E407: Why Venture Capital is Becoming a Winner-Take All Market

Venture capital has never been more competitive. Aram Verdian argues it has also never been more concentrated. Drawing on Accolade Partners' research across more than 3,000 U. S. venture firms, Aram explains why fewer than 20 firms have consistently produced 3x net returns, what separates the firms that keep winning, and why venture is increasingly becoming a winner-take-all business. From portfolio construction and manager selection to AI, late-stage investing, and fund sizing, he shares the framework his team uses to identify the next generation of exceptional venture firms.

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

• 0:00David Weisburd?

  Venture capital has never been more crowded. According to today's guest, it has also never been more concentrated. He believes the industry is becoming winner take all. A handful of firms will capture a disproportionate share of the industry's returns. Everyone else will be fighting over what's left. Today's guest is Aram Verdian, partner at Accolade Partners and a former investor at Andreessen Horowitz. Without further ado, here's my conversation with Aram. Aram, you believe venture capital is becoming a winner take all market. What's underpinning that?

• 0:30Speaker 01

  Yeah, and maybe I can unpack that a little bit because it sounds like a really strong statement. A couple of things I'll say. In venture, and you can go back many, many decades, there is this concept of dispersion of returns, where a handful of firms generate most of the returns. So if you look at going back 40, 50 years and you look at the value that's generated by venture backed companies, there's only a handful of firms that are participating in those companies at the early stages and own meaningful amounts on their cap tables. So double clicking on that, if you look at the dispersion of the top decile, top 5% in venture, relative to the top quartile or the median, that delta is larger than in other asset classes in the private markets. And so if you want to look more recently, and our database has shown this, we've looked at,

• 1:15Speaker 01

  and our data is only US based, we've looked at over 3,000 venture capital firms in the US. And our data has shown that there are less than 25 firms out of 3,000 that have consistently generated 3X net or better funds consecutively, which tells you there's less than 1% of the firms can consistently generate 3X net. And why is it 3X net? Why is it not 2X, 2.5 net? Well, in venture capital, you're waiting for 10 plus years to get to liquidity. And so you need to outperform the public markets and other asset classes in the private markets that can generate liquidity more quickly, even if the return profile is slightly lower than the 3X, to essentially justify that illiquidity.

• 1:57Speaker 01

  And today, if anything, the liquidity in venture is further stretched out. The average unicorn is over 12 years old in the US. And so for that, you need to generate 2, 3, 400 basis points net above the public markets and also private equity that can get you 2X more quickly. Because of that, we have found, and this is how we have done our investing over the last 26 years, there are only a handful of venture capital firms that can be in that less than 1%. So is it a winner take all? There's, I think the conclusion is, and when I unpack that statement is, there's only a handful of firms across the whole stack of venture capital that can generate that consistent 3X net plus returns.

• 2:40David Weisburd?

  25 firms out of the 3,000 that you studied?

• 2:43Speaker 01

  Less than 25. I'm being generous, it's actually less than that. Yeah. And by the way, let me give you more specificity on that. Our database shows vintage or 2005 through today, so about 20 years, where we have found out of 3,000 venture capital firms in the US, only 20 of them have generated consistent 3X net returns.

• 3:02David Weisburd?

  So 20 firms out of 3,000 have consistently generated 3X net returns. What do you make of that data?

• 3:10Speaker 01

  It tracks to the concept of dispersion of returns in venture. Because every year, David, if I asked you, how many companies matter? And let me define what matter is. Multi-billion dollar outcomes in the public markets or M&A.

• 3:23Speaker 01

  Like 5, 10 billion plus. How many companies are there per year? There aren't going to be 30 to 50 every year that are generated in a venture back. It's probably going to be 10, 20, if that. There are years where it's far less than that. And so it actually tracks to exactly that. And so how many firms are going to be backing the seed, series A, series B of those companies, where they own enough where a single deal can return multiples of their funds? So it actually, like, it's less the underlying fund data. You have to double click on that and say, what's driving that? It's the actual company dispersion at exit that matters. The other way to think about it is, I think a lot about how much is raised by venture firms and what needs to happen to generate a 3X on the overall fund raise.

• 4:05Speaker 01

  So depending on the year you look at, we were at 1.200 billion during COVID, then less than 100 billion. We're sort of right around 200 billion plus at this point, per year raising venture capital in the US. To 3X that, you need to generate over a trillion, 2, 3 trillion in market cap at exit and own enough of those companies to get a 3X on the 200 billion raise for that one year. Well, I would argue you can get to 3 to 5 trillion in enterprise value at exit, but how many companies are going to do that collectively? It's going to be an Anthropic, OpenAI, Databricks, SpaceX, et cetera. There are not going to be many that are going to get you to that 3 to 5 trillion. So it goes back to the same dispersion of returns at the company level.

• 4:45David Weisburd?

  So I want to double click on that. There's this meme of top quartile returns. Professor Steve Kaplan showed that roughly 50% of them continue to be top quartile. Do you disagree with this thesis?

• 4:58Speaker 01

  No, I don't. I don't disagree because there's definitely persistence.

• 5:04Speaker 01

  I think it depends on which pocket of the market you play in. So persistent is much harder in pre-seed seed than it is, and I would say maybe the larger bracket firms. So pick your top 5, 10 Sandhill firms. There is significant persistence in returns for those firms because of the brand that they have. The brand is an output from the returns they have generated in the past and the outcomes they've had through IPOs and M&A events. And those outputs then lead you to the next generation of entrepreneurs wanting to work with you, having the reputation then to come in and lead their rounds. Seed is much harder because a lot of the times, if you're an inception check in a company, the company is not known yet.

• 5:47Speaker 01

  Whether it's a good company or it's not a good company, you're taking significant founder, team, product, market risk. Today, you're taking a lot less of that at the series A and the series B. Companies are, have revenues, it's they're raising bigger rounds. The entrepreneurs have shown some traction. There is enough semblance of product market fit. But at the pre-seed seed, persistence is much harder because the level of risk you're taking at the time you're investing is very different. Give you more specificity, those 20 firms that we talked about over the last 21, 22 years, a lot of those are not seed funds. A lot of those are the bigger firms.

• 6:22David Weisburd?

  And that's because brand begets the top deals, the top deals preserves a brand, and this is flywheel effect.

• 6:27Speaker 01

  The flywheel effect continues. Exactly. Now, it doesn't mean it can't happen in seed. I'll give you an example. So we backed a manager who, we backed many managers in seed. Seed is much harder today than it's ever been. So if you are doing seed, you need to have what I call the right to win. Why are you the generalist firm that can win the best deal flow at the early stages? This was much easier in 08, 09, when there were 20 firms and there wasn't much adverse selection. You can get 15, 20% ownership in the best enterprise software companies because there were literally 20 legitimate seed firms. Now they're over 2 to 3,000. And so why are you, as a generalist firm, the one winning it? If you have very specific differentiation and a right to win, and you stay disciplined in terms of your fund size, you're going to continue to do well in seed.

• 7:12Speaker 01

  There are firms that get very large in seed. So I'll give you an example. So let's say your best funds were 40, 50, 70, 100 million dollar funds, and you had three in a row at 3X net. So you would fit into this 20, but you're now raising 500 to billion dollar fund. Because of your success, you got much bigger. The problem with that is, at that point, you can't do the deals you did when you were a 40 million dollar fund. And now you're competing against the big firms. So you're in a whole different ballgame altogether. So consistency and a right to win in seed, if you have those two elements, can actually keep you in the category of the consistently in those 20 firms. But there are very few of them.

• 7:48David Weisburd?

  There's few firms that have that right to win. There's few firms that stay small if they have that right to win.

• 7:53Speaker 01

  Because if they're not small, they're going to start competing with the big firms. And I will tell you, we're not always right, but if I look at the last two decades, and you and I can debate this, how many firms in your mind have emerged as firms that can effectively, consistently, vintage after vintage, compete with the big firms? Very few. Really, very few have.

