Pod Insights The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch 20VC: Foundation Models are the Fastest Depreciating Asset in History, Lina Kahn is a Threat to American Capitalism, PE is Not Coming to Save the M&A Market & How China Could Overtake the US in the AI Race with Michael Eisenberg About this episode Michael Eisenberg is a Co-Founder and General Partner @ Aleph, one of Israel's leading venture firms with a portfolio including the likes of Wix, Lemonade, Empathy, Honeybook and more. Before leading Aleph, Michael was a General Partner @ Benchmark. In Today's Show with Michael Eisenberg We Discuss: 1. The State of AI Investing: Why does Michael believe that "foundation models are the fastest depreciating asset in history"? Are we in an AI bubble today? As an investor, what is the right way to approach this market? Who will be the biggest losers in this AI investing phase? Where will the biggest value accrual be? What lessons does Michael have from the dot com for this? 2. Where Is the Liquidity Coming From? Why does Michael believe that it is BS that private equity will come in and buy a load of software companies and be the primary exit destination? Why does Michael believe that IPO windows are always open? Should founders go out now? What is good enough revenue numbers to go out into the public markets? Why does Michael believe that Lina Kahn is a threat to capitalism? How does Michael predict the next 12-24 months for the M&A market? 3. AI as a Weapon: Who Wins: China or the US: Does Michael agree with the notion that China is 2 years behind the US in AI development? Does Michael agree that AI could be a more dangerous weapon in wars than nuclear weapons? Why does Michael suggest that for all founders in Europe, they should leave? US, China, Israel, Europe, how do they rank for innovating around data regulation for AI? 4. Venture 101: Reserves, Selling Positions and Fund Dying: Why does Michael only want to do reserves into his middle-performing companies? What framework does Michael use to determine whether he should sell a position? Which funds will be the first to die in this next wave of venture? Why does Michael not do sourcing anymore? Where is he weakest in venture? Why does Michael believe that no board meeting needs to be over 45 mins?
Transcript 12,827 words · 4 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Speaker 00 Foundation models are the fastest appreciating asset in history. Why invest in a business where the assets walk out at night? If I'm in Europe and I'm starting a company, I would get out. Lena Connaught said openly, he's, I think, a threat to American capitalism. Whether Biden or Trump gets elected, she needs to go. I don't buy that the IPO window is closed. The IPO window is wide open. The question is, what's the price you're willing to take?
0:19 Harry Stebbings? Welcome back to 20 VC with me, Harry Stebbings. And what a show we have for you today. Joining me is a dear friend, LP in 20 VC and one of the best, Michael Eisenberg. Now, Michael is a co-founder and general partner at Aleph, one of Israel's leading venture firms with a portfolio including the likes of Wix, Lemonade, Empathy, HoneyBook and more. And before leading Aleph, Michael was a general partner at the world renowned Benchmark. But before we dive in, I want to talk about Cooley, the global law firm built around startups and venture capital. Since forming the first venture fund in Silicon Valley, Cooley has formed more venture capital funds than any other law firm in the world. With 60-plus years working with VCs, they help VCs form and manage funds, make investments
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3:01 Speaker 02 You have now arrived at your destination.
3:03 Harry Stebbings? Michael, I'm so excited. Dude, we've been friends for years and this is the first time that we get to do this in person. So thank you for joining me.
3:09 Speaker 00 Thank you for having me. The first time we get to do the podcast in person, but not the first time we meet.
3:13 Harry Stebbings? No, no, no, no, no. First time podcast in person. But you know, it's so funny. I'm sure you find this actually. But I was saying the other day on Twitter that actually it makes such a difference doing in-person shows.
3:23 Speaker 00 I totally agree.
3:23 Harry Stebbings? Really, for me, it's game changer.
3:25 Speaker 00 Thank you for having me.
3:25 Harry Stebbings? Not at all, but I want to dive straight in because it seems like we're in this kind of bizarre AI bubble now. We have one side of the table that says, no, this is the most transformational technology that we've seen in 20 years. And we have another side of the table that says this is completely nuts. The valuations are crazy. The amount of cash that's being burnt is crazy. This is peak. How do you just think about that from a starting point before we do a comparison?
3:46 Speaker 00 I think one of the hardest things to do in the venture business is hold, and in life, by the way, is to hold two truths in your head at the same time. I think both of those things are true. This is the most transformational technology I think I will ever see in my lifetime. And at the same time, there is, like happens with many transformational technologies, it's an incredible gold rush that brings in a lot of people. Both these things are true. You know, when the internet came on and I was starting my venture career, this is in 1995. It was incredible. I mentioned to you before we came on air, the first deal I did was called Picture Vision. And it was an online photo sharing when there were still cameras with film and negatives. You had to actually scan the negatives in order to send the pictures. You upload it, it looked like paint drying. Then there was pets.com and pets.com.com and pets.com.com.com because there's an incredible gold rush.
4:30 Speaker 00 But the internet, eBay, Amazon, et cetera, turned out to be incredible companies. And I think the same will be true about AI, which is, by the way, a giant bucket that we need to kind of break apart. You know, right after the dot com thing, people have forgotten, but there was like a fiber optic craze. Everyone's forgotten it because it's called the dot com crash. But there was a fiber optic equipment and infrastructure craze. And we laid a ton of fiber optic cables and it was a bubble and the stocks went crazy. But we live off that infrastructure today and that's what's made the current moment possible. Same thing happened, you know, Cisco bought, blanking on the name of the company, for $6 billion of the fiber optic routing space in, I think, 2001. Then that bubble burst and, you know, it took a bunch of years to kind of find our footing again. So, yes, AI is the most transformational technology I think I'll ever see in my lifetime. True.
5:15 Speaker 00 It's also true that there's a massive financial gold rush going on and what turns into a bubble. True. What's also true is those bubbles create the infrastructure that we need going forward and that's also true. So a lot of people are going to lose a lot of money during this, like a lot of money. And some foundational companies and technologies will be built.
5:33 Harry Stebbings? Who are those people who lose a lot of money? I'm not asking for the names of those people, but what sort of styles, what behaviors, what categories is the ones that will lead to that loss versus the value creation?
5:42 Speaker 00 Let's start with a non-obvious point, which is that there's a lot of LPs with a lot of exposure to a lot of the same kind of companies through multiple different funds. And they think they have portfolio diversification across a significant number of venture capital funds, but everybody's piled into the same trend and in many cases piled into the same company.
6:00 Harry Stebbings? Do you think LPs are aware of that?
6:01 Speaker 00 I don't know. I think the best ones probably are and others probably aren't. There's a second kind of category, which I call logo chasing. This happens in every one of these cycles where I gotta be in the hot one. There could be five or six or seven hot ones and I need to have that logo. Why? Because I want to tell people I'm in OpenAI, I'm in Character AI, I'm in all these things. Then I think there's a third category of people who think you can replicate a model that exists in one geography and make it in another geography and it's going to work to the same scale and they pay up a high price, but it doesn't work in those geographies to the same scale. I think that's kind of a third category of people. And then I think it's important to say, you know, our mutual friend Gavin Baker of Atreides has this line, which I completely agree with, that foundation models are the fastest appreciating asset in history. I think that is absolutely true.
