E182: Lessons from 17 Years at Menlo Ventures and Accel w/Tyler Sosin

In this episode, I speak with Tyler Sosin, founder of Villain Capital, a new fund focused on investing in vertical software businesses. Having grown up in the venture business for 17 years with storied firms Menlo Ventures and Accel Partners, Tyler brings a unique - and perhaps contrarian - perspective to venture investing. With Villain, Tyler's ambition is to help vertical focused founders efficiently scale their start-ups into dominant franchises that can compound their growth and relative market share over decades. The name of the firm, Villain, was inspired by a quote by Harvey Dent, a character in the Batman film The Dark Knight, who said to Batman, “You either die a hero or see yourself live long enough to become a villain.”

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

• 0:00David Weisburd?

  So everybody comments on your name villain. What is the origins for your name and how did that come about?

• 0:08Speaker 01

  Well, the origin for villain comes from a quote from Batman. Harvey Dent said to Batman over a dinner, quote, "You either die a hero or see yourself live long enough to become a villain." And just as like a cinephile, I always loved that quote. But when I reflected upon my investing career, you know, it truly resonated with me as sort of a north star of what success can be. And that is, you know, finding companies, you know, that basically survive and grow and continue to survive and endure through many decades often and become, you know, essentially the dominant players in their category.

• 0:50Speaker 01

  And obviously, these companies, when they're young, they start off as heroes. But if they do manage to get to, you know, a 20, 30 year mark, they're often villains at that point. They express really interesting tendencies that, you know, rational capitalists should love. They have got amazing customer lock in, really dominant relative market share, pricing power, and they're really hard to dislodge. And so that's why I like them as my north star.

• 1:16David Weisburd?

  What are some examples of some now villains that you invested at Menlo?

• 1:22Speaker 01

  Well, I'd say more generally, like, hey, the universe of tech companies out there, like, who would be, you know, in my opinion, a villain? And this is coming at it from a compliment, like Oracle would be a villain. They've been around for a long time. In the vertical software categories, you know, that I love so much, you know, Jack Henry and FIS in core banking, Vertifor and Applied in insurance, you know, Epic and Cerner in medical health records. These are companies that have been around for multiple decades. They're very large. They are extremely dominant in their categories. And often, if you were to ask, you know, people who use the products or people are trying to disrupt them, they are the targets

• 2:06Speaker 01

  because they're no longer innovating. They capture a lot of economic rent. But it's, in some ways, almost impossible to displace them.

• 2:16David Weisburd?

  It's almost like this full circle of the innovator's dilemma. It's a startup incumbent now disrupted by a new startup, but on its way to being a hundred or Five hundred billion dollar company.

• 2:28Speaker 01

  Yeah, and I should say, I don't think villains necessarily have to be enormous to be that way. I think they just need to be very dominant in the categories they can beat in. As Peter Thiel would say, like, he hates competition. He likes monopolies.

• 2:43David Weisburd?

  Competition is for losers.

• 2:44Speaker 01

  Competition is for losers, and I feel the same way. Like, I'd rather be in a business where, for a variety of reasons, at some scale, it's very hard to compete with them. And so then they can start to display some villainous tendencies and, you know, basically have amazing shareholder returns as a result.

• 3:02David Weisburd?

  So villainous tendencies are a side effect of having so much market power.

• 3:06Speaker 01

  It's also the capacity to have a relationship with a customer where you can extract economic rents. And, you know, that's very hard for most businesses to do. Most businesses compete in commoditized markets. They have to basically run on that treadmill or sprint on that treadmill forever. But there are a few companies out there that don't have to do that, and those are the best investments.

• 3:32David Weisburd?

  I know you didn't define it by market cap, but let's define that now as a hundred billion dollar company. How many of those companies have this kind of extractive relationship with their customers? And how many are their customers just love to give money, like a Starbucks?

• 3:44Speaker 01

  There's different sorts of customer lock-in that you can appreciate. You know, like, I sort of see myself as an anthropologist. And so, like, the question is, what are the, you know, the circumstances and the behavioral tendencies that create, you know, lock-in with a customer? And on the human side, habit formation is a huge one. It's why, you know, the nicotine companies have done, been so successful over time. It's why the Starbucks's of the world have been so successful. In fact, if you look at, I believe it's either the profit margins of addictive businesses, there's a strong correlation between how addictive they are and how profitable they are over time.

• 4:25Speaker 01

  And then there's some secondary effects, reinforcement effects, that really matter. But, you know, for, I'd say, consumer products, addiction is a major point. And then the other major point is things around, you know, habituation and just becoming like... Really familiar with something and therefore not wanting to give it up because it's what you know, and there's a friction to changing to something new. You have a bank account, that bank account is connected to all of these different bill play partners. Your entire financial life is set up on it. It's a hassle to move and it's that cognitive load and perceived friction that keeps people from switching, regardless of whether it's easy to do or actually really difficult to

• 5:10Speaker 01

  do.

• 5:11David Weisburd?

  So you invest at the earlier stage into these companies that you want to be a villain, to be mature and be a villain at some point. What characteristics are you looking for?

• 5:22Speaker 01

  If I come back to what I'm, what I'm doing at Villain, I'm very focused on vertical software and technologies. I'd say vertical software, vertical AI, vertical payments. These are the sort of substrates that, you know, I will be dealing with at this firm. The very best companies have very, very sticky relationships with their customers over time. In a more dry sense, it's basically they develop annuities with these customers and the best businesses build a widget or whatever it is, and that widget creates an annuity by selling it to that customer who basically consumes it for, you know, many, many years. And so I want to see the earliest evidence of that annuity and the earliest evidence

• 6:05Speaker 01

  of a founder who knows how to sell that annuity with some amount of efficiency. And if I find that in a vertical software market, I can get really excited.

