A, Series B, Series C lane, you want to, if you have a scarce amount of time, which everybody does, you need to prioritize. And what are you going to prioritize around?

• 28:01Speaker 01

  Yeah.

• 28:01David Weisburd?

  Other than their track record, how they've been a partner with you, whether they brought you good deals. So there's a, it's not purely kind of this social proof or like superficial process. There's a lot of logic to it.

• 28:14Speaker 01

  There is. And beyond, like take Sequoia as an example, they're very, they run a great diligence process. They've got a great role at X. They're backing some of the best people, right? So they probably believe both the team and the market, and they've done work on it. But it also, Sequoia also brings more engagement from customers. Customers also will take it a little more seriously. So it gives them an edge. It's beyond just-

• 28:38David Weisburd?

  Self fulfilling.

• 28:38Speaker 01

  It's a little self fulfilling, gives them an edge. And it's nice to have a really strong, deep-pocketed syndicate in the company. If they hit some tough times, you now have pockets at the table, which will, you know, kind of will support. So-

• 28:49David Weisburd?

  So it's both upside goes up, downside goes down.

• 28:52Speaker 01

  Yeah, I like the way you put it. Self fulfilling to an extent. If you have a really strong syndicate, it's not just, we believe they did their homework, but they can add real value to de-risk the business.

• 29:02David Weisburd?

  There's this never ending debate about who makes the best venture investor, operators versus investors. The only reason, by the way, there's this debate is because some of the best venture investors in history have not had operating roles.

• 29:16Speaker 01

  Yeah, I think there's some folks at Benchmark that have not had any.

• 29:19David Weisburd?

  Some folks at Benchmark, Bill Gurley, obviously, most famously.

• 29:22Speaker 01

  Yeah, great example, yeah.

• 29:23David Weisburd?

  And, and this is especially pronounced in the later stage where it's more about the spreadsheet than the founders, what we've been talking about. But-

• 29:32David Weisburd?

  Being a direct investor as a secondary fund, which I'd, which I define as you're taking a look at opportunity, you're essentially investing as a non-lead investor in the round, is how I would frame it. How does being an operator background, you've been doing this for nearly a decade, how does that help you and how does that hurt you?

• 29:49Speaker 01

  Yeah, great question. We do lead sometimes, by the way, probably about a quarter of the time.

• 29:53David Weisburd?

  You lead, you lead the manager.

• 29:55Speaker 01

  Sorry, we'll lead the round.

• 29:57David Weisburd?

  You'll lead the round.

• 29:57Speaker 01

  Yeah, we'll lead an A or a B or even a C. But it's not, it's not our norm, but we do. It's a great question. I think so. I was mostly an operator. I've only been back in venture now for almost nine years now at industry, but most of my career was, was as an operator.

• 30:13Speaker 01

  I think probably where it gives me an advantage probably is in it, really by looking at my own mistakes, what did I do badly? When I assess a CEO, I get a pretty good sense. For me, one of the critical things in a CEO, and you've touched on this a little bit, customers. Are they deeply engaged, not just with the product, but with those customers? Are they part of the sales process? Are they? I hate it when a CEO will hire a VP of Sales early in a company's lifecycle. Go be the VP of Sales because you, you need to understand what that customer wants and you've got to capture that customer voice back in the product. So I love CEOs who are both very product oriented and very sales customer oriented. I think that's my, that's my bias learning from my own mistakes when I wasn't paying enough attention to customers and more product focused. I learned that.

• 30:58Speaker 01

  I mean, I think intellectually, anybody can understand how that's important, but I see a lot of VCs make that mistake.

• 31:06Speaker 01

  I think being an operator probably gives some.

• 31:08David Weisburd?

  It's the founder mode for sales. It's your company, you go sell it, you talk to customers. You can't, you can't disintermediate yourself from the customers.

• 31:15Speaker 01

  Exactly. And I frankly, I think you should never disintermediate yourself. You might not be the head of sales anymore, but you have to be.

• 31:22David Weisburd?

  So operationalize that. So I've now raised a hundred million dollars from Sequoia. Industry was in the round or industry co-led. And now I'm growing an organization as a founder. What, what should I be doing?

• 31:33Speaker 01

  I mean, I think a lot of your value is hiring amazing people, right? So you're, you should be probably spending a quarter of your time hiring, right? I just finding the best people you can find across all dimensions of the business. But I also think you should be spending, I'm making up numbers here, but another quarter of your time engaging with your customer base, talking to those customers, getting on the airplane with your salespeople, right? I think for the, the biggest difference when I started in venture back with Battery Ventures in the mid 90s, now we, you cross the chasm, you get to Main Street and it can last 10 years. Main Street can last, I don't know, six months now. It's really short because it's such a dynamic market. There's so much, you know, things pop along and alternatives come up for customers.