6:46 Speaker 00 I was talking to our founder of Seeking Alpha, which is a company, by the way, I did 19 years ago on Benchmark and I'm still on the board of. He made a super interesting observation that financials or stock markets, which is a minute to minute update business or set of data, doesn't do well with a lot of these training models. So you can predict like a lot of things and even write an analyst report, but it doesn't matter because the numbers are off because they changed two minutes ago. And I think how we deal with also the refreshing of information, which is getting to a higher velocity, specifically in areas like financial and stocks, but you know, that's going to be another area.
7:18 Harry Stebbings? So we actually just released a show today with Aravind, the founder of Perplexity.
7:22 Speaker 00 Yeah.
7:22 Harry Stebbings? And I said to him, you know, about the depreciating asset that is these models and what that means for their aligned price. And he said, you don't get it. The price is actually aligned to the teams that are able to bring these models together. That is where the value in these companies are. That is why OpenAI is worth $90 billion. It's not the model itself, it's the collection of specific people with specific skills that are able to bring them together that is worth the value.
7:46 Speaker 00 Perplexity is my favorite app. It's on the home screen of my phone and still, last I checked, indentured servitude was outlawed in the United States. It's like what Bill Gates's father said to him, that everyone's forgotten, why invest in a business where the assets walk out at night? It's true that this is a unique talent business, but if you don't have a lasting kind of asset, and I do believe that software in that case of Microsoft was a lasting asset, the data is not. And the models, as we're starting to see in various, where people are walking out the door and some of them didn't work, right? There was Mustafa's company that was picked apart for its bones and flesh by Microsoft and a very, very elegant exit. Super. Elegant and I think we'll see more of those. But I don't buy that five, six, seven, eight, nine, 10 of these are going to work. It's just not true financially. It's not true.
8:30 Harry Stebbings? I think that you're going to see all the large cloud providers, Google, Amazon, you name it. Essentially say, hey, we need to acquire the foundation models. You'll go here's the smaller ones who can be acquired. And then you're going to see a battle for the crown between Anthropic and OpenAI. And so large cloud providers acquire kind of smaller providers. And you have a battle there because they're too big to be acquired. Do you agree with that summary?
8:51 Speaker 00 I think about it a little differently, which is where do people who use AI start their day? It's a little bit like the Google question. Because I think as you kind of play this forward, you're going to see a whole series of agents. Like I'm not going to go to the New York Times dot com to read it. I'm going to go to my AI screen and say, fetch me the articles that interest me from the New York Times today. And something that, you know, entertains me or is different or something I gotta know. I think where people start their day is what's important. And then there'll be kind of an underlying layer that gets access via APIs, which feels like Anthropic is is a head on right now, which will service a lot of these companies. And a lot of this will be built into what you talked about, the hyperscaler.
9:29 Harry Stebbings? Do you think these are even businesses though for venture? They are so cash consumptive. We also have irrational financial buyers and investors who are obviously large corporates, who have different motives to venture investors. Do you think foundation models are even an asset class that venture investors can make money in?
9:45 Speaker 00 Yes, I don't think we should think about anything in the venture or startup business as an asset class. There are asset classes out there like commercial real estate. You can make money in a class. The venture business is completely sui generis. It's not a class. There is a small number of people in this craft who make money. And there's a small number of startups, you know. The S and P 500 has kept going up on the back of four companies who are venture backed. And these are incredible generational companies that have pushed forward. The rest of them are kind of trailing behind. And we just need to focus on the question of are all of these just incredible companies that will land their themselves into some index and some fortune, some S and P 500 that works? I think the answer is no.
10:29 Speaker 00 And so this is not a class of companies, foundation models. There are one or two companies in there that will make their venture investors a lot of money. And the rest of them will cost their LPs and GPs a lot of money. It's just life. It's what it is in this business.
10:44 Harry Stebbings? Do you just want to break down then, when you look at AI, you said like we put it in a bucket. How should we break down that bucket? And how do you break down that bucket when you think about investing in it today?
10:52 Speaker 00 You know, we should back up one step, which is AI, AI, AI. The real moment is the LLM moment, which is AI has been around for a while. Like in 2013, we invested in a company called Winward, which is now traded in London, which does maritime AI. That's just since 2013. 2015, I invested in Lemonade, which was AI for insurance. We said bots, not brokers before bots were fancy. What's happened the last two years or so is the emergence of the LLM, which is yet another leg up, a different way to kind of prosecute AI. AI itself is not new. When you think about that for a second, the bucket we look at, we invest only in Israel. We asked, can Israel do foundation models? We said no. And we've said that for a very long time. Why? Because a lot of this comes out of academia, it comes out of a lot of these very large companies.
11:37 Speaker 00 We didn't think there was the talent density in Israel specifically for foundation models. Because a lot of the Israeli technology comes out of the military and not academia. You know, why is France so good all of a sudden at AI? Because of academia. What we said was, what we want to do is applied AI. And what we want to do is kind of full stack streaming through the system of AI.
11:57 Harry Stebbings? How do you think about industries which are ripe for AI to be fully efficient in terms of every process from start to finish? Or as much as possible versus those that are not actually and cannot be verticalized in that way?
12:09 Speaker 00 I don't know the answer to the question.
12:10 Harry Stebbings? That's the first time anyone said that on 20VC.
12:15 Speaker 00 These are a modest bunch.
12:17 Harry Stebbings? Well, let me tell you, Harry.
12:19 Speaker 00 So what's what's an area that I think there can be efficiencies in? Places where there's usually amount of paper processes, where people are overburdened. But it's compressible into a bunch of short workflows that you can kind of use AI to do right now. But I think kind of more broadly, there used to be nuclear countries and non-nuclear countries. Now there are going to be AI countries and non-AI countries. And the same way, there's going to be AI companies and non-AI companies. And I think what's going to be shocking about this, that's not like the internet, is it's going to be harder for legacy companies to catch up to AI companies, which is different from the internet. You could kind of keep your retail business and still do e-commerce. You could kind of, in the early days in the 90s, we had this thing called the Intranet,
13:00 Speaker 00 which is how Fortune 500 or Fortune 5000 companies embrace the internet into their companies. They used the internet and they got better at customer service and they digitized. AI is different. If your data is not set up right, you're just not going to get there. And I listened to Warren Buffett say about his insurance businesses that they thought they had 60 different databases. They found out, I can't remember if the number was, they had 600 or 6,000 different databases. They talked to each other. It's like, good luck. When I heard that, you know, I said, we should hold our lemonade for a long time.
13:27 Harry Stebbings? Can I ask you, when you think about value accruing in the stack, I think what I worry about with a lot of them is customer service AI, SDR for sales teams AI. There is so many competitors in very specific niches.
13:41 Speaker 00 That's not a specific niche, by the way. Those are classic areas where software has done work. There was Siebel, there was Salesforce.com, there was Zendesk, there was, those are classic areas where people run to first. The more interesting places to invest, not to overuse Howard Marx's four quadrants of non-consensus right, is to look for kind of out there things that it's hard for people to compete in because you have specific domain knowledge that other people don't have.
14:04 Harry Stebbings? So I really don't like competitive markets when I invest. I find that you have really challenging times in terms of product marketing. You have higher CACs, you have lower retention rates, higher churns, you're all competing on the same channels. Do you agree with me or do you take the view that no, competitive markets are competitive because they are where big markets are?
14:22 Speaker 00 I'm in the Harris Dabings camp. God.
14:24 Harry Stebbings? We would edit it out if you want.