• 6:15David Weisburd?

  That's evidenced by a low burn rate. So soft customers continue to purchase the product month after month. Is there any other metrics and leading indicators that you're looking that a customer would, would, has this annuity type of relationship with the company?

• 6:31Speaker 01

  You'd have to see what their behavior and usage are. You'd have to test pricing and their willingness to churn if you were to suddenly raise pricing. I'd like to know that a founder with an initial wedge in the market that's efficiently developing, generating these annuities, has a roadmap for basically building new products and features that they can sell to them. Existing customer to deepen the relationship significantly over time.

• 6:56David Weisburd?

  And you would argue that you're creating more of a feedback loop from the customer when they're buying multiple things from the same company. Then they're more likely to become a long time customer.

• 7:05Speaker 01

  Yeah, and there should be two, maybe three reasons for that. One, in cloud software, and this is like an important tenant of this business. Like you have this data plane that you're creating, maybe with that initial wedge product. And, you know, in the best of cases, that data can be used in a second or third product to give you the right, like the permission to build a product that would be better than what someone else building that product de novo would build. Because you're already using, you already have the data that's relevant. So it's a matter of a different workflow system or a different set of computations. But you have an advantage by having the core data set that's used in a variety of different tasks.

• 7:43Speaker 01

  So that's number one. Number two is, you know, as you develop a deeper relationship with a customer and have multiple products to sell them. There's a variable, very powerful phenomenon, cross subsidization that can occur. You are pricing and packaging multiple products together. Often these products, you know, work better together in terms of a synergistic, you know, outcome. But also in terms of pricing, you might be able to say, hey, if you buy this product and this product, they both work together. And we can give you a discount where if you bought these products separately, it would be more expensive. And over time, that's a very compelling way for more incumbent companies to compete against startups. You know, it's the bundling effect.

• 8:26David Weisburd?

  Give me an easy to understand example of a company that started with one product and then successfully sold multiple products that that most people would be aware of.

• 8:34Speaker 01

  Microsoft would be a villain and would be, you know, very well known for having multiple products in a bundle where, you know, over time, they have a lot of success. You know, bringing out that new product, bundling it into their existing suite. And ultimately, you know, killing competitors or really driving competitors into, you know, sort of a state of commoditization as a result.

• 8:56David Weisburd?

  Going back to these companies that you look for, that you think it could be villains or market leaders. What's the first kernel? In a company that you see that this might be one of these companies.

• 9:07Speaker 01

  When you think about competition and how to find markets where competition is less of a threat, you know, there are probably a few ways of doing it. One is, you know, network effects. I mean, that's a wonderful, you know, business model if you can attain it. The second is, you know, something like a Carvana where it's like the amount of infrastructure and capex spend required to get to a scale where there's this virtuous cycle that is just so hard to disrupt is enormous, right? I mean, Amazon would have, you know, similar characteristics working for it. I'd say the third that's lesser discussed is market size. And I read a book probably about 10 years ago that just opened my eye to this. And it was a fascinating book called Competition Demystified.

• 9:51Speaker 01

  I encourage everyone to read it. But it was basically this sort of anthropological survey of monopolies and how they fail, right? So you think of monopolies as like, hey, these things really like they shouldn't fail. But every once in a while, they get disrupted and the question is why? And the answer, which is compelling to me, is it's an exogenous effect or something happens that actually increases the size of that market. And as a result, it creates this sort of pocket of oxygen that allows a new entrant in to get to a certain amount of scale where then they're able to basically compete with the incumbent. And that it comes back to one of the big areas where competition can be controlled is,

• 10:35Speaker 01

  you know, one of the big factors is market size. And actually, it's smaller markets that I tend to like or sort of midsize markets because you have, there's just less revenue to go around. And this results in behavior where because the market size is perceived smaller or is smaller, there is less capital funding new companies in that market because the perceived outcome is smaller. Often, these markets, when they're smaller, they're just like less understood. They're more niche, they're more technical. It requires someone who like has exposure to that market and a build mentality. That's hard to find. And so there's fewer, I'd say credible entrepreneurs who go into these markets. And as a result, you have Have fewer competitors.

• 11:16Speaker 01

  And when you have fewer competitors competing with each other, maybe a couple can grow up to be at scale. And that's fine. And then there's usually some sort of rational consolidation that occurs. And so in smaller and medium sized markets, as a result, you end up with these market share constructs that are often quite lopsided. Where it's like, hey, there's three players who control 85% of the market or two players that control the market. Look at, you know, a lot of the businesses I mentioned earlier, Epic and Cerner, Vertifor Applied. I mean, these are relatively large markets, but they're dominated by two people. And it's larger because they were small markets and to begin with that grew over time. But these two players captured those markets. And then, once you are a large player in a small market with a lot of the lock in that I described earlier,

• 12:02Speaker 01

  even if someone wants to disrupt you, the fixed cost of doing so can feel prohibitively high. And so that keeps a lot of people out. So again, like my thesis for vertical software, it's not to say that vertical software can't build really big businesses. But I think a lot of great vertical software is great because it is actually going after a smaller market where you can have less competition from day one, less competition entering over time. And therefore it gives you a lot more freedom, like a lot less pressure to have to grow at any certain rate or to have to have like a build velocity that's, you know, keeping up with seven other competitors. And it affords you therefore a chance to be much more capital efficient and take a much longer term view. So.

• 12:44David Weisburd?