• 8:20Speaker 01

  I mean, if you look at, you've got founders, drive, and recent. Those were started in the last two decades. They've effectively competed really well and they're in the top bracket. And then you have some solo GPs that have done an incredible job and they have a right to win. They've developed a brand and they can effectively compete with the big firms. But outside of that, it's really hard. Now, if you're a seed firm and you have a 100 million dollar fund and you're focused on technical founders and AI, or you're focused on inception stage co-founding of, we have a firm that's focused on energy, climate, and sure tech retail. They essentially are such experts in those fields, they can, they're almost like co-founders. They find the problem, the niche in the market because they know the customer set, they know where the product market fit is. They know the entrepreneurs and the operators well. They almost co-found the companies together.

• 9:05Speaker 01

  They have a right to win and there's no adverse selection there. And they can, if they can stay consistent with their strategy and their fund size, they can continue to deliver great returns. That works really well in seed. What doesn't work well, if you take those two examples I just gave you and you blow it up to a billion dollar fund, becomes much harder at that point to generate those returns.

• 9:25David Weisburd?

  At some point, a niche strategy, if it gets too big, now you're again competing against the big brands and the brand flywheel is just too much to overcome.

• 9:34Speaker 01

  Some firms have done it, it's just really, really hard, David. And like, as I said, they're thrive founders and recent, just over the last two, two and a half decades have reached that top echelon. Some solo GPs have, but it's really hard.

• 9:50Speaker 01

  And we see spinouts all the time that are, I call it sort of the messy middle. It's actually the hardest place to invest in where it's not seed. It's not billion plus big firms, it's sort of in between. But the in-between is hard because you can't do the seed rounds because you're too big structurally. You can't do the 2 million dollar round. You can't go and camp at Berkeley or Stanford and be like a technical co-founder, like a 75 million dollar fund would do. But you're also big enough where you are going to bump into the big firms. And so you're in this messy middle where it's really hard for you, one, get the best deal flow at the seed, structurally you can. And two, you don't necessarily have the brand to win the best deal flow against the big firms.

• 10:34Speaker 01

  Yeah, venture has become really confusing over the past five years. At least for me, it has.

• 10:38David Weisburd?

  Maybe you could unpack how adverse selection works at the early stage.

• 10:46Speaker 01

  This is a concept we grapple with a lot. We are believers in strong portfolio construction, and that's where adverse selection already comes in. What is portfolio construction to us? It's the concept of portfolio construction is not just numerically fund size ownership in a company. It is the following. Subjectively and qualitatively, first, we think about where the manager is playing, whatever subsect they're in, at reasonable exit outcomes with dilution, can a single outcome return multiples of your fund? Essentially, it boils down to this. Now, if you are in the hottest categories of an AI, 5% ownership may do that for you. If you're in a niche market, 20% may be necessary to answer the question.

• 11:29Speaker 01

  So, and now, if I go back 20 years in portfolio construction, it was much easier for you to get 15, 20% ownership in the hottest categories in software. There were less firms, it was not as competitive. You didn't necessarily have to show the right to win because there just weren't many options. If you were doing a seed round in 08, 09, or 2010, over 1 to 2 million, structurally, the big firms weren't doing that. Companies were becoming more capital efficient, where they didn't need to raise an A. They could actually get off to product market fit with 1 or 2 million. That's where Micro VC was born. It was called Micro VC now seed. Today, with over 1,000 firms, it's really hard to get that 15, 20% ownership, unless you're one of those firms that almost is like a co-founder. You're an expert in the field, you brought in the idea.

• 12:13Speaker 01

  There is no adverse selection there because you yourself are the expert and you almost served like a co-founder on that deal. It doesn't mean you're getting 30 to 50% of the company. You can get a solid 15% plus with a sub $5 million check. But if you went head on today and said, I'm going to play in the hottest category of AI and try to get 15, 20% ownership on a sub $10 million check, that's really hard to do. And if you do do that, there could be some level of adverse selection there. So we think a lot about two things. One is that question I mentioned. A single company, wherever you're playing in the market, subsector, end market, can return multiples of your fund. Secondly, we do care about the manager's ability to lead around. Why does that matter? Leading around qualitatively tells you that there is a strong signal

• 12:58Speaker 01

  the founders want them as the most meaningful investor on the cap table, at least in that round, which means they value their counsel, they want them potential on the board down the road. But small participatory versus lead or co-lead are very different signals to us.

• 13:13David Weisburd?

  Maybe you could double click on that.

• 13:14Speaker 01

  This is early stage only, not late stage, because like, leading in late stage is really hard. So if someone is doing Harvey at 8 billion or Anthropic at whatever, 60 billion, 4 billion, like you did, like, you can't lead that. Structurally, that's hard. I'm thinking more, it's a sub $100 million valuation, sub $50 million valuation. You're structurally designed as a firm to write the type of check where you can lead.

• 13:37Speaker 01

  We're looking for firms that can do that. Because going back to my initial point on a single company can return multiples of your fund, mathematically, it's much easier for you to do that if you are a lead or co-lead than if you're participatory. Take a $50 million fund that owns 5% of a business. Typically, there's 50% dilution through the arc of the company raising over multiple rounds, over 10 years. So let's say you own 2.5% of that company. If it sells for a billion dollars, you return half of your fund. You need 10 $1 billion outcomes to get a sort of a 5X mid-3s net fund.

• 14:07Speaker 01

  Getting 10 $1 billion outcomes is really hard. Now, you can have 1 $10 billion outcome and that works, but it's really hard. That fund math is really hard. What you really want is if you have a unicorn outcome, it returns multiples of your fund. And then if you have a $10 billion outcome, you don't have a 3X fund, you have a 5 to 10X fund. Now you have an actual, like, top 1% fund for that vintage. So the way you do that is you don't own 5% upfront, you own 10 plus. And with dilution, maybe you end up at 5, 7, 8%. You have a billion, $2 billion outcome, you just return multiple turns on your fund. You have a $10 billion outcome, you're going to have a 10X fund. So, leading is important to us, and it doesn't have to be consistently 100% of your deals you have to lead,

• 14:51Speaker 01

  but you do have to have this muscle of like, in my core deals, I'm going to be a lead or co-lead, and I want to be a meaningful investor on the cap table of this business. Because if it works, it's going to be meaningful to my fund. Now, that's not always the case, right? Because you can own 0.01% of Anthropic, and it's going to be really meaningful. So you need to break that rule, and it can be some percentage of your fund where you say, I'm going to break that rule. But a big chunk of my fund is the core deals I'm doing where I'm leading or co-leading. So it's not a dogmatic, every deal has to be that.

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• 16:03David Weisburd?

  Jamie Rowde has this philosophy where she wants her fund managers doing 90% in a very strict buy box and 10% kind of breaking the rules. How do you think about that?

• 16:13Speaker 01

  90/10, like, it depends on the manager.

• 16:17Speaker 01

  We've seen 80/20, we've seen 75/25.

• 16:18David Weisburd?

  Is there something to that in that you have very strict rules and then you have a very specific buy box?

• 16:23Speaker 01

  No, it depends on the manager. If the manager has an incredible network, and they believe they can access the top 0.1% entrepreneurs. Say they're running, I'm going to give you an example. Say they're running a $150 million fund. And this manager's bread and butter is a 2 to 4 million dollar check for 10%. Technical founders early on. I mean, we have this firm, we're back in their fund too now. But this GP has such an incredible network with a 0.1% entrepreneurs, where they can get access to those deals, but those deals are massive rounds and huge valuations. On a $150 million fund, you're not going to lead, you're not even going to co-lead. You're going to be like the little participatory check. But the outcomes can be so large in those deals, you can still return a big chunk, if not multiples of your fund.

• 17:08Speaker 01

  And so if you have a special person like that, you shouldn't constrain them to 90/10. If they want to do 70/30, go for it.

• 17:15David Weisburd?

  It goes back to that same criteria. If it could be a fund returner or multiple fund returner, that's really the thing.