• 32:18Speaker 01

  So I think therefore the CEO needs to stay engaged always with the customer and be iterating product as a result constantly. Therefore, a large part of their time, pick a number, 25%, needs to be customer facing.

• 32:35David Weisburd?

  What are some other mistakes that you've made recently that you've changed your mind on?

• 32:39Speaker 01

  As a venture capitalist, I think, you know, when I came into industry ventures, I had no experience with fund to fund investing, no experience investing in seed stage managers. I probably drank the Kool-Aid from managers who had not run a fund before. And I backed a few of those that were mistakes. I didn't follow the Ray Dalio, like believability, like what's the track record here? I think I didn't put enough emphasis on the track record. The metrics speak loudly. A story is a story and it's great. But at industry ventures, I think the one thing I've learned from, from Roland and others

• 33:23Speaker 01

  who've just taught me this, and they gave me some rope to hang myself with and I managed to hang myself, they didn't kill me.

• 33:29David Weisburd?

  Hopefully not too much rope.

• 33:30Speaker 01

  Yeah, not too much rope. But I think what I learned is that the track record really does matter and make sure they have a track record that's consistent with the strategy they're going to play. I mean, it's easy enough to have an angel list track record with, you know, writing $50,000 checks. That's a bit different from leading. If your fund one is going to go lead rounds with a million dollar check, that's, that's a different thing. And you need to diligence that good, call all those CEOs where they wrote a $50,000 check and ask them. Would you have taken a lead check from this manager? I might lie to you, but if you ask enough of them, you're probably going to get a good sense of that.

• 34:04David Weisburd?

  You have one of the most interesting vantage points in the seed stage in the world. What's gone on with emerging managers? What's your pronostication over the next couple of years? And where do you see the industry going?

• 34:14Speaker 01

  That's a really good question. I think that there is a lot of risk for managers right now at the seed stage. That's coming by a capital being put into the seed stage by these larger funds who are writing, you know, opportunity, they're writing option, option checks to be able to write a check. So they may overpay for that.

• 34:38David Weisburd?

  It's like CAC, their, their customer acquisition cost is a seed check.

• 34:42Speaker 01

  Yeah, very good way to put it. So I think that that's a risk and I think the smart ones are, are, are just not going to play in that, you know, write a check into those over, overpriced seed rounds. And they got to navigate a frothy market and maintain some discipline around their entry check valuation. Cause that is their big check. It's not like in Andreessen, and I think it's not Andreessen and Sequoia and others aren't being stupid in paying 3X. The bulk of their capital is going to come later, but maybe the only check for this, our seed stage manager. And so that value, they do, they do have to be very valuation aware.

• 35:23David Weisburd?

  Let's say you're emerging manager and you're in your office and you're about to meet with the next OpenAI. And you know, this is one of the top companies of this generation, or you believe that to be the case. You're competing against Sequoia and Andreessen. I know all these narratives, people say all these positioning. What exactly do you consult that emerging manager to say and to differentiate against the large firms?

• 35:44Speaker 01

  What I would try to do, and we have a couple of managers, Papa, I mean Pebble Bed is a great example. They offer so much value that a Sequoia and Andreessen simply can't offer from a time management perspective. They're going to roll up their sleeves and they're going to help them code. Go pitch that CEO to take a check relatively small, therefore not super dilutive. A third of what Sequoia might be offering you if you have. Have a term sheet already in from Sequoia because we're going to go add real value to your business. You know, and then we have managers who can add value on the customer side and really roll up their sleeves and get engaged. So pitch them not to be super valuation sensitive right now, but to take value beyond the, you know, greenback dollar from us and pitch that value proposition to them. We're not just money.

• 36:28David Weisburd?

  So two things there. One is you're basically essentially joining their team. So your services and cash for equity. The other aspect that I want to underline what you're saying is because what you basically, your answer to my question was do the unscalable. Because if it was scalable, Andreessen Sequoia would do it. If it was like bring in PR agents, you can't do that. You have to do the only thing that they cannot scale.

• 36:51Speaker 01

  Yeah, that's a

• 36:52David Weisburd?

  Focus only on unscalable.

• 36:53Speaker 01

  That's a great way to put it. That's a really great way to put it. Yeah.

• 36:56David Weisburd?

  And earn your carry.

• 36:57Speaker 01

  And unscalable is yourselves, right?

• 37:00David Weisburd?

  Yourselves, your focus of a very high quality thinker and experienced leader.

• 37:05Speaker 01

  Yourself, your role at X might be a little bit special, right? Versus, you know, and that that often happens when our managers are sector focused. They have real value there. They have specific customers they can make warm introductions to, right? They have team members who, you know, they know would love this, this particular company.