14:28 Speaker 00 On the one hand, I never think about competition because I don't think that's what undoes companies. Bad execution undoes companies. At the same token, I prefer actually market education. I prefer these completely uncharted spaces. A few examples, we just backed a AI to synthetic biology and chemistry rocket fuel company. And you go, rocket fuel? So the one is very competitive. A lot of people provide rocket fuel, but there's nobody who provides synthetically engineered rocket fuel from the bottom up. You know, that's at 1/12 of the cost. And we may succeed, we may fail, I don't know. There's a lot of market education that will come to saying, hey, we're not going to take oil and refine it. Instead, we're going to build it from the bottom up. It's going to take a lot of market education to do that, but I think that's okay. I much prefer that.
15:09 Harry Stebbings? How do you size that in portfolio? So it's like that is inherently more risky play than a SaaS business or a fintech business, I would argue. How do you size that in a portfolio?
15:18 Speaker 00 Oh, so I don't think it's a more risky play than a SaaS thing. I'll argue that SaaS is way more risky. One, because of the competition and price erosion. We have a false sense of security from models. Like, I can pull the model forward. I gave this presentation at our annual meeting a few years ago, which I said, you know, we've hit peak SaaS. Anytime you can kind of stamp out MBAs from universities, you can pull the model forward, that's not going to be a venture business. When I hear people talking about some of the growth funds, oh, software is like a bond, you know, with a higher yield, just no. That's not the venture business. I gave a cringe.
15:50 Harry Stebbings? Yeah, I just go, geez, that's like a bond. Oh.
15:54 Speaker 00 You have tons of growth funds and even PE funds thinking that they can predict the future revenue. So, in some cases, you can. It's not, it's not that you can't. But doing that as a strategy, I think it's both inherently risky and non-reminiscent because it's really, really, really tough to be unique. When I first joined Benchmark in 2005, I had some time on my hands to have a portfolio. So, I did this little piece of research to try to figure out why do companies get premium multiples? The obvious answer is high growth. But it wasn't always the case. And the thing I discovered, I kind of called and interviewed at the time, sell-side analysts on Wall Street, who had a more prominent place in the world in those days. And in all my research, I came up with the following insight, which is, companies get premium multiples when it's the only way to play a future trend in the public markets.
16:37 Speaker 00 If I think the world is going towards X, AI, whatever it is, and I'm the first AI company, the only AI in a given market, I'm going to get a premium multiple because it's the only way public investors can play that trend that they want to play.
16:47 Harry Stebbings? This is Nvidia, huh?
16:49 Speaker 00 I think this is big-time Nvidia. Being unique actually has real value. Again, provided that you have the growth and, you know, the gross profits, et cetera. You can't ignore that stuff. But all things being equal, if I have multiple ways to play a market, you'll get a lower multiple. If I have a single way to play a market evolution, I'll get a premium multiple.
17:07 Harry Stebbings? I actually think about this a lot, too. And I'm just like looking at, you know, I've got the founder of Clavio on the show tonight, which is a $7 billion company, you know, doing $750 million a year in revenue, growing 60% year on year.
17:17 Speaker 00 It's quite remarkable because most public companies today in the software space are going ten to twenty percent, which is part of my peak SaaS theory.
17:23 Harry Stebbings? It's absolutely remarkable, but you know, the multiple on it is not great. I think the multiple is like a six X or a seven X. And then I look at an Atlassian, which is trading at a twelve X, and it's not inherently better business. I'm just trying to figure out the difference between the two and to your point there, like why one is premium and one is not.
17:41 Speaker 00 But I would assume that if you want to play kind of developer growth, which I think is a real trend, that's why you want to own Atlassian. There are more developers in the world today. It'll be interesting to see what happens with AI, but I think in general, horizontal SaaS processes are going to be disrupted by AI. We just actually did a portfolio review. We looked at like with the cat, we categorized our investments. Of the last seventeen investments we made at Olive, one was a SaaS company.
18:04 Harry Stebbings? Sorry, last seventeen investments, all but one was a SaaS company?
18:07 Speaker 00 No, only one was a SaaS company.
18:11 Harry Stebbings? Vertical or horizontal?
18:13 Speaker 00 Horizontal, only one was a horizontal SaaS company.
18:14 Harry Stebbings? But when we look at a lot of the big companies that we see today, and I'm not naming and then we're denigrating quality or anything like that, but like your air tables, your notions of the world. These are all horizontal SaaS companies.
18:25 Speaker 00 Yeah.
18:25 Harry Stebbings? You know, bluntly, a lot of people say, well, AI actually kills vertical SaaS because it means that the cost of creating that same vertical SaaS, but customizing it for your organization is way easier. So vertical SaaS is the one that dies.
18:35 Speaker 00 I heard a rumor, I don't know if it's true, but I've heard it from three people now, which either means I'm in an echo chamber or it might be true, is that Amazon has said, don't buy any more software. AI can take care of all the kind of business process needs we need in software. I think that's going to be a trend.
18:49 Harry Stebbings? What does that mean?
18:50 Speaker 00 I think you'll see a lot of companies build their own software, or you have tools that create kind of unique business process software for a lot of these companies. I don't know if it's tomorrow or in five years, but I think there'll be more of that.
19:01 Harry Stebbings? I think we drastically overestimate the internal education or knowledge of company employees, and I don't mean that disparagingly. But you know, when we look at Accenture, they just posted two point four billion in generative AI revenues.
19:13 Speaker 00 You know, why is that?
19:14 Harry Stebbings? Because companies have no fricking idea how to integrate AI into their business units.
19:19 Speaker 00 What kind of business is Accenture?
19:20 Harry Stebbings? It's a consulting business.
19:22 Speaker 00 Right, it's not a software business, consulting business. So you have the unique knowledge. By the way, McKinsey. Is also doing extremely well today in these at-risk fee businesses, right? They're not taking a lot of their fees today in kind of consulting fees, but they're saying, we can improve your bottom line, we can improve your top line. And they go in there and they use a ton of software and a ton of data that they've bought and created themselves, right? The fastest growing business inside of McKinsey is software. And they go in and say, I can bring like a lot of really, really smart people and a lot of technological capabilities and upgrade your business into the next era. That either does or doesn't include off-the-shelf software, I don't know, but I think there's a lot less of it going forward. Again, you have to ask a very simple question. I'm more of a big-picture guy than a, than a micro guy,
20:04 Speaker 00 but why are so few of these companies growing better than 15, 20% in the public markets? You can barely find any. I think the market for purchasing software is slowing down.
20:12 Harry Stebbings? A hundred percent. Well, so I mean, there's a couple of different options. There's one, you know, you could have like a box, which is just like the saturation rate of the market is so high already. I mean, they already have pretty much everyone as their customers. They need to upsell a new product, which they've been too slow to do. Same with a Dropbox as well, which you would admit to. Or to your point, they're slowing down or not buying as much.
20:32 Speaker 00 Whatever it is, I think is slowing down.
20:34 Harry Stebbings? Yeah.
20:35 Speaker 00 So is that a trend? I don't know. I think we've squeezed a lot of efficiency out of businesses using kind of basic software already. And so to get to another level of efficiency or revenue generation is a big deal. I think also corporate buyers and whatever business they're in, what they're interested in is not the software to squeeze the incremental dollar of efficiency out of my business, where's my new revenue opportunity from this? And that's going to require kind of a big leap, and you don't get that in traditional SaaS software.