• 17:20Speaker 01

  And if you are going to say, by the way, there are firms which have proven everything I just said wrong, which are all participatory, no lead, and have killed it. The way they have done it is this GP that I described, they're doing that 100% of their time. They're in the right networks, they are consistently getting access to the 0.1% entrepreneurs, and they are not ownership dogmatic. It's just really hard to do that. Because in every single one of your funds, you're going to need not one, not two, but multiple winners, or one mega, mega winner to drive the 3X net returns. And I go back to venture is one of the hardest asset classes to generate consistent returns. And the 20 firms out of 3,000 is exactly that data point is,

• 18:05Speaker 01

  we see a lot of firms that have 1 10X fund, and then it's harder to generate not the 10X, but the consistent 3X net. So you want to make sure that your strategy is such that, and consistent, that vintage after vintage, you can still generate those consistent returns. By the way, we, I think, what's the phrase, it's like, we eat our own cookie. Like, even us, accolade as a fund of funds, we're disciplined in terms of fund size. We didn't increase our fund size by $1 last time, it was 500 to 500. We are luckily in that same bucket where we have generated, we're in those 25 firms, where we have generated consistent 3X net or LPs. But the way, if we were an out and raised a billion dollars, we wouldn't be able to allocate it. We would generate the average returns in venture and the average venture returns,

• 18:48Speaker 01

  like, you can probably do better in the private equity or public markets. So consistency is equally important in your strategy.

• 18:55David Weisburd?

  Is that because your managers are capacity-constrained themselves?

• 18:58Speaker 01

  The answer is yes. And I actually went on another podcast, David, and I talked about how we don't, we actually want to be a big part of the managers. Once we have conviction, we can be as high as, I mean, we've been 50% plus of a manager's fund. And some managers love that, some really want to diversify. And we have this conversation a lot with the GPs on why we're the right partner, even at that level of concentration with them. But yes, I mean, it's typically at fund one, when it's not as obvious, you can be a big chunk of the fund. By fund three, four, when it's obvious, like, it's harder to be 30 to 50% of the fund. So, but if we could, that's the way we'd scale our fund. We typically invest in no more than 18 to 20 managers in every one of our fund of funds.

• 19:44Speaker 01

  So if you said every manager is 30 million, bottoms up, that's the fund size. If we can get 50 million, then we can raise a billion dollars. But getting 50 million in a $75 million fund, really hard to do.

• 19:55David Weisburd?

  This is a theme I keep hearing over and over, over hundreds of episodes. This idea that there's just not that many great investments. Alpha is just scarce. Charlie Munger used to say, when you graduate, you need a punch card of 20 investments that you should make your entire career, and that's it. And you need to find those 20 best opportunities. Peter Thiel says his biggest regret was not doing Facebook Series A after he did the seed investment.

• 20:22Speaker 01

  Yeah.

• 20:22David Weisburd?

  These exceptional companies, even though it seems like they're commonplace today, really historically, they're just extremely rare.

• 20:29Speaker 01

  I totally agree. We talk about the limited number of funds to invest in, and to your point, the limited number of companies to invest in as well. There are more points today in a company's lifecycle to put money to work than there was maybe 10, 15 years ago. Like, late stage is a new asset class altogether in terms of, you can actually generate venture-like returns at the mid-stage, potentially even late-stage, depending on the company. That really wasn't the case 10, 15 years ago, because structurally, a lot of the appreciation would happen in the either public markets. Today, it's happening in the private markets. As I said, the average unicorn is private for 12-plus years. So if you are targeting a select few companies, you can invest across multiple cycles. Much harder with funds.

• 21:12Speaker 01

  You got one, it's usually one and done, close over two months, and that's it. So it's much harder for you to scale your check in a way you couldn't accompany over multiple rounds. By the way, the other thing I'll say is,

• 21:23Speaker 01

  if you are able to scale your check to 50 to 100 million in a small fund, it's usually not small anymore. They've gone much bigger, which then puts the consistency into question. So you could raise a billion, 2 billion as an allocator, and invest significant dollars in firms that have grown a lot, putting aside the big firms, but the seed firms. Say, take a seed firm that's 75 million, now raising 500. Yeah, you could probably get 100 million if you were 30 in the 75. The question is, do you want to? Is that the right time to double down on that firm? What I would rather do is go to the GP and say, hey, raise another 75, and we'll do all your 75.

• 22:00Speaker 01

  And by the way, that's a conversation we constantly have with GPs.

• 22:02David Weisburd?

  That's actually where I wanted to go, which is you mentioned that you guys oftentimes are 50% of a fund. I guess you could do up to 100%, at least in theory.

• 22:11Speaker 01

  In theory, yeah, they might as well just work with us in one office at that point.

• 22:15David Weisburd?

  Yeah, might as well give them that.

• 22:16Speaker 01

  What do you think, by the way, you're thinking maybe down the road you raise a fund. If an LP came to you, an LP using highly educated in the space and you really bond with them, like you align with them in their thesis and they told you, we want to be 50% plus of your fund. How do you react?

• 22:30David Weisburd?

  I think there's not that much differentiation on the LP side, similar to how you think on the GP side. And I think some LPs are extremely differentiated. What does that mean? I think there's significant information alpha in the private markets, especially around venture. LPs have our LPs in many different funds. As venture becomes more and more consensus, oftentimes they know which companies to focus on. And I think a true great LP partner is extremely valuable.

• 23:06David Weisburd?

  If that happens to be the case, if there's an LP partner that truly has that information asymmetry, I think it makes a lot of sense.

• 23:16David Weisburd?

  I always wonder, because a lot of GPs, they're focused on having a lot of diversification in case some LP doesn't re-up. Now they have a hole in their portfolio, but I feel like once you're on your fund three, fund four, replacing one LP, it's not the end of the world. And I think really partnering with the right people, all things being equal, I think that's more valuable than diversifying your LP base.

• 23:41Speaker 01

  I totally agree with you. And I mean, you don't have to use us as an example, but say this LP, this hypothetical LP, say they don't re-up with you and they were a big chunk of your fund in fund two or fund three. It's a big hole, but there is usually a specific reason they're not re-upping with you because they have been consistently allocating in the venture for decades. So if they're not re-upping with you, your team blew up or performance was not what was expected. In which case it's not an issue that only they're facing. The rest of your LPs are going to be facing as well for your next fund raise. It would be very rare for that type of LP that you described not to come in, but everyone else in your LP base is supportive of the next fund. I've yet to see a scenario like that ever take place.

• 24:21David Weisburd?

  What's your pitch to GPs, why they should take 50% of your capital in these really difficult access funds?

• 24:27Speaker 01

  The first thing I say is talk to every manager we've backed in the past and we give them the whole list. Tell this to myself and we tell this to our team and we all hold ourselves to the standard. We want to be the LP that when you were first getting set up, we helped you literally get your operation set up. We worked with you and maybe even co-drafted your LPA. We helped you with your deck when you were first ideating on what you were doing. We helped you with everything from LP composition, portfolio, construction, strategy, not directing you what to do, but helping you think through it.

• 24:58David Weisburd?

  Thought partner.

• 25:00Speaker 01

  We want to be the first call you make when you think about raising a fund and then be a thought partner in that ideation process. After that, once we become an investor with you, we add a lot of value to the GPs. Now introductions, everyone makes intros. We will help on the ground level with the portfolio companies where we can. We'll help you interview candidates. We will help you with other LP intros and other GP intros, either for your companies or for yourself. The thing I pride ourselves on is I consistently see this in our team and with our GPs. We get calls from our GPs at like 9:00 PM, 10:00 PM, 11:00 PM, when they have a problem or they have an issue. They have a conflict of interest, they're thinking about a staff member, they're thinking about a cross fund investment, they're thinking about whether they should sell a company

• 25:45Speaker 01

  and what piece to sell, and they're calling us late at night. That's the call we want to get as an LP and that's the message we want to send to every one of our GPs. When you're having a good day or a bad day, when it's late at night and you want to talk to one of your LPs, we are the LP to call and we're always going to pick up the phone.