  Put some numbers on it. What is considered a small market in your playbook?

• 12:48Speaker 01

  I would say.

• 12:51Speaker 01

  Anything below like a, like a hundred million of SAM, you know, like or TAM, total addressable market is, is considered a.

• 13:00David Weisburd?

  So a hundred million of customers spending money in that market?

• 13:03Speaker 01

  Yeah, we're like the perceived, hey, if we acquire this entire market, we could build a hundred million dollar business. I think that's like, that is like relatively small. And for me, I would be interested in companies. Pursuing markets of that size up to 500 million.

• 13:20David Weisburd?

  Let's just go in the middle of that $250 million total market per year. A bunch of venture capitalists are going, looking around the table at different firms and they all see the same $250 million market. And they say, this can't return the fund. Double click on the rationale on why it's not as competitive.

• 13:38Speaker 01

  Exactly that. I think you would find a business, I mean, my ideal villain investment, you find a company that is expressing that early efficiency, building in annuity with the wedge product that they're selling and therefore is growing efficiently. And when you look around, you see very little competition, right? Like maybe there's one legacy incumbent and then that's it. That's great. And then the venture guy looking at that says, well, geez, you know, it's a nice business, but my opportunity cost is like enormous. And so if I put a $5 million investment in this company, like I might make a 10x, but that doesn't move the needle for me.

• 14:18David Weisburd?

  That doesn't make my fun.

• 14:20Speaker 01

  Yeah, I need to, I need to believe that I can make 150, 200x on this investment. And I hopefully with the funds, the way they're organized now is I need to believe I can not only invest that 5 million, but to really make it worth my time, I need to invest another 50 million behind that.

• 14:36David Weisburd?

  There's a minimum viable check size or company, check size per company.

• 14:42Speaker 01

  Yeah, there's a minimum check size that's in the way most funds work is like, hey, they've got a certain amount of slots. I'm going to own check size.

• 14:50David Weisburd?

  A fixed number of board seats.

• 14:52Speaker 01

  There's a fixed number of board seats and then they think about the amount that a investment can return as a percentage of a fund. And they're looking to basically with every investment they make, believe that they have a fund returner on their hand. Funds as they've gotten a lot larger, it's just much harder for them to get excited about a business where it's like, wow, that's, that's great. That's a $400 million TAM, company's growing really nicely, like whoop de, it doesn't move the needle because I'm looking for the $50 billion company that I can write that first check. And then I can write a much larger check from my growth fund and then I can do something even larger from an SPV like, and that's a very different, you know, mode of thinking and capital allocation.

• 15:36David Weisburd?

  How do you make your math work?

• 15:38Speaker 01

  Three things matter. One is fund size. I think a fund size of 150 million or less is suitable for this strategy. Because you could have a bunch of 3 million, $5 million investments where you're making a 5 to 7X. And I think that those could have like a real, like they could be needle movers for that fund. Fund size matters. Concentration matters. Like, I think we would be looking for a portfolio that's a bit unusual in the venture industry where it's 15 to 20 investments versus, I'd say, 25 to 30 or 25 to 40. And nominal pre-money matters.

• 16:17Speaker 01

  It's most liquidity in venture outside of the mega IPOs are acquisitions in the 100 million to 500 million dollar range. And so, building an investment philosophy and a strategy where we make a lot of money on those outcomes. And then if you were to reverse engineer into that, let's just say, the average outcome you're thinking about is a 200 million EV once you sell it. Therefore, what does the pre-money have to be in order to make a 5 to 15X return? And my guess is that for us, it's going to be somewhere between in 30 million pre, depending on some of the underlying characteristics of the company. And so then you might say, hey, well, Tyler, how do you find companies that have that early product market fit that you're looking for?

• 17:02Speaker 01

  Where you can sort of get them at pre-moneys that sort of make sense, you know, that are nominally on the lower end? And the answer is, well, you're looking for businesses where there's a fly in the ointment. There has to be something that is countervailing, that is uninteresting to the mainstream VC. And for me, the two things that I'm willing to take risks on are, one, the market size, and two, is the growth rate. Right? And so, market size, we discussed earlier. Growth rate, it's a longer conversation, but you know, when you look at the venture industry today, I think there was a guy, like a benchmark partner interviewed on a podcast recently where he said, hey, like these new AI companies like are growing at like 4X year over year. Like the new, it's now, venture guys always-

• 17:45David Weisburd?

  New 2X is 4X.

• 17:47Speaker 01

  I venture guys always speak in like multiples of growth rates for the first three or four years. I never understood why exactly, but it's like now it's like you gotta be 4X, 4X, and then 3X or like you mean nothing to me, right? And you look at these companies and it is incredible that can grow from like zero to 100 million in 18 months. Like it is phenomenal, right? But like I'm delighted when they say this because it means like there's this like wide swath of companies out there who are only growing at like, you know, 120% who are like completely uninteresting as a result. And so when you get those factors like, hey, they might be growing a little bit slower. And 120% is like exceptional growth in my opinion, they might be growing at like 70 to 80%. That would be fine with me too.

• 18:32Speaker 01

  They might be going after smaller teams, that's fine too. As long as the pre-money valuation makes sense and the companies are efficient and the founders and I lock arm in the ethos of compounding the business as opposed to just growing the business at the highest rate possible at all costs. We can have a very, very, you know, productive and lucrative partnership of the time.

• 18:55David Weisburd?

  Is there a different psychology with these founders that are looking to build a 2, 3, 400 million dollar company? Are they older, more experienced, less kind of in their twenties looking to become billionaires? And is there something different about these type of founders?