21:00 Harry Stebbings? I guess the question that's interesting there is like, are you able to actually extract value efficiently? Because if you are making millions and millions for your customers in that way, how do you actually extract the value that you are providing in an efficient way? That's not like a SaaS model where you only get 50K and you're actually saving them 10 million.
21:18 Speaker 00 Buyers today are willing to pay for value. It's harder for companies who are used to price per seat models or used to large enterprises to kind of adapt to this. There's been a bunch of pieces written, I think Sarah Table wrote one, that people pay for work. I think that's a real thing. I think people will pay for improvements to their business, and I think the consultants like Accenture and McKinsey are the leading edge of this. But I think it's going to come into software very, very quickly.
21:42 Harry Stebbings? I remember speaking to our mutual friend Mark Evans before and he said, the thing you just always have to remember with adoption cycles is we always overestimate in a year and underestimate in 10. So just breathe. And I just always remember that and it really actually affects how I think about investing in adoption cycles. Do you think that's the case here? Or do you actually think, no, no, no, we are seeing the fastest technological breakthroughs in development within LLMs every single week. It is a velocity that we haven't seen before.
22:11 Speaker 00 I think both of those things are true again.
22:12 Harry Stebbings? Well, a wise man once told me that it's about holding two opposing opinions.
22:16 Speaker 00 Exactly. I think the adoption is incredible and the pace that these things are learning at and adapting at is incredible. I mean, you just, by the way, you see the efficiency in customer service at a lot of these fintech companies, Lemonade or Adyen or Klarna or any of these people, it's stunning. And at the same time, when you kind of look across a broad economy, it's going to take a lot longer than people think. And there'll be some disruptors and some people who get this and regulation will have something to say about it. Not in the way everyone's talking about, you know, like Sam Altman trying to do regulatory lock-in, but there's just a lot of businesses that are regulated, like farmers are regulated and financial services are regulated and, you know, it's hard for regulators to keep up with AI and that's going to be a big deal for how much it can be deployed.
22:54 Harry Stebbings? So my biggest concern actually is that you have regulators who fear that it's getting away from them, place these very punitive policies or regulations on data, on data access. And actually, we have a real plateauing in the development of AI systems because of regulatory challenges.
23:10 Speaker 00 Super high level. That's more likely to happen in Europe than in the US. I think that is going to set Europe back in competitiveness more than it's already been set back in competitiveness over the last 20 years. If I'm in Europe and I'm starting a company, I would get out. Sorry.
23:25 Harry Stebbings? Oh, thanks, Michael. Welcome to London.
23:30 Speaker 00 I think, I think the US can ill afford to slap too many shackles of regulation on AI companies because they're in competition with China. And I think Israel won't do it. And so when you look at kind of the key markets for AI development, where the US is first and China is second and Israel is third, I think those are likely to be less regulated than most, certainly than Europe. And so those will be advantaged. Economies going forward.
23:54 Harry Stebbings? So we had Alex from Scale AI on the show the other day. And he said, the thing that we're not talking about enough is that, you know, really AI is the most demonstrable power that any country or nation can hold and leverage in a in a case of war. And we should have closed systems as a result. Open systems would mean that our biggest enemies, Russia, China, are able to access the same levels of technology that we are. We have to close the systems and we have to leverage AI to build AGI to win wars. Do you agree with that perspective?
24:24 Speaker 00 I agree with it in part. I think it is true that AI is likely to be a key competitive advantage in wars, even significant. Look, we're living through a war in Israel right now. And so kind of closing the kill chain using AI is a thing, not just in Israel, it's all over the world. And there's there's a big European company now that's doing a few hundred million dollars of revenue that uses AI to close the kill chain for European armies. This is a real deal. I said before, if the 20th century was about nuclear countries versus non-nuclear countries, the 21st century is AI countries versus non-AI countries. We shouldn't lose sight of the nuclear ones because there's these terrible people in Iran out there, you know, who are looking to acquire a nuclear weapon. By the way, not just threaten Israel, to threaten Europe. That's the key thing people don't understand. They have missiles long enough to hit Israel, new missiles long enough to hit Europe.
25:09 Speaker 00 And thinking of them as an AI country is quite frightening, actually, and they may be, they're very smart people there. What is naive about what Alex said is that you can keep it closed. I just think it's tough. You know, the US put a ban on Nvidia chips going to China. I don't sense that it slowed China down in a meaningful way. I think there's enough kind of semi-degraded chips that you can kind of string together or open source designs. You can kind of figure this out. I think the world is far more open than we give it credit for today. And so it's really, really, really tough to shut this down. I think we just have to be ever more competitive technologically to stay ahead of the bad guys.
25:45 Harry Stebbings? Someone said recently that China is two years behind the US on AI.
25:49 Speaker 00 I've heard that.
25:49 Harry Stebbings? Would you agree with that?
25:50 Speaker 00 I think they were 10 years ahead of the US on AI and psyops using TikTok. I think they were 10 years ahead of the US in sophistication of how to manipulate the minds of young people using AI algorithms in TikTok. I would assume, I generally assume of my competitor, of my enemy, that they're much smarter than I am. That's the only way to stay ahead. So even if by some bizarre notion, you think that they're two years behind, you should think they're two years ahead.
26:17 Harry Stebbings? I slightly worry, honestly. We mentioned a little bit about geopolitics and global conflict. In the investing world, I feel a little bit uncomfortable when I have these like 30 to 35 year old MBAs, nothing against them, but who are like getting super jacked up about the margins of defence companies and how defence is like the best place to be right now. And I'm like, you are aware of the weight of your words. I know that we have enemies and people have different rights, whatever, whatever. But this is still about closing kill chains. And you're like talking in your MBA language about margin optimisation. It just feels a bit off. How do you feel about this new wave of excitement towards defence?
26:59 Harry Stebbings? Also being aware of the weight of what that actually means to fund with billions of dollars more efficient killing?
27:05 Speaker 00 As a father of four children who have served in Gaza and on the northern border, which Hezbollah has been burning nonstop in Israel, war is a real thing. It's a very serious thing. It's serious because people get killed. It's serious because it shows what you're fighting for, which is freedom and the values of the West. There are enemies out there. I've written publicly that I think this generation of Israeli kids is the defining generation. They've stood up and fought for what matters. I think there aren't enough people willing to stand up and fight. Now, these kids, because they've been in battle, have a level of maturity than your average MBA student does not have. And they understand what it means to hold a weapon. Holding a weapon is a responsibility. You know, Israel has a tiny homicide rate, despite the fact that most of the population is armed and many of them will walk around with automatic machine guns on their back. Like you can go to a wedding, I was just at one.
27:51 Speaker 00 There are eight girls in wedding dresses of sorts and they have machine guns slung on their back. Their back, but you learn to respect it. You learn to understand that this is a serious matter. And that if you're not careful and you're not responsible, people get killed. At the same time, I think that there was always an alliance between Silicon Valley and the defense industry. And patriotism to use, you know, I'm from the United States originally is, is a real thing and it should be in tech. You should be patriotic. I think patriotism is a great thing, a wonderful thing. People should be proud of their people and proud of their country and proud of their cultures. That's not the same thing as your margin is my opportunity. I think there will be a lot of money made in defense going forward. I think people way underestimate what it takes to sell defense. You know, the government buyers, the regulations, how hard it is to sell.