• 26:00David Weisburd?

  How do you earn that first call?

• 26:01Speaker 01

  You show that hustle and ability to help and be a partner from day one. I mean, everything I mentioned from you there, ideating their deck, pushing them in all the right ways, helping them and giving them the feedback, helping them set up the firm. They see you as a true partner, not just an LP GP relationship.

• 26:20David Weisburd?

  Sometimes I think about this, we're actually talking about my mentor, Eric Anderson. He taught me this, which is there's some advisors that are, me and him have had many fascinating conversations over the years, but he said that there's two types of advisors, ones that are absorbers and ones that are amplifiers. So sometimes you call an advisor and with a big emergency, you end up basically, instead of them being there and listening to you and helping you, you end up having to calm them down. They amplify, they make it worse of an issue. And there's some advisors where you could tell them our fund is going to deliver a zero X and they're going to start like coaching you through it. Those are kind of the two extremes.

• 27:03Speaker 01

  Yeah.

• 27:03David Weisburd?

  Is there something to that?

• 27:04Speaker 01

  We are the type of partner where if someone calls us with something, we're not going to tell them, oh, this is what you should do. We're going to actually work through it with them and they're the ones who are going to make the decisions. But we're going to show them potentially all the potential blind spots we've seen over the past two decades. I'll give you an example. So if a manager calls us and says, I got this position, I can sell a piece in the next round. Should I sell or not? How much should I sell or should I just keep rolling?

• 27:31Speaker 01

  We're not going to have this like strong reaction, oh, you should sell all of it or you should sell 50% or you should roll the whole thing. What we're going to tell them is let's actually talk through it. And how would we talk through it? We'll say, okay, let's think about where this investment is in which fund? Where's the life cycle of that fund? Let's think about what is the return profile of that investment at that stage? You're thinking of selling relative to the fund size. Tell me how well your conviction level is in that company at that valuation going forward and what the potential return profile would be. Now, the manager talks through all these things with us. By the end of it, they actually come to the conclusion themselves because they're thinking through all the different avenues and all the different dimensions to make that decision. That's why they're calling us. They're not calling us to say, tell me what to do, but tell me about all the ways I should be thinking about this and all the different blind spots that I haven't seen before.

• 28:15David Weisburd?

  Hunter and Satya from Homebrew says that every round you need to be either a net buyer, net seller of the company. And that's the way to look at it. Is that how you look at it?

• 28:24Speaker 01

  It depends. Like you would answer those questions, right? Like where are you in the fund cycle of the fund? Do you have conviction in that company? So if you have a lot of conviction in that company, even if it's returning the fund, you can say you're still not buyer. Maybe the valuation is attractive, maybe you see significant 5, 10 X plus upside from there. Or maybe you don't, where you think valuation is overstretched.

• 28:43Speaker 01

  I'm already eight years into the fund, it's returning three times my fund. So I'm going to take one X DPI on the whole fund out to de-risk. That can be a great way to do it too. It really depends.

• 28:54David Weisburd?

  As a fund of fund, you're investing into the top GP. So you guys are in some ways slightly misled, meaning that the GP is managing their career. They want to always make sure they have this two X, three X fund at a minimum as an LP.

• 29:07Speaker 01

  Three X, not.

• 29:08David Weisburd?

  Three X, if they're one of these 25 funds. And the LP in many ways wants the most spikiness. They want them to get a 15 X or zero X in theory.

• 29:18Speaker 01

  Why do you think the LP wants spikiness?

• 29:20David Weisburd?

  I think because they have more shots on goal because they have a portfolio approach.

• 29:25Speaker 01

  You feel that way about fund of funds?

• 29:27David Weisburd?

  Well, that's actually my question for you. Is that how you look at it?

• 29:29Speaker 01

  We've looked at our performance over this. We've consistently generated great returns for our LPs. We've been very fortunate and this is all thanks to our GPs we've backed. We have had some funds that have been spike, underlying funds that have been spiky, but we've also had significant consistency where like we find a significant chunk of every one of our fund of funds is three X net or above. So I think we shoot for more durability and consistency in our underwrite than let's try to get spikiness. And it goes back to my point of participatory or lead. If you're constantly participating in deals and not leading, you will probably hit an anthropic in one of your funds. But hitting an anthropic every two years is really hard.

• 30:11Speaker 01

  So if you hit an anthropic and you own less than 1%, you're going to have a 10 to 15 X fund, maybe more. But that model for you to be spiky every vintage predicates on you finding an anthropic every two years. It's really hard. We want GPs who have a consistency in their strategy. And maybe there's a bucket, it's a 90, 10, maybe 80, 20, 70, 30, where that 30%, they can still find the anthropics of the world, but they're focused on their bread and butter, which is leading, co-leading in the lanes where they have the right to win. That's where you can see more consistency. The other thing is if you think about fund of funds versus like other LPs that have one pool of capital, we don't have one pool of capital. We raise our funds every two years. So we want to show consistency in every one of our fund of funds. In order to do that, we don't want the one fund to be spiky and the other one not.

• 30:56Speaker 01

  So we'd rather have two, three to four X net fund of funds in a row than have a five X fund and a one and a half, two X fund.

• 31:04David Weisburd?

  So even on the GP level, you don't like that spigginess?

• 31:07Speaker 01

  Oh, we love when we have a 10x fund. But coming in to do the underwrite, we're not underwriting a 10 to 15x fund. We're underwriting on the reasonable exit assumptions with where the manager is playing, their portfolio construction, their right to win, their team. Can they generate 3 to 5x net? If the answer is yes, great. And then if they outperform, they can get a 10x plus. But that's not the expectation we come in with.

• 31:28David Weisburd?

  Everybody talks about the power law. It's almost tried at this point and everything is driven by these power law outcomes.

• 31:35Speaker 01

  Depends what markets you're in. So if you are a 75 to 100 million dollar fund, you focus on technical founders or you focus in maybe not the hottest AI areas, which are both in terms of round sizes and valuations through the roof. You can still do really well and get a 3 to 5x net fund. Like, take healthcare IT as an example. Healthcare IT is not going to command multi 100 billion plus exit outcomes. Most likely, I mean, there might be a few companies like that, but it's like open evidence, et cetera. But there usually aren't as many. You're really underwriting to can I at 1 to 5 billion dollar exit outcomes, generate exceptional fund level returns, even less than a billion dollar outcomes? And if you do that, you can generate consistent returns.

• 32:20Speaker 01

  So, but if you're one of the big firms, so you are on Sand Hill billion plus funds. I mean, you're playing the power law on steroids. That's what you need. You don't need one, you need 3 to 5 deck of corns, huge outcomes to return multiples of your own. I mean, we did this analysis for the big firms. You need anywhere from 30 to 50 billion in exit outcomes, every vintage, to generate a 3 to 5x net fund, 30 to 50 billion. Now, it's possible, right? Because we talked about Anthropic, OpenAI, Databricks, SpaceX. But you gotta have that every two years. It's hard.

• 32:54David Weisburd?

  I remember only a couple of years ago, Founder's Fund was telling all their LPs, we need to hit a hundred billion dollar outcome in every one of their funds. And a lot of LPs told me that's just crazy. And then now you have these 3 trillion dollar plus.

• 33:09Speaker 01

  And Founder's Fund has done an amazing job, one, identifying those companies, but also doubling down on them across multiple of their funds.

• 33:14David Weisburd?

  Concentrating.

• 33:15Speaker 01

  Yep. By the way, concentration comes in two forms and both are powerful. One, one form of concentration is what I said, ownership upfront, defending it so that you think about the exit math relative to fund size. The other way to concentrate is dollars of the fund. So percentage of dollars in a single deal. So if you have a runner in the portfolio, we are totally fine with the GP putting 20, 30% of their fund into a single company. We're totally fine with the level of concentration. We just backed the fund. It's a fund one and their concentration limit is close to 40%. We're totally fine with it because we trust the GP. They're going to invest early in the companies and they have a great way to assess the mid-stage, late-stage risk of that company. And if they want to double down, they should do that. Founder's Fund has done that beautifully over the past decade.