• 19:11Speaker 01

  I often think the founders who are willing to grow, go a little bit more slowly have been burned. Like I was actually speaking to a founder today who has this ethos of growing a bit more slowly, but also just like efficiently. And, you know, his last company ran out of money, it was just cash zero and died. The other phenotype of founder is one that's like been in the woods for a while. I've done a few angel investments as we've gotten villain off the ground. And some of these companies have been, you know, in the woods for five or six years. And they started with something and they had to pivot and they had to pivot again. So by the time they get to this product market fit that I love, like, I don't know, they've been kind of burned by the venture industry.

• 19:55Speaker 01

  It's just very hard for them to raise capital. The instincts of like survival and frugality are like in their DNA at that point.

• 20:03David Weisburd?

  And what ways is being burned like that an asset and what ways is that liability?

• 20:08Speaker 01

  I think it's an asset, right? I like to me, it's much

• 20:11David Weisburd?

  Because you could argue the opposite, which is it keeps them from making bold bets and compounding and all these other benefits. But you would argue it's an asset.

• 20:19Speaker 01

  Generally, I would say it's an asset.

• 20:21David Weisburd?

  In what ways?

• 20:22Speaker 01

  Uh, because I think the vast majority of even great businesses that fail fail because they grow too fast. There's this urgency to like, like, keep up with the Joneses, which again is like that 4X growth rate. Um, it's, it's this feeling like, hey, if we don't achieve this perceived set of numbers, like, no one's going to fund us, we're going to die, our competitors are going to overtake us. I mean, there's like this panic that sort of you see as they start, you know, walking through their mental models. And, um, I think that can lead to some really, really shitty capital allocation decisions, right? Like, most companies fail, in my opinion, in the venture landscape, because they try to grow too quickly, they try to build too much product too quickly,

• 21:03Speaker 01

  and they basically parallel process too many things that need to be done in a more sequential manner. Um, and some of this also is just like, certain markets require just more time to sort of like, break. And there's a learning curve to any business being built that just requires time. And so I actually get quite like nervous about companies that are just growing fast, whether, whether they're permitted to because they have great economics or not, they're like, there is something that like frightens me a little bit because, um, I, I think, you know, like organizational capacity can get strained to the point where things can break in a, in a, in a way that it's hard to put back the pieces. And you've seen that in the venture landscape,

• 21:47Speaker 01

  you know, we've got all these assets out there that are basically hung, right? Like from 2021, all these mega funding rounds chasing a lot of growth. And, and you could say there's probably an alter, like an alternative history where if these founders had a different mentality of just like, growing, um, I'd say taking a compounding mentality, where it's like an endurance compounding mentality, where it's not, you know, triple, triple, double, double, or 4X, 4X, 3X, but it's more, hey, I'm going to grow this business between 60 and 80% for the next seven years, or the next 12 years. And I'm just going to do it on my timeframe. But we're going to continue making progress. We're going to do it with precision and with capital efficiency.

• 22:31Speaker 01

  I suspect a lot of the founders who now have hung businesses would be in much better places.

• 22:37David Weisburd?

  It seems like there's like a dialectic here, like two opposing philosophies. One is about founder market fit. So you have like a Facebook that's literally plowing and burning billions of dollars trying to build their network effect before they even knew whether they had a business model. That was like the question for many years. And then there's a question in 2012, whether they could port their business model into mobile, they had to deal with all that. Sam Altman is another example, OpenAI just burning all this. Like people still don't know whether LLMs will have a sustainable model, but they're just going out there and doing market share. And then there's, you know, the businesses that like Qualtrics that grew and compounded over 20 years and oftentimes not in New York or San Francisco in these like, you know,

• 23:20David Weisburd?

  second tier cities where they're compounding. And maybe it's one of these industries that starts out as a $500 million TAM and it also compounds 12% per year. And suddenly in year 20, it's a $5 billion industry and they're, they have this kind of monopoly position. So both models could work, but they're certainly different personality types.

• 23:39Speaker 01

  You make a great point with Qualtrics. You look at Procore, I think that was a, you know, 20 year overnight success. You know, I think ServiceTitan was sort of under the radar building for a long period of time before it really broke out as a, as an asset that VCs and growth equity firms liked. But, you know, I think there's something about that journey that makes these businesses amazing. And for me, hypergrowth is much less exciting than seeing a business that was a kind of a slower grower that actually over time starts to see their growth accelerate. And often it's the case because like the, sort of the flywheel is working, the multi

• 24:18Speaker 01

  product strategy is working, the familiarity of the market with the product is working. They're becoming the standard. The ecosystem is converging around them and, and these create, you know, these flywheels of operational leverage where a business that was kind of sleepier, you know, growing at, you know, 70, 80%, maybe suddenly is growing at 120% at a much larger scale. And when you see those things, you gotta be like, wow, that's going to be an incredible business.

• 24:46David Weisburd?

  Sometimes the different arms of the business.

• 24:49Speaker 01

  Aren't individually that spectacular. When you put them into one system, they achieve product market fit.

• 24:56David Weisburd?