28:35 Speaker 00 If you've never sold defense technology and you just come out of an MBA, good luck. Palantir took 20 years to crack this code. Android cracked it much faster because of Palantir. Palmer lucky, people kind of because he's dressed in a Hawaiian shirt, don't take him seriously enough. Trey Stevens is there who was at Palantir. Trey Stevens of Founders Fund. That guy is incredible and he knows more about selling defense technology than everyone's forgotten. And that's just different. And so people will lose a lot of money chasing the new, new thing, which today happens to be defense in addition to AI.
29:05 Harry Stebbings? I completely agree with you on Palmer and Trey, but we're seeing this like move to hard tech. It's like people seem to agree with you. Actually, SaaS is overproliferated, too competitive, whatever we want to say on that. But actually we need to move to hard tech. We need to move to whether that's climate, but much more physical, challenging style of investing. How do you see that, Michael? Because I think a load of software investors are going to lose their shirts investing in a completely different type of company.
29:32 Speaker 00 So I'm unencumbered by any knowledge of technology or software and I've never management experience, by the way. I've never managed anything and I can't write a lot of code. Last line of code I wrote was in the seventh grade. This is the venture business. You're going to lose a lot of money. You're going to lose a lot of companies. The question is actually, why does a founder want to take your money if he comes from something else other than software? And I think that'll be interesting and very Darwinian in that some founders or the great founders are likely not taking SaaS investors money. Because the SaaS playbook, as it's become called, doesn't apply to any of these harder technologies.
30:05 Harry Stebbings? You said before, when we were chatting before the recording, that I could just exploit you for your wisdom and your more experience. Let's put it that way. I think you said age.
30:14 Speaker 00 My age.
30:14 Harry Stebbings? Yeah, but I increased wisdom is what I'll go for.
30:17 Speaker 00 My podcast with Beezer, I said, we should talk about ageism because she should probably get rid of me from the fund. I'm too old to be doing this.
30:24 Harry Stebbings? Listen, I wanna, I wanna start on like my big concern right now, and I sound like I'm the old one, but I'm wondering where is liquidity gonna come from? Like, I'm looking at the different avenues, which is IPO, it's M and A, and then it's like PE. And I just wanna hear your wisdom and experience on this, because I'm concerned. M and A seems totally shut. Lina Khan seems like, you know, the ultimate challenger to M and A. How do you see M and A, Marcus? Is it completely shut? Am I right to be worried?
30:51 Speaker 00 Lina Khan, I would say openly, is, I think, a threat to American capitalism. Whether Biden or Trump gets elected, she needs to go, because we need to be able to have M and A for the big companies. And as best I can tell, she hasn't redefined what antitrust is, and so I think she's taken a lot of liberties that are just bad for capitalism globally. Where's liquidity getting up from? So I have bad news for you. Ninety-eight percent of people don't get liquid. This is a very difficult environment, number one, but number two, this actually is a hard business. I know there's been like an explosion of venture capitalists. It's a hard business.
31:22 Harry Stebbings? Let's just go back a stab. You, you said that most people don't get liquid. One way to get liquid ahead of time is secondaries, or to sell parts of positions.
31:31 Speaker 00 If there are buyers.
31:32 Harry Stebbings? If there are buyers.
31:33 Speaker 00 You know, one of the things I'm just scared, so let's just back up. A tiny number of companies get sold or go public. I don't buy that the IPO window is closed. The IPO window is wide open. The question is, what's the price you're willing to take? You can go public, Reddit went public, it's done very well in the public markets, it's delivered a stellar first quarter after going public. It's doing very well, it's like a seven or eight billion dollar company right now. You don't need to have a half a billion or a billion dollars of revenue to go public. We took Lemonade public with sixty million of revenue. You should go public early and the markets are open. Take the price the public markets will give you, and build your company in the public markets, you will be better off for it. I am a huge believer in that.
32:09 Harry Stebbings? Would you really say that to, to your companies today, here at two hundred million and they're on the going, ah, you know what, actually, public markets will probably give us two X premium in eighteen months' time?
32:19 Speaker 00 I don't know if they'll give you a two experiment, but go. And by the way, if the bankers are playing this game, we want you to have half a billion dollars instead of find a second tier banker. They're just as good. You don't need to raise 500 million dollars and you go public. Go get, take your company public. Let's say a hundred million of revenue. Take your company public at 600 million, raise 80 million dollars, build an efficient business and go.
32:39 Harry Stebbings? I think people forget that your Shopify went public at 700 million.
32:43 Speaker 00 Yeah.
32:43 Harry Stebbings? Some of the best businesses in the world.
32:45 Speaker 00 Amazon, the best business in the world went public. Everyone's forgotten that Facebook went down 50% after their IPO. It's one of the biggest companies in the world today. It's okay. And everyone's like expecting like PE to turn up and buy these companies. I got bad news. Number one, they're going to buy a tiny percentage of companies. Number two, interest rates are way up. They can't borrow anymore. Number three, they're incredibly price sensitive. Most companies waiting for PE to come see them. I hear this is like this whole meme right now that PE is going to be the buyers of the future.
33:08 Harry Stebbings? Well, so listen, we had Mark Suster on the show and he said, listen, PE will be the primary buyers for the next generation of software companies. I just want to touch on a couple of different components that you mentioned there. You said about the cost of capital. How does that impact how they think about buying?
33:21 Speaker 00 It drives prices down. Increased cost of capital drives multiples down, just what it does. When interest rates go up, multiples go down. It's the laws of physics. They'll pay a lower multiple because their cost of capital is higher. You know, people are just not going to get liquid the way they think they are. And the top part of the cap table, this happened by the way in 2001, 02, 03, 04. The top part of the cap table got us Lick pref back. People have forgotten the Lick pref's matter. And they got their Lick pref back. And in some cases, there used to be an 8% coupon on these things. Many cases now there isn't. They took an 8% coupon and then what was left went to the rest of the cap table.
33:52 Harry Stebbings? Are you concerned we're going to see many more plural sites? Plural site obviously happened last week, which Vista wrote down from three and a half billion to zero because you know, the cost.
33:59 Speaker 00 I'm not concerned, I'm certain. It's happening, we just don't know. By the way, in venture portfolios, there's a lot of this also. And I also wonder a lot about how many SaaS companies get undermined by AI right now. And there's a lot of SaaS portfolios sitting at hefty prices in people's portfolios, hefty values in people's portfolios that aren't worth that anymore.
34:16 Harry Stebbings? You're certain. So that means that there's a ton of companies that PE have bought, where the cost of that debt is now way too high and they are in trouble. Does that mean we have a generation of, as I think Jason Lampkin puts it, Mulligan PE funds? And do they? Just get that off the hook for it.
34:30 Speaker 00 I have no idea whether they get let off the hook for it. I don't know if it's a ton of companies, but it's not one. It's not just Pluralsight. There's a lot more like that out there. There's a lot more like that out there. And we also think about the following. If you were a PE fund that just took a significant write down on one or two big software purchases, you can have appetite to buy something? I don't think so. There's a small number of really great businesses that are built in venture. It's like 10 a year. And some other ones get smaller liquidity events, which is great. We should have that. But if you can get paid 10 to 20 times on your medium companies, or even five to seven times on your medium companies, it's not a bad outcome. You know, we talked, I don't want to mention company now. We talked before on the show, we just took 100% of our equity off the table in a company. I think we did 11x or so.