• 33:59David Weisburd?

  And they have a 40% concentration risk?

• 34:00Speaker 01

  On a single deal.

• 34:01David Weisburd?

  Before they even know the deal, they just put that in their docs?

• 34:04Speaker 01

  Yeah, we didn't push back. We're totally fine with it. We love GPs who have conviction. I mean, we invested with conviction. I just told you, we were fine being more than 50% of the fund. Like, we love seeing that in our GPs as well.

• 34:16David Weisburd?

  You've talked about right to win. One of the interesting things about right to wins is they're kind of like unicorns. There's many different ways that you could win. In many ways, there's a game theory around it. Once everybody discovers the right to win, it starts to be competed away. What are some interesting right to wins that you see today in the market?

• 34:33Speaker 01

  We have backed a fund that's focused on the Israeli ecosystem for multiple decades. They have a true right to win. They have a brand in that specific ecosystem. We backed a technical, a fund that's incredibly technical, that's camped out at Berkeley and Stanford, essentially co-founding and coding with the engineers. That's not something the big firms are going to do. And that's a round that actually ends up being 1 to 2 million before anyone even discovers that company that that manager can do. I mentioned, we have done a fund and we're the biggest investor in it, where they're focused on specific sub-sectors, whether it's like energy, retail, insurance, supply chain. And in those areas, they do the research upfront, they co-found the companies, they have a right to win.

• 35:16Speaker 01

  It's that entrepreneur that they recruit or co-ideate with. Even if they get a term sheet from a bulge bracket firm, they're not going to go with them. Because from inception to getting to the point of the term sheet, that firm was responsible and helpful throughout that whole process. So they're going to be loyal to that firm. That's the right to win. So we care a lot about if you are not one of the big firms, do you have true differentiation at the stage you're playing? Meaning, technical founder at the pre-seed before anyone else sees it? Or do you have a right to win in that specific end market in the way where you're actually doing the work? So you will see in our portfolio, we have the big firms. We have the firms that, I would call them challengers, that have done well.

• 35:59Speaker 01

  I mentioned like the very few firms that have over the past two decades been able to challenge the big firms and maybe join their leagues. And then we have the seed firms that are playing in a different ballgame, but they have a right to win. Those are the three you would see in our portfolio typically.

• 36:14David Weisburd?

  We were talking before you were recording about media and specifically very niche media. Talk to me about that strategy.

• 36:22Speaker 01

  Yeah, that was you. That's what I was saying, you should raise a fund. You got a real right to win. Because I remember when you started your podcast and like a couple of years later, you had 400 plus and have a real following.

• 36:32David Weisburd?

  Thank you for our podcast and for our business. The combination of the one-to-one relationships and also just the crowd and just having a captive mind with GPs, LPs has proven to be extremely useful. You've invested into a fund that has a podcast with very technical CIOs and CTOs. Tell me about that.

• 36:53Speaker 01

  Oh yeah, we did invest in one. It's focused on technical founders in security, DevOps. I would say AI engineering, AI opportunities. And one of the GPs there started a podcast a couple of years ago, focused on technical engineers and even engineers and buyers at the enterprise level. I believe it has the highest subscriber volume of any technical podcast out there. And that's brought deal flow, that's brought a following, that's brought customer introduction. So that's been a great flywheel for the whole organization and for that GP.

• 37:29David Weisburd?

  That's where the alpha is from access on multiple levels.

• 37:32Speaker 01

  If you think about the speakers they've had on that podcast, it's everyone from like essentially all the companies we talked about and the CTOs of those companies. The other thing they did recently is off of the podcast, because it's been so successful, they created an incubator, which is attached to the podcast. It's now a studio, it's in the same building, but companies can come and build. They can benefit from the community that's coming from that podcast because it's engineers. Essentially, a lot of the products they're backing are usually used by the engineers themselves. So those entrepreneurs who are thinking about starting a company can now stay in that space for six, 12 weeks, learn from that community, learn all the pain points, build their company. And that manager will have the right to win because they created that community to begin with for that founder.

• 38:16David Weisburd?

  You've talked about accolades, strategy. You guys are at $8 billion right now. You mentioned you have 500 million dollar funds. How much of that is funds versus co-investments?

• 38:27Speaker 01

  It's mostly funds. We don't do a lot of co-investments and there are some LPs that do co-invest incredibly well and fund the funds that do well. I mean, we've looked at our track record over the past 25 years and I think we've done a great job in primary fund investments and that's where our strength is. By the way, as a firm, that's how we've always operated. We don't go international, we don't have, we don't have multiple different strategies. We do venture and growth equity. And we tell our LPs for as long as I've been at the firm, we're not the smartest LP out there with a singular focus, which is why we've done well. And so most of what we do, long-winded way of saying, is fund investments.

• 39:05David Weisburd?

  Why is that?

• 39:07Speaker 01

  Just, we think we're better at it than doing direct investments. If we started to do co-investments, I think it's not enough for you to just piggyback off of the GPs. Especially in an environment we are in now where there is a lot of adverse selection. Like, if we are going to see a Series B, Series C deal, why are we seeing it versus everyone else in the 3,000 firms out there that are supposed to see those deals? Now, there's nuanced situations where there's parrot from a manager, which is why we could see it. But I also don't know if it would be great at assessing those opportunities as a direct investor. Whereas I think we're really good at assessing those opportunities as a fund investor. When we're underwriting a first-time fund and their right to win, that's where our strength comes in. I don't know if our strength comes in assessing a Series B company.

• 39:52Speaker 01

  By the way, if we did do a lot of these deals, you would have to do a lot of them because you'll probably have some zeros and you want to make sure you have a diversified portfolio. And trust me, we can lead or co-lead, so we have to participate. It goes against everything I just said. Like, we would have to be a passive check, participating in everything. And I don't even know if we're good at it. So I think we know our strengths and weaknesses and we know where we can play with strength. And we're fiduciary to our LPs, so we stuck to more fund investments. Now, we do do co-investments, but more on the private equity growth side. So it's a big part of our firm as well, where these are more bootstrapped, capital-efficient software companies. Why do we do those and not on the venture side? You typically invest in the same round as the manager at the same cost basis because they just have capacity in the round and their fund can't fill it. So we're fully aligned with the manager.

• 40:36Speaker 01

  We come in on the same timeline as the manager. And even more of a benefit if there's no economics to the deal.

• 40:45David Weisburd?

  So another way, you don't have to diligence whether this is one of the better deals or the manager, one of the worst deals.

• 40:52Speaker 01

  If it's a core deal on mandate, coming in on the same cost basis and only because they don't have enough capacity from their fund, you have great alignment as a co-investor in that deal.

• 40:59David Weisburd?

  For us, we're investing alongside top funds, investing for the first time. What's the failure mode on that?

• 41:06Speaker 01

  Series B, like five years ago, was the toughest round to invest in because you hadn't fully proven out scale of product market fit, but the valuation was high enough, much higher than the Series A. It's like the hardest round to invest in. Series B today is all over the place. My sense is from the deals you mentioned that you looked at and did deal by deal.

• 41:24Speaker 01

  Forget the nomenclature, they're mature deals.

• 41:26David Weisburd?

  Yeah.

• 41:26Speaker 01

  They have product market fit, they've proven it out. GPs are falling over themselves to get into the deals because they were subscribed.

• 41:36Speaker 01

  If you're going to be in that stage of a company's lifecycle,

• 41:41Speaker 01

  I think it's actually, it makes sense for you to say, the signals I'm going to use is the traction of the company and the current syndicate of the company and try to get as much as I can in the deal. But you likely will participate because the rounds are just way too big to begin with.

• 41:55David Weisburd?