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• 25:40Speaker 01

  You bring up like, you know, Google or Facebook or OpenAI. You know, I, there's a podcast I eventually wanted to maybe do myself called like The First Five Years, which would be going back and trying to get to like the first five years of financial data of like these, you know, really amazing companies. Cause I actually think that, you know, Facebook was quite profitable early on. If I look back at like their S1, like business grew like an enormous amount through the early years. I don't know what the quality of revenue was. Obviously like Facebook had these network effects that were just incredible. And so it's a business I, I really understand and appreciate. And same with Google. I think Google actually was like really quite profitable out of the gate,

• 26:24Speaker 01

  growing at several hundred percent a year. And so there are special businesses like that. You know, OpenAI is a very different business. It hemorrhages cash to the extent that these other businesses at their scale did not. As a sort of a, someone interested in company history or economic history, it reminds me a lot more of the memory business where like the need to reinvest in the next generation model is, feels like it's important for surviving and continuing to be the best LLM out there. And I, I personally just think that's a really, it's a hard place to be. I do. Think it's an interesting study today of these businesses that are being funded that have enormous burn rates in their early years and they're growing fast.

• 27:07Speaker 01

  And the question is like, when they get to be more mature, like, how valuable are they and how defensible are they?

• 27:12David Weisburd?

  Startup history is also something I'm really interested in just how these things came about. And one of the most interesting things is this kind of three person club that Reid Hoffman, Mark Pincus and Peter Thiel had talking about social networks before Facebook. Talk about having a prepared mind. They would just talk about this. Obviously Reid Hoffman also started LinkedIn. I think Mark Pincus started a social network that ended up not getting off the ground, but they were kind of developing this thesis in real, both in real time individually and also as a group. So they had this really powerful prepared mind for when Facebook landed on their lap. They were almost waiting for the Facebook to come about versus to the rest of the world, the rest of the, you know, seven billion, seven billion people.

• 27:56David Weisburd?

  It just seemed like a totally novel, totally idiosyncratic business. They were like really ready for it.

• 28:01Speaker 01

  For Facebook, it was probably some combination of cloud computing and modern software engineering and behavioral psychology, understanding addiction and how to get users engaged that like all of these things needed to come together to make a network, you know, a network effect that we understand it as now, you know, viable.

• 28:21David Weisburd?

  And before Villain, you were at Menlo Ventures, storied venture capital franchise, best known for Uber and I'm sure many other Deca unicorns. When you were inside Menlo, how much more powerful is it to be around a group of really smart people? Kind of workshopping these ideas versus I have this thesis. How much did having a group help, help you formulate your, your thinking?

• 28:46Speaker 01

  Certainly in terms of blind spots, I think, you know, groups can be helpful to sort of seeing something from an angle where, you know, you're, you're, you didn't see it or you're not being intellectually honest enough with yourself about that potential issue or that potential upside that you just like haven't been able to accept. And so I think for that reason, like having. People around who you can talk to about investments and get their feedback, people you trust is important and I definitely benefited from that during my time.

• 29:19David Weisburd?

  And now as a solo GP, how do you build that around you so that you have people to, you know, riff with and to keep you honest in your thesis?

• 29:28Speaker 01

  There's a very small set of people out there who have similar mental models as I do about these types of companies. And there are other small little firms and, you know, I think you can be very collegial. Your partnership almost becomes this extended group of people who, you know, you're just happy to talk to about investment opportunities. You're happy to have them look at investments and, you know, maybe that changes. But I think when it's a bunch of small firms looking at stuff like you can be in a situation where you can like, both invest in a company.

• 30:01David Weisburd?

  The incentives are aligned for you guys to both co-invest versus one firm has to take the.

• 30:05Speaker 01

  Exactly.

• 30:06David Weisburd?

  So conscious about not having mediocre or poor thought partners. Do you think that information could negatively affect you as well?

• 30:14Speaker 01

  Any information can negatively affect you. I think you, you know, thought partners are like this repeat game. You have, you, you work with them on something and you can decide after that you don't want to, like you just discounted their thoughts or they might impress you. In which case like you reweight them even higher sort of in your estimates. I feel like I've been fortunate to surround myself and be part of firms where there's a bunch of really intelligent people. And so I've just, I've figured out the people who I like. And when you talk to them over the course of several months, looking at several opportunities, kind of riffing, like you get a sense of like, do they, do they provide some, some insight that, that really like helps your thinking?

• 30:57David Weisburd?

  And part of that sense is you know what excellence looks like, what a tier one VC looks like. And that's the standard that you hold your, your network to.

• 31:04Speaker 01

  Whether it's a tier one VC, I, you know, my brother is one of the smartest people I know. He founded a, it's now a hedge fund called CAS Partners. Like I've learned a lot from him over the years, just mental models around endurance. He invested companies at much later stages than I do, but like, I think our thinking is similar. Like what causes these businesses to like continue to compound for many years to come? Like what's the, what's the advantage? It's both within. Top tier firms like Menlo and like Excel, it's within a broader network of people who invest in different asset classes, but can bring unique insights. It's from reading. I mean, I think reading is like a wonderful place to find mental models, like competition, demystified, people like Peter Thiel, like, and you might have your own variant on it.

• 31:48Speaker 01

  Like Peter Thiel is thinking about how do I build monopolistic businesses, like, you know, and he has a different substrate that he can work with. He's like, I've got the Elon Musk empire, the Peter, the, the founder's fund franchise. Like, he has a, advantages compared to me that allow him to invest in incredible businesses that look very different, but can achieve similar economic returns. For me, I'm, I'm taking a more off the beaten path approach. And, but again, I think our North Star is like, how do you find businesses that can, that can persist?

• 32:21David Weisburd?

  When you look at tier one funds, is it follow, kind of FOMO and herd behavior? Or is it more just rational, rationally following incentives? What percentage is herd behavior versus rational first principles thinking?