35:13 Speaker 00 We have a different view of the company than the management, some of the other investors do. That's fine. It's totally fine. We're very happy. We'll be super happy if the founder makes it into a 30x and we were wrong. We'll be so happy for him. But liquidity is a thing. And by the way, the last thing I'll just say about the secondary markets, we've discovered, you know, you get these emails, like you probably get them also, two a day that says, I got a buyer in the market for so and so company. So over the last three or four weeks, we decided to do a little experiment. We reach out to them now. We used to ignore them. But now it's interesting because like you discover there are actual buyers there. There aren't. Okay, there are not actual buyers there. It's, hey, okay, we can hold this price if you get us due diligence material in the company. These are just people looking for data. I think most of those buyers aren't out there either.
35:53 Harry Stebbings? Very rarely do you hear the advice to sell all of your position. The kind of canonical advice is, well, I'll sell 33% at a time in increments. Selling all of a position is respectfully a strange take. I would never sell all of the position, Michael. I would sell 80% maybe, even when I didn't believe. But I would still want to ride the upside on 20% in case I was wrong. How did you think about that 100%?
36:15 Speaker 00 You asked me before we got on the show, what is the biggest mistake I made during XRP? One of them was not selling 100% of one or two positions when the prices were high. I'm actually in the opposite camp generally, which is ride your winners. That's the general camp I'm in. I think the question you need to ask yourself if you're a venture capitalist and you sit on the board is do I have an information advantage or a unique insight that somebody else does not have? If I think I have that, I should act on it. And if I should act on it, I should act on it with conviction. It's like when I go into companies, I don't want a half position. If I have conviction, I'm going to take a whole position. This business is an outlier business. It's just the nature of it. So take the whole position. And if you think you've hit a good return, take the money off the table. I don't think you average into positions in the venture capital business.
37:00 Harry Stebbings? Can you just unpack that for me?
37:02 Speaker 00 You do it right in the public market. So you kind of average into a position and then average out of a position. I don't think this is like this. This is a binary industry, very, very binary investments. And I'm in that binary camp.
37:13 Harry Stebbings? Do you do prorata?
37:14 Speaker 00 Rarely.
37:15 Harry Stebbings? Why?
37:15 Speaker 00 I kind of drank the benchmark Kool-Aid. We don't get the same kind of credit that benchmark gets because all of invested or someone's got invested. We don't have to do one more round. But we try to kind of peel back on it. We think we have to buy our ownership in the first round. Our unique insight is in C to N A. Buy it. Write the check. Buy it. We wrote this giant check to a company called Dream Security, which is AI infrastructure for protecting critical assets in countries. It was the biggest check we wrote. Crazy competitive deal. Incredible team.
37:44 Harry Stebbings? When you say the biggest check you wrote, it's like proportion of fund, like 10%?
37:48 Speaker 00 No. Initial check, six and a half, seven percent of the fund. They're not going to need to raise any more money, it looks like, after the A. They can, but they probably don't need to. If I didn't get my ownership in the A by writing this big check, I wouldn't have a position. And I still feel like I'm sub-love. I'd love to have more.
38:02 Harry Stebbings? I think one of the biggest misnomers is, hey, we'll place a load of bets and then we'll be able to concentrate capital into our winners. Whenever I hear this, I'm like, are you high? Like, when does that ever? My best performing companies, generally speaking, like 99% of the time, have Sequoia and all the best all over them. I'm not like, oh, sure, I'd love to go travel prorata.
38:21 Speaker 00 I was talking to a venture capitalist, Jesse B. Rudy at IA Ventures.
38:24 Harry Stebbings? I like him.
38:25 Speaker 00 I like him too. He made a very smart observation. He said that we do prorata into our middling companies. Super interesting. He said the good ones just kind of get, they become runaways and you kind of get more capital. And bad ones you want to put money into. But sometimes, one out of Some number of these kind of middling companies where most people don't see what's going on there at the beginning. But I do. You give them a little extra capital or you kind of double down once or twice and you end up with a winner out of this kind of middle part of the portfolio. It's a giant winner. I thought that was super insightful.
38:54 Harry Stebbings? I look at my my fun one, which is a tiny eight million fund. Actually, our best value drivers today were all in the mare and the worst performing companies were all in the rocket ship category. They're the ones that went to zero quickest.
39:08 Speaker 00 Those are the ones you should have sold a hundred percent of as they were on their way up.
39:10 Harry Stebbings? I should have done. I know. I know. Absolutely. I should have done. But actually, I think there was a big difference between consumer and enterprise there. Consumer sell. I mean, what I found was like, it's much more transient of whether it works or not. Enterprise, you've got a lot more predictability.
39:24 Speaker 00 Consumer is ephemeral. Sometimes works, sometimes doesn't, sometimes goes out of style. I think of consumer as fast fashion in many cases, unless you build a moat. I think there are rare consumer companies who who build a moat. You know, apropos of the AI conversation, some of them target consumers. It's really hard to tell the difference visibly between OpenAI and Anthropic and many one of a number of models. So you kind of ask yourself, what's the moat? So they're the moats to data and over time, some people will note that it's significantly better. It's like Elon Musk is talking about XAI is going to be the place of truth. I hope he's right. I'm not sure how I'll know. That's kind of a question. How do you build a moat on those businesses? It's not clear to me right now. Google built the moat because they were by far the fastest. And then they had this kind of reinforcing ad business that added on to it.
40:07 Speaker 00 But who gets to build a moat in these businesses? Not obvious to me.
40:10 Harry Stebbings? We spoke about the three different exit sources being M and A, IPO, P. When you're making investments, do you think about kind of value creation and pathway to exit?
40:20 Speaker 00 Nope.
40:20 Harry Stebbings? Nope, nothing at all. So we don't outcome scenario plan of, okay, if HoneyBook does X, Y, and Z, then we have this outcome. We don't think.
40:28 Speaker 00 Nope, for a variety of reasons. Number one, because companies pivot. Number two, because you convince yourself of all sorts of stupid things by kind of dreaming about the exit. And number three, it never works out like that. So why bother?
40:40 Harry Stebbings? Do you think we're going to see a generation of funds die, Michael?
40:43 Speaker 00 Of course. Bruce Dunleavy from venture used to say that venture capital is the highest barrier to exit of any business out there. No one wants to leave. You know, the management fees kind of keep coming. I think that's true. So it takes longer than people think. But yes, of course.
40:53 Harry Stebbings? And which segment is that?
40:54 Speaker 00 The whole generation of people grow up during a ZIRP. You know, now reality is biting. That's not a bad thing, by the way. It's like startups going out of business. You recycle the talented to something better.
41:02 Harry Stebbings? Who is that segment, though? Is that kind of old, ailing funds that haven't innovated in the valley style? Or is it the micro funds where it was like, you know, operators who had $5 million funds on the side and were doing it part-time because it was kind of cool?
41:16 Speaker 00 I think the first style of funds that goes out of business is funds where there's three, four, or five partners and only one of them is good. And then that person gets tired of holding everybody on their shoulders and they leave and set their own thing up and everyone knows. I think that's one. There's just some people who won't deliver capital back to LPs and they'll be gone. And some will be big and some will be small and it's fine.
41:34 Harry Stebbings? I've been shocked by how much focus LPs still place on TVPI. I speak to a lot of LPs and I thought, given the last few years, they would reduce the importance of TVPI and just focus on DP. No, that's still like, oh, wow. I'm like, really? You still give a shit about that?