  Last time we chatted, you said that was one of the most confusing venture environments that you've been in your career. Why is that?

• 42:01Speaker 01

  I mean, everything I just said, I could be wrong.

• 42:04Speaker 01

  The whole industry has changed. Micro VC is the most competitive I've ever seen. I keep calling it micro VC because that's what it was in oh eight, oh nine, oh ten. But seed is now the most competitive and the most confusing place to invest in. If you're a new seed fund, there has never been a harder time for you to start a fund and to invest your fund. Late stage has emerged as a whole new category in venture because companies are staying private longer. And we can talk about why. AI has broken the rules of fundraising, valuations, company traction,

• 42:33Speaker 01

  and everything around there, which has led to fundraising at the firm level, fundraising at the company level. I mean, last year, 10 firms made up more than 50% of the fundraise. 18 firms, 80%. You unpack that, why is that the case? But because you have five companies in the last two years that have raised more than 50% of the capital on the whole industry. AI has broken the rules of all those things. So yeah, that's why I'm confused. And then we talked about the different categories in venture. In my mind, there's only four. There's pre-seed, challengers, big firms, late stage. And every single one of those categories is challenging to navigate today.

• 43:11David Weisburd?

  You're constantly talking to your top GPs or in these funds that are continuously raising these rounds. Databricks, OpenAI, Anthropic, SpaceX, a lot of these reach Series H and beyond.

• 43:28Speaker 01

  Series M for Databricks, can you believe that?

• 43:30David Weisburd?

  Series M, yeah. I met Ali probably two, three years ago when it was like a $10 billion company and it's grown multiples since then.

• 43:40Speaker 01

  They're almost at that in terms of revenue.

• 43:43David Weisburd?

  What's your sense for why companies want to stay private longer?

• 43:47Speaker 01

  Well, a couple of, two reasons. Forget that being a public company is hard and you have to report quarterly. That's been the case for a long time. The two structural changes that have happened more recently is there's more private capital available. So these companies you mentioned, they have options in the private markets to raise scalable capital, to do acquisitions to scale in a way they couldn't before. They can raise billions and billions of dollars in the private markets. By the way, if you told me a private company in 2026 can raise a $30 billion round, I would say no way. Anthropic did that in one month. So you can actually raise sizable capital in the private markets today as a private company. If you're one of the 0.1% of those companies.

• 44:29Speaker 01

  Secondly, a lot of the capital that's being raised by these companies can be secondaries as well and tender offers coming from the teams themselves. So if you think about using the examples of those companies, like employees have been able to get liquidity in the private markets from private capital. In the past, if you were an executive at one of these companies, you were waiting for the public markets to buy a house. Now you can do that through the private markets. So there's less incentive for you as a management team, as an employee group at one of these companies to go public because you can get liquidity in the private markets today. That's why the average unicorn is 12 plus years now.

• 45:07David Weisburd?

  I had a fascinating conversation with Matt Whitheiler from Wellington. And he gave me a couple of stats. There's roughly $3 trillion in the venture market and there's $127 trillion.

• 45:19Speaker 01

  $3 trillion of what?

• 45:20David Weisburd?

  $3 trillion of capital deployed in the venture market. There's roughly $127 trillion in the public markets. And Wellington did this analysis of all public tech companies prior to the SpaceX IPO. And only four were predicting more than 30% growth rates. So the public markets are starving for companies.

• 45:40Speaker 01

  I mean, look at the Bessemer Cloud Index. In February, March, if you look at the SaaS index, there were six companies trading at 10x revenue when SaaS apocalypse hit. Six companies, David, two years ago, there were dozens and dozens, above 10x EV to next 12 months revenue, six companies. Now there's more, there's like 13 to 15 because companies like CrowdStrike, Data, CloudFlare, Snowflake, they've shown enough acceleration of growth from AI, the public markets have rewarded them. And Palantir is the only company trading at an astronomical revenue multiple, now SpaceX as well. But if you look at just SaaS companies or Bessemer Cloud Index, Palantir is the only one. So if I think about a Databricks or Anthropic and their growth rates, if they were to go public, like those growth rates in SaaS don't exist today in the public market. So they would trade at a premium.

• 46:24David Weisburd?

  So it got me really thinking about this, which is my thesis is that all things being equal, if things were truly equal, companies would stay private longer. Why? The most important thing is just being able to think long term. The public market is just, it's not even a quarterly, it's on a daily basis.

• 46:44Speaker 01

  Yeah.

• 46:44David Weisburd?

  Makes it so difficult to make long-term trade-offs. And when you're building for the future, you really need to think long term. And to your point, I think the only reason why even SpaceX, taken to the extreme, why did SpaceX go public after 24 years? It's not because Elon Musk got tired of being a private company. It's because they had literally exhausted the capital markets. You mentioned a statistic, I'll give you another one. 75% of all capital in venture capital in Q1 2026 was deployed into five companies. Said another way, if the rounds were 25% more, there'd be literally no capital. Forget about the seed rounds, forget about Series A, Series B, Series C. There would be no capital.

• 47:25David Weisburd?

  So if there was, now instead of $3 trillion, if there was $6 trillion in venture, what does that mean? That means that all of these companies could have done next round. Anthropic could have done a $2 trillion, SpaceX could have done a $2 trillion private market. There's no lack of capital in the private markets that would want even a 1.52X. They may never say they don't go around fundraising.

• 47:47Speaker 01

  I don't disagree with you.

• 47:48David Weisburd?

  But there's a lot of capital. So, but what's really interesting about this is that a lot of people have the view, well, the private markets, there's some kind of bubble or there's too much capital and they use history as this guide. But if you think about it, between the competition between the private and the public markets, so many of these companies previously would have gone public. The Amazons, the Googles, they went public so much earlier.

• 48:10Speaker 01

  In their lifecycle, yeah.

• 48:11David Weisburd?

  And my thesis, as these companies go public and return capital, a lot of that capital is actually going to go from the public markets back to the private markets. Said another way, the higher returns you have in the private markets, the more capital shifts from the public markets into the private markets and continuously basically keeping companies private longer and longer. If you put a gun to my head and said, where would the venture market be in five, six years? I think there's still room for another 2X in kind of total market share.

• 48:44Speaker 01

  So let's play this out, David. This is a really interesting point you're bringing. Let's say we go from the three to six trillion and these companies can raise another one or two rounds, like hypothetically SpaceX before going public. When they do go public, even today, like SpaceX, Anthropic, OpenAI, and Databricks, you look at their cap table and they've been raised so much capital in the private markets. Getting liquidity for those investors in those companies, it's going to take a really, really long time. It's not six months, 12 months, it's many, many years potentially. Just because I don't know if we have seen private companies at the scale they are, at the scale they've raised in the private markets, go public

• 49:28Speaker 01

  and then see full exit liquidity for their initial venture investors or their mid-stage or their late-stage venture investors. So I am really curious how that's going to play out over the next few years. And if we go with your analogy of like, well, let's take this, amp up another 2X in the private markets, it'll take even longer. So we might be looking at, let me ask you this more concretely. Say you invest in the private markets at Anthropic at $2 trillion at the end of this year. And it goes out and goes public in Q1, Q2. What are you doing? Are you holding it for the next? You just invested a year ago. You're a venture investor, late stage. Let's say you came into an SPV. Are you holding it or are you selling it to a Click1 and F2X?

• 50:12David Weisburd?

  There's a couple of things to unpack there.

• 50:16David Weisburd?

  I was also investor in SpaceX. One thing that SpaceX did, it's very underrated, but they really engineered around liquidity. So they have a bunch of unlocks.

• 50:25Speaker 01

  They do, yeah. It's more formulaic.

• 50:27David Weisburd?