• 32:38Speaker 01

  Uh, I think a lot of it is herd behavior around certain themes and founder personas. And then again, kind of coalescing around certain metrics that would basically qualify or disqualify a company as being. And sometimes I think some PCs like, don't understand why those metrics are what they are. You're like, well, this company needs to be growing at 400% year over year. Okay. Why? Or this company needs to have a 3X LTV CAC. Okay. That made sense, but, but why? Like, what's the underpinnings of that from an economic standpoint?

• 33:15David Weisburd?

  And are all the 3X LTV CAC companies the same?

• 33:18Speaker 01

  Are they same? Or, or is, you know, a 3X LTV CAC company where the company has a nine month lifetime value with its customer different from one that has a multi-year, you know, customer relationship? Are they the same or different? The answer is very different. But like, I, I don't, you know, I think there are a lot of very smart PCs. I think there are, like any industry, I think there's a wide variety of thinkers out there.

• 33:39David Weisburd?

  One of the things I really think about in asset management as a whole, is there are these incentives for herd behavior in that if everybody goes down, if every long only fund goes down by 5% and you're down by 5%, the LPs are going to re-up. But if you're down and everybody else is up, even if the last three years you were up, that's going to put pressure not only on the fun to re-up, but you're a champion within that LP having to vouch for you. So there's this kind of rational herd behavior where you could be safe in a losing strategy as long as the entire industry is going in that direction.

• 34:12Speaker 01

  The way LPs think obviously puts pressure on GP thinking.

• 34:18David Weisburd?

  There's some really interesting dynamics that I think people don't fully appreciate unless they've been in that seat.

• 34:24Speaker 01

  Yeah. Sometimes I question it. I think that, for instance, people give me feedback that, okay, hey, 15 to 20 investments, that's just not a lot of diversification. I'm like, well, you also have 15 to 20 managers. You're diversified at the GP level. So then, why do you want so much diversification at the individual investment level? I don't always get great answers. I just think things are done the way they're done, and it's better to have okay returns with no obvious black eyes than great returns. And so I think that thinking can permeate through the industry.

• 35:04David Weisburd?

  Part of the art of being a GP is knowing which rules to follow and which rules to break, knowing which hills to die on, and being very conscious about that. And sometimes you could even tell people, I know everybody wants this, this is why I'm doing this. And a lot of top LPs will accept that. But there's only so many variations to their business model they could also accept. One of your paradoxical strategies is that your companies will be bought by PE, growth equity incumbents. Tell me about that. Is that a fundamentally different business that gets bought by strategic M&A and IPOs?

• 35:37Speaker 01

  Vertical software, when these companies get to a certain scale, and by that I mean 10 to 15 million of ARR, where they can basically float, they can be close to profitability or profitable, depending on how fast they want to grow, they become very attractive assets to a larger universe than what I think is available to any random venture-backed company. Because, again, vertical software companies, they build these annuities, they have these very sticky customer bases.

• 36:11Speaker 01

  They're highly sought after by private equity firms or growth equity firms. And so they become, those become an additional set of buyers for the companies that we'll be investing in. And then, you know, related to that, there's companies like Constellation Software, who like their entire business is buying vertical software companies. And so it's not that I don't want to build businesses that incumbents don't want to buy. Like when I look at my investments at Menlo and the acquisitions that occurred, Fieldwire was bought by Hilton, an incumbent in the construction space. India was bought by Applied, again, another incumbent in the insurance space. Calstone was bought by Carlyle, you know, Flywire went public, Carta, I think will go public.

• 36:54Speaker 01

  And so there is more of a diversity. I just think that at some scale, vertical software companies become great assets. And that's just not the case for most venture-backed companies. And so I think there's just better liquidity characteristics for these businesses. So we're not going to orient selling these companies to PE just for the sake of it. I just prefer that there are additional off-ramps. The vast majority of M&A in the venture market is still 1 to 500 million, and I want to play to the fat part of that curve. And so that includes all of the potential liquidity participants.

• 37:27David Weisburd?

  Does that make your fund kind of a mix of VC and PE, almost like a combination of both?

• 37:33Speaker 01

  Uh, yes. I think it's kind of VC and like micro-growth equity. I think the distinction is, you know, I think a lot of PE firms, when they buy businesses, like that's the end of innovation or, you know, it's a lot about cost reduction and rationalization. Like I want to invest in businesses that, you know, are pushing products. I want to invest in product-centric founders who have just a long timeline ahead of them to build and compound their businesses at some reasonably high rate. And I think that's a different ethos than what like PE would be bringing to the table for most of these assets.

• 38:14Speaker 01

  I'm on the boards of several companies now in, that are vertical software businesses that have, have grown to be much larger than I probably ever anticipated they could be. And so that, that is a core tenet of this thesis, which is that like, I think that one of the hardest things, one of the areas where VCs make the most mistake, most mistakes around actually like saying no to businesses that end up being very successful, is saying no to businesses that at their earlier stages, look like they're in nicheier markets or smaller markets, and they turn them down for market size, but the businesses are working. And eventually, as they scale, they discover new areas to expand into.

• 38:58Speaker 01

  For me, like, for instance, when I was at Excel, you know, sources business called Peer Transfer at the time, that turned into a company called Flywire. And I remember, like, this was a company that sold a reconciliation platform to college universities. Actually, they gave it away for free, but it allowed them to monetize international student tuition payments. So the value proposition was, hey, really hard for these college universities to manage international student payments, and also very expensive for students to send these payments through their traditional banking networks. So you kind of solve the problem on both sides, and you actually monetize through FX. And we did it as like a Series A investment with Spark at the time. And I remember the company went out to raise like a Series B,

• 39:43Speaker 01

  and like, everyone turned down this company, except for-

• 39:47David Weisburd?

  Small town.