41:49 Speaker 00 No, they should actually. You know, I had this tweet in back and forth with Ibrahim Ajami of Mobatullah. The DPI is what matters. And that's true. If you didn't take money off the table during, you know, the ZIRP era, there's something wrong. Let's just be clear about that. But TVPI actually matters because I had this conversation with one of our LPs at our annual meeting, which is if the thing is compounding at a high rate and keeps going, that's not a bad thing. I can kind of think through, if I kind of wait another two or three years, that this will be worth a significantly larger amount of money. The question is one level beneath TVPI, which is how real is it and how sustainable is it? People in the venture business, and this goes back to the previous conversation about competitive markets versus non-competitive markets, underestimate moats on businesses, the value of moats and
42:33 Speaker 00 competitive advantage on business. There is insufficient time spent on how do I deepen competitive advantage in this business? To take a financial rendering of this, multiple is my expectation for future cash flows. So the question of future cash flows is not just how much cash it is per year, but how many years this goes on for. How many years this goes on for is a function Of competitive advantage. So you need to think through how deep my competitive advantage is in a given category. You know, there's a lot of talk about Google right now, does AI undermine their ad model? Yes, but that competitive advantage is actually really deep, I think, for the time being. How long that lasts, though, is really the question. And that depends on consumer behavior, which is fickle, right? How much of it moves to a different modality than the search?
43:14 Speaker 00 And so the question that I think needs to be asked in TVPI land is these underlying portfolio companies, how deep is their competitive advantage? How sustainable is the growth? And I think when you kind of dig that level deeper, you'll find that a small number of companies matter to VPI, and that matters.
43:34 Harry Stebbings? You said, how sustainable is the growth there? We're seeing this kind of transition from a lot of companies, from hyperscalers or hypergrowth to actually just quite slow growths and maybe sustainable growth, but just low growth companies that need to just grind it out. What happens in that world?
43:51 Speaker 00 You know, we talked about like 100% growth like it was easy for a decade, so, but it's not. 30, 40% growth is great business. So let's just say that, first of all.
43:58 Harry Stebbings? But very few have it.
44:00 Speaker 00 Very few have it. 10 to 15 to 20% growth is tricky. That's a tricky middle place if you're a venture capitalist, because it's not clear how you get out of it. These would have been great businesses if they didn't take venture capital. If they took venture capital and stacked their large preference on the cap table, it's challenging. What happens to them? Some of them will grind it out for a very long time until some sort of exit market opens up. As long as they're in control of their own destiny and they're profitable. That's not a terrible way to think about this. Others will be traded in large secondary trades and portfolios. And some of them, if they're good enough, will buy back stock. I just had a company actually that bought back stock from early investors. I didn't sell because I thought the price was too low, but I have a company that generates more than enough cash. We bought back stock, so I reduced dilution in this company, which already wasn't much. It's a profitable business for a while.
44:45 Speaker 00 We'll see what happens to the asset over time. You know, we will make, by the way, a significant multiple on our capital whenever it comes out. It's not growing. It's probably the CAGR is probably 30, 35%. It knows how to slower go through, but generates a lot of cash. We'll see what happens. By the way, one of my bigger exits in my career, we distributed hundreds of millions of dollars of dividends. It's a strange, it doesn't happen, but it's never happened to me again.
45:05 Harry Stebbings? The final one, if you were to analyze yourself today as an investor, where do you most need to improve?
45:11 Speaker 00 That's a great question. Two areas. It has been said about me multiple times that I am very, very direct and therefore an acquired taste.
45:21 Harry Stebbings? That should be the name of the podcast, an acquired taste.
45:24 Speaker 00 And it takes time for entrepreneurs to understand that I'm just, I'm asking the hard questions and being very direct because this is important and urgent and they need to get going about this. And there's no sense of beating around the bush. And so probably I should find a better way to deliver messages.
45:39 Harry Stebbings? Do you care? And what I mean by that is like,
45:41 Speaker 00 No, I don't.
45:41 Harry Stebbings? Because truth be told, what I find is the best founders, take it or not, they appreciate the directness and move on.
45:48 Speaker 00 You know, one of the things I found about myself as I'm getting older, I'm getting cranky about board meetings. There's a lot of pontificating at board meetings. I've come to the conclusion that with good preparation, most board meetings can be finished in 45 minutes. There's real governance that needs to go on there. There's core strategic issues that you need to pound on, but most of them can be finished in 45 minutes. Some need two hours, none need three to four hours. There's just a lot of kind of endless sharing of opinions.
46:12 Harry Stebbings? For boards that are done in 45 minutes, what is the prep that is done? Is it a Google Doc with three core questions that people think about ahead of time?
46:18 Speaker 00 It's generally a letter and not a presentation. It's rich in data, but it upfront identifies, these are my core one, two, or three strategic issues that I gotta get board input on. You prep for it, you do calls beforehand, and then the conversation is super concentrated. Because you're attacking the question, I find that people don't expand. All these boards, they show endless amounts of numbers and people, you know, want to get into the margins and they show a product plan. Everyone wants to be the product manager on the board. It's like, just no. I'm getting cranky about this and I probably should moderate my behavior. So there's another area for improvement.
46:51 Harry Stebbings? Do you find Zoom board meetings were effective as in person?
46:53 Speaker 00 Not at all. I don't, I don't think, I don't like Zoom at all. I hate Zoom. This is better.
46:58 Harry Stebbings? Way better.
46:58 Speaker 00 You know, I didn't invest over Zoom during the pandemic. I just, I met people out of a farm, I met people and I do everything in person that I can. It's harder now because you have board members who've invested from all over the world. It's just hard to get everyone in one place. But I think in-person board meetings matter a ton. And by the way, I'll spend two hours in person because I like people, love the people. And I think it's harder for people to pontificate in person. By the way, the other area I gotta get better at by a long shot. You, you can get really absorbed into these companies. And sometimes I need to kind of pull myself out at a high level. Cause I think, you know, you could just be too intense around these companies. And my job is actually to sit at 10,000 feet.
47:37 Harry Stebbings? Why is that bad?
47:38 Speaker 00 Because I think it can rattle entrepreneurs, particularly first timers. Second timers don't get rattled. My Tom Bar didn't get rattled by anything. Ron Gordon didn't get rattled by anything.
47:46 Harry Stebbings? Do you prefer second time founders?
47:48 Speaker 00 No, no, I love the whole first time thing. I have this company that's building the monetization layer for L L Ms now in a very unique way using blockchain. This is a company that started during the pandemic. We were about four kilometers from each other. And when there was shutdown, I had a pass to get around Israel because I chaired the largest volunteer organization in Israel. And I would pick them up and bring them to my house and we'd sit face to face. And slowly we built this company. Hasn't been launched yet, but they have a couple of hundred customers already. He's an incredible entrepreneur, you know, but he was a first timer and I think it took us time to find out, find our rhythm. And we would spend a couple of hours just pounding on this idea, month after month after month during the pandemic. I think you probably would have gotten started earlier if I hadn't been so aggressive.
48:26 Harry Stebbings? Final one for a quick fire. Do you prefer founders who've got experience in a market or who are net new naive?
48:31 Speaker 00 Oh, net new naive, net new naive. The fact that Shai and Daniel of Lemonade didn't know anything about insurance, like helped a ton. When we first invested in Lemonade, I called a bunch of fintech investors and said, who's the insurance guy? I said, nobody, that's the beauty. So none of them would invest, just quite a turn up. These guys have broken every rule, every rule of how you build an insurance company for the better because they knew nothing about it. By the way, everyone told us, don't go to New York first. You'll never get a license there. That's the hardest DFS. And we said, go to New York. Actually, I didn't say it. Daniel said, let's go to New York. It was against every insurance expert's advice. I generally have a healthy skepticism for expertise.