  It's more formulaic. This idea of making hundreds of billions of dollars liquid in six months in the same day. If you think about it from first principles, it's an absurd paradigm. And it should never be that way to just dump liquidity into the market. It shouldn't even be legal. It's just not good for anybody. So they've created gates on that. I think a lot of people are going to look at that. And I'd like to see that implemented as a best practice. It also rewards venture investors that want to say long the company. They don't have this intense pressure to sell before everybody else sells. So I think that's going to become more commonplace, especially for these big IPOs.

• 51:10David Weisburd?

  But in the same conversation with Matt, he mentioned, I believe, Wellington's roughly a $2 trillion organization and they're barely getting. In most IPOs, they don't get their desired allocation.

• 51:25Speaker 01

  Yeah.

• 51:25David Weisburd?

  There's much more capital that wants to get into those opportunities, which goes back to there's only before SpaceX, four growth tech companies in the world. Now there's five. Obviously, you need to be diversified as a public investor as well. So I think this meme around this finite amount of capital that could go to top in the public markets.

• 51:44Speaker 01

  By the way, this is where I think I'm going to be wrong because I said this earlier. If you'd asked me three years ago, can a private company raise $30 billion in one month, I would have probably said no, but it happened. But if there is $30 billion of capital interest in a private company in one month, I would imagine there is many multiples of that for that company in the public markets. So you're probably right.

• 52:04David Weisburd?

  Roughly 10% of retail, even less, was filled at the SpaceX IPO.

• 52:08Speaker 01

  Right.

• 52:10David Weisburd?

  And that was 30% of the IPO. I think $25 billion roughly.

• 52:14Speaker 01

  So maybe we'll all be fine and there's enough liquidity in the public markets for these companies.

• 52:17David Weisburd?

  But I do think I'd like companies to revisit the six-month cliff and to engineer.

• 52:23Speaker 01

  Shorter?

• 52:24David Weisburd?

  I think you should have some unlock at different types. And I think it should be.

• 52:28Speaker 01

  The way SpaceX is doing.

• 52:29David Weisburd?

  Yeah, the way SpaceX is doing. One of the other things that's really making venture difficult to underwrite is AI and specifically how quickly the AI ecosystem is changing. How does that change how you approach investing?

• 52:44Speaker 01

  It's really hard. And we don't try to, so we're not macro investors. We talked to a lot of people about the AI opportunity set, but we're not going to say foundation models are going to be winners. The infra is going to be the winners. App layer is going to be the winner, so we should only invest there. We're going to invest across the board in the best managers. They're going to decide where it's best to invest. That being said, the landscape is changing pretty significantly. And there is significant competition in app layer. Foundation models can undercut the app layer as well. We're seeing that on a monthly basis, whether it's the public markets or the private markets. The other thing we're seeing is that there's a lot of experimentation in AI. I'm really thinking about the enterprise level adoption of AI. And we're seeing this a lot at the early stage, which is concerning, where our company can go from one to five, one to 10 in ARR.

• 53:29Speaker 01

  And I'm using ARR in quotation marks because the company hasn't even seen a year of renewal cycle, but it's scaling pretty quickly. They don't really have a persona analysis on their customer. And it might be experimental revenue for every, like, it could be, hey, I'm going to deploy, I'm going to deploy this solution for three months and see how it goes. And if the company takes that and multiplies it by four and says, that's my ARR and goes out to raise a round off of that, that's tough, but that happens. Like, and I think experimentation is so quick in AI from an adoption standpoint, and there's so much competition that, especially at the early stages, it's really hard to differentiate. Now, if you're one of the big companies or one of the app layer companies and you have

• 54:14Speaker 01

  scaled to 100 to a billion in ARR pretty quickly and you've shown a renewal cycle, you have great net retention, that's far more sticky. But if you're in the less than a one-year-old company, but quickly showed traction, it's still a really hard place to invest to figure out if that's going to be the successful company.

• 54:28David Weisburd?

  You've seen a lot of these companies go from zero to 10 and then down to zero.

• 54:34Speaker 01

  Well, the problem with the private markets, David, is they stay on the books not at zero for a long time. Like, it's not as efficient. So a company that goes from zero to 10 can raise at 400, 500 million. And say they get stuck there or they go down from the 10 million revenue. You might still market at 400, 500 million for a number of years. So private markets are not immediately efficient, unfortunately, from that standpoint. I mean, we're still looking at companies from the COVID days that are still marked up at 30, 40 times revenues. You look at their counterparts in the public markets, they're trading at three times. You would think, where is it described? Like, software company that grows at 15, 20% today, that's venture-backed, that was done vintages 2017 through 22, can't go public. Like, it's not growing enough. It's not like a Databricks.

• 55:18Speaker 01

  And its comps are trading at a fraction of the revenues it's being held at. So I don't think you see that roadkill right away. But I do think you can see plateauing of performance. And that's something we look at when we underwrite managers as well, is traction of the underlying portfolio companies over a longitude of time.

• 55:38David Weisburd?

  Do you oftentimes see big disparities between marks of different managers?

• 55:45Speaker 01

  Different managers, not as much, but we do see discrepancies in marks and how we think about where the mark should be. Not always, but sometimes, especially for two reasons. One is with COVID and the valuations were high, and two, SaaS apocalypse. SaaS apocalypse has rerated non-AI venture-backed software companies. If you are not showing acceleration of growth from AI, if you can't show the resilience, if you're not growing at least 30 to 50% plus, that company today, if you're not in that category, you're not trading at 10 times. You're trading it anywhere from two to 10 times. And if, God forbid, your seed-based workflow, sub-20% growth, like, you're in the sub-three, sub-four, four times ARR. The private marks on a lot of companies that are in that, not necessarily workflow,

• 56:30Speaker 01

  but take system of record company, growing 20, 30%. I'll just use a random example, $100 million company, growing 25% organically. Say there's no price increases, organic 25% growth, break even, rule of 25 company. What do you do with that company? Say it's $300 million ARR, 25% break even, rule of 25. Can't go public. It's not growing fast enough. Bankers are not going to want to take it public. It's not a sexy AI story. It's not accelerating its growth. It's not Databricks. It's not the Anthropic, OpenAI, etc., SpaceX. So what do you do? Private equity would have bought that company two years ago. They're not interested anymore. They're interested in an AI story. They're interested in an AI-native company that can accelerate and be resilient from AI. Maybe there's a strategic acquisition, but I find that hard to believe because even

• 57:14Speaker 01

  strategics in their boardrooms are talking about, how do we reinvent our product from an AI standpoint? So what happens to that company? I have a question for you. It's not a bad company, but it's just not good enough for the exits that would have been possible two years ago.

• 57:30David Weisburd?

  My first gut reaction was, remind me of search funds. In business schools, you would go and find these mom and pop companies.

• 57:37Speaker 01

  Right.

• 57:38David Weisburd?

  Are there now going to be 300 million or billion?

• 57:40Speaker 01

  So let's say this company is sitting on the books at 15 times revenue right now. So $300 million company sitting at 4.5 billion. Well, a search fund is going to come in and try to buy it for three times. If that, you're not wrong. There will be buyers. You can find private equity investors that buy value and they're fine with a 20, 25% grower, but they are going to pay nowhere close to where it's being valued on the books.

• 58:03David Weisburd?

  Oftentimes, in these sticky situations, you have it across asset classes, people could have the luxury of marking mentally an asset at whatever price until there's a come-to-Jesus moment. Somebody needs a liquidity, somebody needs to move forward, and then overnight it gets sold.

• 58:20Speaker 01

  Yeah, I agree. So we think a lot about that. I mean, when we underwrite a new manager and we look at their historical performance, like, we don't just take the marks. We think about contextually where the market is, where the company is playing, and what the actual valuation of the company would be.

• 58:33David Weisburd?

  You have concern about the venture market, but you're also very excited about the venture market. What makes you most excited about it outside of just AI?