• 37:23David Weisburd?

  So I also want to double click on what you're saying and seem to imply you have some of your top pre-seed and seed managers writing a check. And shortly after they bring in money from the large multi-stage managers, is this like some kind of processes? It's like a double close, like just break down, break down what you meant by that.

• 37:41Speaker 01

  So we were lucky enough to be an early investor in Pair. Pair, they've just done a fantastic job. Now Pair has become over time, you know, they've just proven out the ability to be disproportionately good investor at seed. You know, relatively high success to failure rate and some really huge breakout winners. And Sequoia has caught on to that. So, you know, Sequoia will

• 38:04David Weisburd?

  So they're partnering with them.

• 38:05Speaker 01

  They've partnered with them very closely. They will, you know,

• 38:10Speaker 01

  Be tracking those investments and may, within a few months, write a follow-on check. So you can start to earn real credibility and have quick follow-ons. And that's one of the pitches that you asked earlier, what advice would you give? I guess if they're sitting in a room with a CEO who has a term sheet from Sequoia already, it is hard. You've got to say you've got more value, you offer more value, take mine. If they don't yet have that term sheet, your pitch might be, hey, I've earned a lot of credibility and you will now have introductions to all these brand names you want.

• 38:39David Weisburd?

  I think if you take out a dictionary and you go to alpha and you look at the definition, I think the definition is Sequoia will write a check after me three months later at a higher valuation.

• 38:49Speaker 01

  That's great.

• 38:49David Weisburd?

  I've never heard a better definition of what is your right to win and what is your alpha?

• 38:54Speaker 01

  Yeah.

• 38:56David Weisburd?

  Going back, you've now been in the industry and doing direct investing, co-investing for almost a decade. What is one piece of advice that you'd give JR almost a decade ago when you just started? That would either help you accelerate your career or help you avoid costly mistakes?

• 39:11Speaker 01

  I think the biggest thing I've learned from one of our teammates, don't miss companies you really believe are N of one or really special. Don't get caught up, and this is going to be a little contradictory to my advice earlier, to avoid valuation froth, but N of one is special. N of one is obviously rare and you can't get too caught up on valuation too. I looked at, I always looked at valuation from the perspective of what kind of multiple am I paying relative to comps? And I think that's, that's a big mistake. I think a much better way to look at it, and it takes a lot of work and there's a lot of guesswork in it you have to just be comfortable with, is instead of taking that approach, back into a valuation based on where you believe this thing can exit, what you think

• 39:54Speaker 01

  the opportunity is here, and then, then come up with a valuation where you underwrite it to whatever you do, a 3X, a 10X. Think about it that way. I think a lot of, a lot of managers make the mistake, VCs make the mistake of passing on great opportunities because they see it as expensive relative to comparables that aren't really comparables because the comparables aren't the N of one.

• 40:16David Weisburd?

  That makes perfect sense. And I risk of asking a very question. A decade ago, you were underwriting your winners probably to a one to $10 billion valuation. Now it's could be 10 to 100 billion. Why is that happening? Is it just that tech, tech is amassing more network effects and more profit margins? Why has exit valuations grown by 10x? And then it's not just because startups are going, staying private longer because you have the tech companies now worth three, four trillion. So why is that happening?

• 40:42Speaker 01

  I mean, I think it's as simple as that Mark Andreessen quote, and I think somebody's taken it over for AI, but software is eating the world. AI is eating the world, right? And I can't remember who said that, but that is, that is what's happening. I mean, these market, market size opportunities are getting bigger and bigger. I mean, we're, and

• 40:59Speaker 01

  I can't think of an industry that isn't now being impacted, right, by technology. Think of what robotics are now doing in industrial settings, for example, things that are like.

• 41:07David Weisburd?

  Tech is everything. It's becoming more widespread and deeper. So they're getting more of spend within every company and they're not only servicing tech companies, they're servicing everybody, including consumers.

• 41:17Speaker 01

  It's a great way to put it.

• 41:18David Weisburd?

  Broader and deeper.

• 41:19Speaker 01

  Yeah.

• 41:20David Weisburd?

  Well, JR, this has been absolute masterclass. Thanks for, thanks for coming. Shout out to HF0 who, who hosted us for this beautiful podcast and I look forward to keeping in touch.

• 41:29Speaker 01

  Yeah. Thanks so much, David. Thanks. I appreciate it.

• 41:31David Weisburd?

  Thanks, JR. Thanks for listening to my conversation. If you enjoyed this episode, please share with a friend. This helps us grow. Also provides the very best feedback when we review the episode's analytics. Thank you for your support.