• 39:48Speaker 01

  Small town. It was like, hey, this could be 150, 200 million dollars.

• 39:51David Weisburd?

  So even after your investment, several years later, it's too small even then?

• 39:54Speaker 01

  Yeah. It's still a small business, but it's working. Small, but working, right? And so then-

• 40:00David Weisburd?

  Which might as well be dead for VCs.

• 40:01Speaker 01

  Might as well be dead for some VCs. One of the partners at Bain ended up funding it at the Series B. And, you know, the company eventually ended up like compounding to be much larger than anyone imagined, including myself. And I think it's a 500 million dollar revenue business today. At one point, it was a 5 billion dollar market cap. It's, I think, closer to like 1.3, which is still much larger than 150 million in terms of enterprise value. And I remember my colleague at the time, Adam Valken, he was talking to the Bain partner, and this was after the company IPO'd. He's like, "Did you know, did you have like any sense that this company was going to be like a multi-billion dollar outcome?"

• 40:41Speaker 01

  He said, no, like I underwrote it to a Forex and I was like completely surprised on the upside. And in my career, like I've just, I've seen that time and time again, like whether it's, you know, Carta, which today is, you know, close to a $500 million business, starting in the small dinky market of cap table management, or it's something like Qualia, which is like a really like amazing business in title software, where ostensibly the core TAM that they were going after was, you know, 200 to 300 million. Or even Everlaw, which today is an amazing business in e-discovery where like historically, you know, the size of e-discovery outcomes was quite tapped, or I should say quite limited.

• 41:23Speaker 01

  There is a history of VCs, when they say no to deals, they say no to companies that are growing really nicely, have really strong founders with great product DNA, and where the blemish is the market size. And I think what really people should be thinking about is how receptive is a market to the product? Like if it's a small market, but people are buying, like that's something worth investigating.

• 41:47David Weisburd?

  What are some patterns across those four companies?

• 41:49Speaker 01

  You get to a certain size and credibility where like you start to see adjacencies. Whether it's like an adjacent constituent in the ecosystem that you can sell products to, because the data that you're harvesting for your core product is relevant to them, or it's just other products within the broader stack of the constituency that you're selling to, just it becomes like bigger and bigger and bigger. People could challenge me on this, but I have never found a business that has been like, well, I ran out of market size. Like I just stopped every single customer and we ran out of market like and could never figure anything out again. It's, that is not what happens. Like companies stop growing.

• 42:30Speaker 01

  They may start to saturate their market, but they typically stop growing because they, their ability to build new products, you know, declines. And so for me, like if we're going to go after, if we're going to invest in a company that ends up being the size of Carta, which now has four or five products, or the size of, you know, Qualia, which has, you know, several different products. Like it is a it is a long term commitment to building product. And I don't necessarily think it needs to be in some like hyperbolic. You know, eight year period, it could be over a longer period of time. And as long as you have a really efficient business, it affords you that time to build that product. And so never underestimate a business that's working and a founder who builds.

• 43:14Speaker 01

  While a business is working to unlock new opportunity, it's it happens. It's almost like a belief system, but it's magic.

• 43:20David Weisburd?

  I would add one other factor that is ability to fundraise and storytell. Henry Ward has done a phenomenal job telling the story of Karta and connecting all the threads together into Karta's competitive advantage. But other founders as well are able to sell past their current vision. Good fundraising is something about selling the future, but the ability to sell the future is what what makes the best fundraisers the best.

• 43:43Speaker 01

  I agree, especially in the in the venture context that that is.

• 43:46David Weisburd?

  What are those components that allows you to grow to 50 million, saturate the market now grow to 500 million? What are the like double click on that?

• 43:54Speaker 01

  The number one thing is you have to become dominant in a certain vertical. Like the size doesn't really matter, but you have to become dominant. That sort of dominance allows you, you know, affords you a book of business like ARR. That gives you just a lot of cash running through the company and.

• 44:13David Weisburd?

  So you have resources.

• 44:14Speaker 01

  You have, so then you can sustain.

• 44:15David Weisburd?

  What about team, you have built a team that executes on a big factor?

• 44:19Speaker 01

  Team is very important. You know, I companies can fail because there are, there's a deficit of of quality hires and an ability to attract talent. But I think people can mistake like hiring lots of people for like hiring a great.

• 44:36David Weisburd?

  Quality versus quality.

• 44:38Speaker 01

  Like you can have a much smaller team that that really kind of. Does incredible things over time. And so I think it's about keeping the bar high, especially for the businesses that I'm going to be funding, like in especially in the earlier days, it's like they've got to approach the problem from, hey, everyone that we hire is high, high impact, but we're not hiring a lot of them.

• 44:59David Weisburd?

  Yeah. So as your company, as you invest in these companies and they they saturate the market, should they be taking small, small shots on goal for their next market? How do they operationalize finding the second market?

• 45:11Speaker 01

  Often, I think it's very continuous conversations with customers and with, you know, counterparties to customers.

• 45:20David Weisburd?

  Seeing where the market is pulling.

• 45:22Speaker 01

  Yeah, yeah.

• 45:22David Weisburd?

  I wish you'd have this product.