• 58:41Speaker 01

  I tell my wife, this is the only job I believe I'm good at. And at this point, I'm locked in for the rest of my career and. The thing I've enjoyed the most about this job is the managers we back and the people we work with, they're just exceptionally talented people. And what excites me the most is, one, we get to work with the smartest people, and I always feel dumb in the room with the managers. But then you fast forward three, five, 10 years, and the manager you backed at the PowerPoint stage where you wrote the PowerPoint with them, their deck, their strategy, you helped them set up the firm, and they're massively successful. That is the most gratifying moment in our careers. Seeing that from inception to the success story actually playing out, if they're one of those top 20 firms out of 3,000, that to me is probably the most gratifying part of my job.

• 59:26David Weisburd?

  Is that the best example of a relationship compounding in your career?

• 59:31Speaker 01

  I'm a big believer in not being transactional with people. So, I mean, I talk a lot about this, like, call me at 10:00 PM, I really mean it. And I am a big believer in non-transactional, vulnerable, highly-connected relationships with people. And that has compounds in many different ways. It compounds in transparency, it compounds in trust, it compounds in learning from each other, it compounds from growing together. That can be within your team, that can be with GPs, and that can be with LPs. So I'm a big believer in that. That's how I've always operated, and there is a certain group of people that really resonates

• 1:00:14Speaker 01

  with that, and I can see in those relationships truly compound.

• 1:00:17David Weisburd?

  Just to put my master in psychology hat on, the reason for that is typically people will start with a little vulnerability. So they might call you and ask you almost a technical question. I have an LPAC situation, what do you think about this technical question? And as you build trust with that person, they'll give you more and more trust, and that starts to really compound.

• 1:00:38Speaker 01

  It starts there, and it gets to the point where we are having daily slacks and text messages with our managers. So it gets to that point. It's exactly right.

• 1:00:48David Weisburd?

  Is that what's compounded the most in your career?

• 1:00:49Speaker 01

  Yes, that's a big part of it externally. I mean, internally, just the team I work with, like, the people I work with are... Actually, we did an onsite with a manager recently, and we talked about the concept of can colleagues be friends or not? And there are many firms out there, and venture firms, where the colleagues are not friends, but they're just professionals working together, but there is really not a big connection outside of work. And there are some firms where that's not the case. They start out as friendships, and then that's the foundational layer, or they're almost like, I don't say family members, but they treat each other like family members because they're so close. That's the foundational layer, on top of which they build a firm, and then there's a professional setting.

• 1:01:32Speaker 01

  I'm very fortunate, and where the compounding has really happened is the combination of both at Accolade, because the partners we have, I worked with them for decades plus, and it's not just professional relationship, it's not just friendship, I consider them family. And having that combination is really, really hard. I remember when I was in Stanford Business School, and I was fortunate enough to run the Venture Club for a year, and in my second year there, and a lot of the first years come, and they talk about how they want to intern, or they want to work in a venture capital firm. And at that point, we had data from tens and tens and tens of placements we had done over many years from the Venture Club. And it was interesting, the number one reason typically a graduating GSB student didn't

• 1:02:17Speaker 01

  work out at a venture firm was team and culture. It wasn't performance, it wasn't compensation, but it was just culture and team. And so my takeaway from that, and when I spoke with a lot of the first years, was like, look, you can optimize for brand, you can optimize for firm, for the logos, but you have to make sure the team and the culture you have is the one that can compound, I'm going to use your word. Because if it doesn't compound, no matter how sexy, how great that firm is, it's going to be really hard for you to stay there for decades. The thing that needs to compound is your team and culture internally. You compound that, the rest will work.

• 1:02:52David Weisburd?

  I often times think a lot about, as we built this business with Curtis, we're now at seven people, and think about what makes something anti-fragile, and the relationship of the founders is extremely underrated. And you even see this, you see this in technology companies, which is where I learned this, which is you have two founders, let's say they kind of like each other, they go after a business idea, it doesn't work, maybe they go after a second one, it doesn't work, and then they respectfully close the company, and they say the business didn't work. But you have two other founders that all they want to do is work together, and they're compounding their relationship.

• 1:03:33David Weisburd?

  They go after one business, it doesn't work, second business, third business, fourth. And the mythology is always rewritten, which is maybe they had this like pain point, or they were like laying on someone's mattress, and they, they thought that they wanted to like travel the world, like Airbnb story. But when you really get to know these founders, it's really the strength of the founding team, and them wanting to find a way to survive. In Airbnb's case, it was literally they were selling cereals, which is kind of like this mythology. But why were they selling cereals? Why were they selling cereals for something that was an absurd business, which was blowing up mattresses and putting them in people's houses? It's because they wanted to work together, and that part is so underrated.

• 1:04:12Speaker 01

  It is completely underrated. I totally agree. If you have that foundation, the external work compounds on that. If you don't have that foundation, it's just really hard to compound. So we're big believers at this organizational internal compounding.

• 1:04:25David Weisburd?

  Is that something you look for with GPs as well?

• 1:04:29Speaker 01

  We diligence that a lot. So if we are coming into Fund One, and there's a new partnership, that's a big part of what we diligence. Yeah, we've done a lot of solo GPs where that's less an issue. And if we feel like there is a concern, or we have enough questions, we would wait till Fund Two. It's actually the one thing that's the hardest to diligence. If you're coming into a Fund One, and you have a two, three, four GP team, and they haven't had a formal historical time to work together, that is the hardest thing to diligence.

• 1:04:58David Weisburd?

  Before we started the firm, me and Curtis sat down, we spent two weeks writing our values. If you had told me that a decade ago, I would have said that's the most performative, ridiculous way to start a business.

• 1:05:08Speaker 01

  We have GPs who write like tens and hundreds of pages together on values, what they want the firm to be, what their concerns are, their vision. And if anything, you probably should do that exercise individually, and then come together, and really discuss it honestly and transparently. And that shouldn't be a one-week process, there should be multiple months of dating each other to figure out whether you really want to partner together. So we do spend a lot of time on that process with the GPs, if they are coming together for the first time to do Fund One.

• 1:05:36David Weisburd?

  If you could go back, you were just graduating Stanford Business School, and you could give yourself one timeless piece of advice, what would that be?

• 1:05:43Speaker 01

  My colleagues tell me this all the time, be more open-minded. It's, the industry we're in is changing a lot. It's changed far faster than I expected. And I talked about how everything is confusing. It's because if we took a very formulaic, dogmatic approach to venture, it wouldn't be confusing. We would just say, this is...

• 1:06:06David Weisburd?

  Just be wrong.

• 1:06:07Speaker 01

  We'd probably be wrong, exactly. We would just say like, this is how we invest, and we're going to keep investing like that. But the market moves away from you. And so, one thing, and I've become less and less dogmatic, and less and less formulaic over time, for being formulaic is important for that 70/30 we talked about, for the 70%, because it does lead to actual consistent returns. But you have to put in the context of the market, and where we are in venture. And I'm saying it's confusing is because I'm being more open-minded today than I was when I was graduating from Stanford. I'm, because I'm confused more about the venture market, we are able to do new opportunities in those three pockets, big firms, challengers, small firms. We're not saying, this is where we play, this is where we have made money from 2000 to

• 1:06:52Speaker 01

  2010, so we're going to keep doing that. To your point, we're going to lose money if we do that. So being more open-minded.

• 1:06:57David Weisburd?

  It's a paradox of knowledge, the more you find out, the less you know.

• 1:07:01Speaker 01

  The other thing is, like, we have an incredible culture at the firm where no one person has the answer. I'm a big believer in the process that drives truth-seeking. So we come into a room together, not knowing the answer, but I love the idea of getting to the answer together. We never have this like five people come into a room, one of them has the answer, and is pounding the table, and everyone's like, oh yeah, great, let's do this. I love coming into a room saying, here's the problem. Even if I have the answer in my head, or I think I have a hypothetical answer in my head, I don't want to say it. I want to come up with that answer together. So I'm a big believer in the process of truth-making together, and I believe we make better decisions because of that.

• 1:07:42David Weisburd?

  Well, Ram, this was an absolute masterclass. Thanks so much for jumping on.

• 1:07:46Speaker 01

  Thank you for having me on. This is great.