49:06 Harry Stebbings? Listen, I want to move into a quick fire. So I say a short statement. What have you changed your mind on most in the last 12 months, Michael?
49:12 Speaker 00 Younger people. I was concerned about younger people being too absorbed in Tik Tok and Instagram and watching what happened in Israel over the last 12 months and how the younger people went out to fight for what mattered, fight for their brothers and sisters and fight for women who were raped. Younger people, particularly in Israel, but maybe elsewhere, are going to surprise us. And this is going to be an incredible generation who's going to be forced to stand up and fight because, you know, Israel's one place, but there's Ukraine. And there's more of this going on around the world right now. We saw what happened in Germany last week. I think younger people are going to surprise us.
49:40 Harry Stebbings? What's the biggest misconception of the Israeli startup ecosystem?
49:43 Speaker 00 That's a good question. I'll tell you this, by the way, we've raised an incredible amount of foreign money. Into our company since October 7th, an insane amount of money. It's wide open for business right now and investors are on the ground every day. That's right now. But the biggest misconception is people think Israelis know how to scale things. And for the most part, when you grow up in a small country, it's harder to think of scale. And so when you're a foreign investor, you need to help Israelis think in big scale.
50:06 Harry Stebbings? Which competitor do you most respect and why them?
50:09 Speaker 00 I said before, I respect all competitors and I think they're 2X better than I am. I have to work harder than anyone. If I said this to Beesir, if I'm not the hardest working venture capitalist out there, shame on me and I'm going to get killed. These guys are all 2X better than I am. I was on email with Mamoun Ahmed from Klarna this morning. That guy is so good. I think, how do I become Mamoun? I just think they're all better than I am and you know, more naturally suited for this business. So I gotta work harder.
50:32 Harry Stebbings? What's the biggest piece of BS you hear most often?
50:34 Speaker 00 Board members giving product advice.
50:37 Harry Stebbings? What's the biggest sin of the zero interest rate environment?
50:40 Speaker 00 Probably not having sold enough of my portfolio. Generally, when things get too easy, if something is not hard, it doesn't matter. This is supposed to be hard and life is supposed to be challenging. And when we succeed in challenging things, whether it's relationships or hardships or defending freedom or building a startup company, that's hard to build like Andoril or you know, or which is the synthetic chemistry company, we feel satisfied afterwards. This is meant to be challenging. Life is not supposed to be necessarily easy. And you gotta keep working at it and keep working at it. The Protestant work ethic is a real deal. It matters and you gotta keep this hard work matters. The other thing I think, by the way, I've never invested a nickel in China. I think China was a zerp phenomenon also, China investing.
51:23 Harry Stebbings? Why?
51:24 Speaker 00 People look for yield in other places and ignored the risk, what I call stroke of pen risk. I'm the only guy who calls it that, where you know, the government just take away your assets. And so, but because people are chasing yield, they just kind of, you know, send it over.
51:36 Harry Stebbings? That's like a mic drop at the end. Tell me, my friend, where do you want to be in 10 years? Where is Alaf in 10 years' time? You now do the content platform as well.
51:44 Speaker 00 Yeah.
51:45 Harry Stebbings? And then your partner does the data platform.
51:47 Speaker 00 Yeah.
51:47 Harry Stebbings? What do you want for Alaf in 10 years?
51:49 Speaker 00 Well, I don't know. I hope they'll keep me around. Like I'm old for this business at 53. I don't ignore the data which says as you get older in this business, you don't do as well. And so I hope. Keep me around.
51:58 Harry Stebbings? Okay, you've got sourcing, selecting, servicing, the three components of venture, just saying. Where do you think you're best and worst? So Keith Raboy on the show said he's worst at sourcing. And as time, relevance and that sourcing is his biggest challenge. How do you think about?
52:12 Speaker 00 I've stopped sourcing. I get all my deals right now through referrals of 30 years of being in this business. And so I actually don't do proactive sourcing anymore. I don't know if I was good at it or bad at it, but I don't do it anymore. I need to do two or three deals a year. There's enough that come my way that I think are super interesting. I don't think I provide enough kind of management help to companies because I don't know how to manage my way out of a paper bag. I think what I do better than average is networking. I have a large global network. And I think that's valuable. I think if you have good chutzpah and are not bashful and you know enough people, you can reach anyone in the world. And I think that's valuable. I had to get the seal of a Fortune 10 company in the last 48 hours. It took two hops.
52:49 Harry Stebbings? Final one, what question do you not get asked that you think you should get asked more?
52:55 Speaker 00 I get asked the first level question of how do you balance your time? And I tell you, I think there's no such thing as work-life balance. You've heard me say that 100 times.
53:02 Harry Stebbings? I get asked that one to you.
53:03 Speaker 00 The second level question is how do other people think about the way you balance your time? That's the better question to ask. If I'm self-reflective, there are many people who I love and respect who probably think I don't give them enough time. And that I don't have enough time for the things I should be having time for. Whether it's my day job as a venture capitalist, community work, family, et cetera. I think, as I say in Hebrew, after 120, which is when you go to the pearly gates, I'll probably have to give judgment for not having given people who wanted that time to time.
53:33 Harry Stebbings? Michael, I always love our chats. I'm so glad we could do this in person. So thank you so much for joining me.
53:39 Speaker 00 Harry, it's so good to see you. Keep doing what you're doing. You're providing just an incredible service and thank you for taking me as an LP and you're fun.
53:46 Harry Stebbings? God, I so enjoyed doing that show with Michael. He really has been an incredible supporter, friend, mentor. I'm so grateful to him for being an LP in the fund. I love doing that show. If you want to watch the full episode, you can, of course, on YouTube by searching for 20 VC. That's two zero VC. But before we leave you today, I want to talk about Cooley, the global law firm built around startups and venture.
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55:36 Harry Stebbings? engage with your audience, and sell anything from products to content, all in one place, all on your terms. What's blown me away is the Squarespace Blueprint AI and SEO tools. It's like crafting your site with a guided system, ensuring it not only reflects your unique style, but also ranks well on search engines. Plus, their flexible payment options cater to every customer's needs, making transactions smooth and hassle-free. And the Squarespace AI? It's a content wizard helping you whip up text that truly resonates with your brand voice. So if you're ready to get started, head to Squarespace.com for a free trial. And when you're ready to launch, go to Squarespace.com/20vc and use the code 20vc to save 10% off your first purchase of a website or domain.
56:20 Harry Stebbings? As always, I so appreciate all your support and stay tuned for an incredible episode this coming Friday with the former Head of Growth at Revolut for 20Growth.
Previous 20VC: Index's Danny Rimer on Investing Lessons from Hits like Figma, Discord and Etsy to Missing Snapchat, Airbnb, Facebook & Spotify | Why Valuation is a Trap and Market Sizing, Signalling and Sector/Geo-Specific Funds are all Noise Next 20Growth: How Revolut Acquired Their First 10M Users: Tips, Tactics and Strategies From the Revolut Product & Growth Playbook with Val Scholz, Former Head of Growth @ Revolut Page updated September 29, 2026 · transcript and summary are machine-generated