• 45:24Speaker 01

  Yeah, it's like, oh, wow. I remember India was ultimately sold to Applied, but it was it was kind of an interesting story. Like, they started out as this product that sat next to the AMS system that enabled accords data to be collected more efficiently from customers of commercial insurance agents, you know, brokerages. And they built this, like, this was a wedge product, right? Like, like AMS systems are, their data architecture, like, they are not structured to collect houses data, do anything with it. And they didn't have the front end workflows. And so this is what India built and got this really nice flywheel going, building, you know, like, basically, a nice book of ARR with with insurance

• 46:09Speaker 01

  agencies. Lo and behold, you know, as we're starting to get to a certain scale and thinking about the next products, obviously, there's a bunch of other stuff we wanted to sell into the insurance agency. But, you know, these insurance companies came knocking on our door and said, well, look, you have all of this accords data that we essentially like, take from you in a PDF and then rekey it into our underwriting system so that we can like, you know, create like a, like a policy or a quote for, for that customer. Like, can you sell us an API and we'll just consume the data that way?

• 46:41David Weisburd?

  Another way to look at it is what is a company? It's mostly a brand promise. So I go to Tyler and he delivers this to me. Let's say you do, you do laundry and I come to you and you, you do laundry so well. And I'm like, oh, man, I wish you would do dry cleaning. Why don't you do dry cleaning? And I could start selling you for many months, like, this is the market. I could bring my friends. The customer actually driving the supplier to start something is is even next level to product market fit.

• 47:08Speaker 01

  Hey, if you built this, like, I would love this, this other product sucks, like, we've got this huge problem. And then it's a question of sequencing. Like, when you've got an empathetic founder, who's product-driven and listening to their customers, and has good instincts themselves, then it's a question of prioritization. All right, there's these five different things we could build. Maybe three of them are for the existing customers. So, that's an easier sell, because you're selling to that existing customer you already have a relationship with. Oh, two are to their counterparty that, like, you know, we could, like, get some sort of network effect selling to them through our initial customer. There's some sort of forcing function, like, we should consider that.

• 47:50Speaker 01

  And you just have to think about, like, okay, well, how scaled is our business? How much volatility is in our core business versus, you know, like, how many things do we need to solve in our core before we start to think about what's next? That's always the question. And then, once you feel like you can do something next, it's, all right, of these five different things, you know, what is the thing that we are most excited about? Either in terms of, like, confidence and it's succeeding, or, hey, it really opens up this big new opportunity for us.

• 48:20David Weisburd?

  And you used a very specific term, sequencing, which is not necessarily shot selection. I have these five industries, I'm gonna pick one. I might do three of these five, but here's the exact order to do it. Because if I do it this way, I'll get more profit, which will allow me to hire and solve these two problems faster. Versus if I go this way, it's gonna take 10 years to build a profitable business, and then those two opportunities might not be there. So it's also like, the, literally, the sequence, not necessarily which business do I want to go to. And I think a lot of times, people confuse those two. In asset management, for example, you know exactly what your business will look like at a trillion AUM. There's five of these companies. They'll have real estate, private equity, maybe some venture capital, some secondaries. So, it's not actually, what will your business look like?

• 49:03David Weisburd?

  It's what is the best and most efficient way to get there? It's kind of like this maze. One thing that I always kind of look down on is these founders, like a Naval Ravikant Thauzen, and he's like, "I make nine months to make a big decision." And I always egotistically thought, well, he's just being... He's just not proactive enough. He doesn't have the courage to go out and act like, why doesn't he just go do something? But oftentimes, these are one-way doors. You come in and you're now committed to this business for five, maybe 10 years. Spending nine months could be very efficient to make that decision versus to use Jeff Bezos' analogy, it's two-way doors. You could go in and go out. Those, maybe you do act quicker. So there is a lot of wisdom to knowing when you do spend a lot of time deciding the next, the next stage of the business.

• 49:48David Weisburd?

  If you could go back 17 years ago, when you first started in venture in 2008, what would be your advice to younger Tyler? What nugget of advice would you give him in order to accelerate his career?

• 50:10Speaker 01

  That's a great question. You know, you stumped me.

• 50:15David Weisburd?

  I could ask myself that question. I just started thinking about it. The number one concept I would teach myself is this concept of ignorance debt, which is when you start something, there's a lot that you don't know about it. And you have to methodically go out to seek the knowledge to make at least the known unknowns. If you can make the unknown unknowns into known unknowns, you're going to progress much faster than if they remain unknown unknowns. And I think the way to do that is just to get the right peer group and the right mentor group around you to accelerate your, your knowledge. And then I've tried to teach myself how to do that because that's also, you have to learn those skillsets. But, but basically trying to pay down my ignorance debt as quickly as possible. That's a term coined by Alex from Ozy.

• 51:00Speaker 01

  I like that. I, you know, you flummox me. The Thelians are like an interesting bunch. Like I feel, I feel like it, you know.

• 51:11Speaker 01

  Sort of being close to like that kind of founders fund kind of group would have been interesting like there's just I clearly take a much more conservative you know almost growth equity approach to venture building but there's there's very clearly a you know a classic venture model but like kind of more the risk frontier model and not to say that I'd be good at it I just I think it's fascinating you know what he's able to accomplish so

• 51:41David Weisburd?

  The TL fellowship and that whole ecosystem is really interesting

• 51:44Speaker 01

  It's very powerful it's like it's a very powerful interesting ecosystem I think it's a very like you know their thinking is extremely first principles based and and and it's quite foreign to me so I'm not saying I I would want to like do anything differently than I do today or think necessarily differently I like the mental models that I've accrued over time but I'm impressed with you know they've been able to build

• 52:09David Weisburd?

  How do people follow you and stay up to date with everything that you're working on?

• 52:14Speaker 01

  If you're interested in getting in touch with me either you know through LinkedIn or Tyler at Bill and Capital dot com

• 52:19David Weisburd?

  Awesome thanks thanks Tyler for sitting down

• 52:21Speaker 01

  It was a real pleasure