Pod Insights The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch 20VC: The Biggest Misconceptions & Hardest Truths About Seed Investing Today; Why The Best Founders Don't Need You, Why Uncapped SAFEs Are Good, Why Reserves Are Bad, Why Signalling is BS, Why Price Doesn't Matter with David Tisch & Terrence Rohan About this episode David Tisch is the Managing Partner of BoxGroup, one of the leading seed-stage investment firms of the last decade having invested in over 500 seed-stage startups, including Plaid, Ro, Ramp, PillPack, Amplitude, Stripe, Warby Parker, Harry’s, Flexport, Classpass, Airtable and more. Terrence Rohan is the Managing Director @ Otherwise Fund, a fund that discretely empowers a network of today's top founders to make multi-stage venture investments. Terrence has invested in the likes of Figma, Hugging Face, Vanta, Notion and Robinhood to name a few. In Today's Seed Investing Special We Discuss: 1. Is Seed Investing Now a Commoditised Asset Class: Why does Dave Tisch believe seed investing will remain the most inefficient market? What does that mean for the future of returns at seed? Why should you always pay up and be price-insensitive at seed rounds? Why does David believe that no one is great at seed investing? Why does David believe that you cannot index the seed market? 2. The Biggest BS Elements of Venture Capital: Signaling: Why does David believe that the theory of signaling is total BS? Why does Terrence disagree and think it is valid and common? Group Decision-Making: Why does Terrence believe that investing decisions should be made solo and groups merely encourage consensus decision-making? Reserves: Why does Terrence believe reserves hurt DPI and are not good? How does David respond given his growth fund? Venture Value Add: Why do David and Terrence think venture value add services platforms are BS and not worth it? 3. The World of LPs: What is the single biggest misalignment between VCs and LPs? What are David and Terrence's biggest pieces of advice for emerging managers today? Should LPs expect depressed returns from venture as the asset class commoditises?
Transcript 16,505 words · 3 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Speaker 00 If you invest in the biggest, best companies, you will have great returns. If the best company is going to raise a $10 million on a $100 million seed round, and you say no, but that turns out to be the $100 billion opportunity, that was a mistake.
0:15 Speaker 01 Preserves and follow-ons, I think it actually hurts seed investing, and it hurts seed investing in two ways.
0:21 Speaker 00 No one expects the multi-stage fund to do all their Series As if they bought enough in the seed. Signaling doesn't exist.
0:27 Harry Stebbings? This is 20 VC with me, Harry Stebbings, and still we have two of the best seed investors joining me to discuss what is the state of seed today? And what can we expect for seed rounds moving forward? In the blue corner, we have 20 VC veteran David Tisch, managing partner at Box Group, where he's invested in over 500 seed-stage startups, including Plaid, Ram, Stripe, Flexport and more. And in the red corner, we have Terrence Rohan, managing director at Otherwise Fund. Terrence has invested in the likes of Notion, Figma, Hugging Face, and many more incredible companies. But before we dive into the show today, Hive is the marketplace for private stock. Whether you run a fund, lead an investing syndicate, or invest solo,
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3:33 Speaker 01 You have now arrived at your destination.
3:35 Harry Stebbings? I am so excited for this. I've been looking forward to this one for a while. The Twitter shitposting, David, has been incredibly entertaining. I feel sorry for Terrence having to put up with us for this conversation. But first, thank you so much for joining me today.
3:48 Speaker 01 Thanks for having me back, Harry. Thanks for having me. I'm excited to be here.
3:51 Harry Stebbings? Now, I want to just start with some intros. So can you first just explain a little bit about who you are, what firm you founded, and then where you focus in particular? Let's start there. And Terrence, why don't we start with you, given the fact David's done this twice before?
4:05 Speaker 01 Sure. So my name's Terrence Isseid-Investor. I've been fortunate over the past 10 to 15 years to back some incredible founders at their earliest stages. Pigma, Notion, Hugging Face, Vanta, Robinhood, Patreon, Front, just to name a few. Started off my tech career originally at Google. I was there 05 to 010. I did various product development and product marketing roles. And then started professionally investing in 2010. I joined Index Ventures, actually joined over in London. And led and managed the seed practice for them for seven years. Did that both in London for a short stint and then in San Francisco. You know, they gave me a lot of rope to innovate. And one of the things that I innovated it on was actually giving capital to founders to invest.
4:47 Speaker 01 And so I incubated a fund for them, which later was the genesis for Otherwise. So Otherwise is the fund that I invest out of. The model is we give capital to a network of top founders and they discreetly make multi-stage investments, primarily at seed. Don't publicly talk about the fund or the strategy. So I'm going to hold to that. In terms of investing, I write 250K checks. I do mostly seed, but I do some later-stage investment. I'm sector agnostic, but do mostly applications and really try to support amazing founders.
5:18 Harry Stebbings? That's some good early-stage checks, isn't it? You're naming those off. I was like, poof, bring it, David.
5:25 Speaker 00 I'm not going to compete, so I will just, uh, I'm David. I live in New York and I collect toys. That's where we're at. David Tisch, I run Box Group, which I've been doing for about 15 years. Before that, I started and ran Techstars in New York for a couple of years, but left in 2012 to do Box Group full-time. As of recently, we just closed our sixth fund. So it's a $212 million early-stage fund. We do pre-seed, seed investing. We write a 500K to a million-dollar check. We're happy to be the second or third biggest check in around. We don't take board seats. Believe in, in what we call collaborative seed investing. It's what we've been doing since the beginning of the fund and we do so in conjunction with the whole ecosystem.
6:09 Speaker 00 So we come in peace and we work nicely with others. We also have a follow-on fund to go with that. Uh, Box Group Six and Box Group Picks, because that rhymes and we're into rhyming. We are a team of nine investors, uh, seven are based in New York, two in San Francisco, and we've been working together for a long time.
6:27 Harry Stebbings? Do you have stapled funds? Do LPs do both of them in equal ratios?
6:31 Speaker 00 Yes.
6:31 Harry Stebbings? Now, we chatted a little bit before about Keith Raboy, David, and you know, very good at seed investing. Keith said on the show with me recently, every investor needs to be able to answer the question, why do the best founders in the world choose you? When you think about that question, why do the best founders in the world choose otherwise? Or box over other people? What's your answer to that?
6:53 Speaker 00 It's important to meet the best founders. So the first step is, do you see them? Do you get to know who they are and what they're working on as early as you can in that journey? A relationship starts ideally well before the transactional portion of raising capital. I've been doing this a long time. I think repeat founders come to you if you've provided the level of relationship that they're looking for as they raise capital. So first off is, the first time you work with somebody, did you do well enough by them for them to come back? I think that is a foundation of a long career in venture, is building repeat relationships. I think for first time founders, you have to find them where they are
7:37 Speaker 00 and you have to get to know them in a style that meets them versus a product that I think can differentiate. I think at the end of the day, for the most part, all VCs offer the same product. We are giving money and we are taking equity. What comes after that is obfuscated in a sales pitch. Pick me for all of these reasons, when you are a amazingly unique lead investor of multi-stage rounds, ala Sequoia, Andreessen, Founders Fund, Keith now at Cosla. You have a history and a track record of a brand that I think is really hard to compete with. And it's not saying that you can't compete sometimes,
8:19 Speaker 00 but the probability that you can win against one of the top three, five, 10 firms on a repeat basis, I think is a really challenging proposition.
8:29 Harry Stebbings? Can you compete sometimes, though? If they think that you can be competitive or have the ability to be competitive, they're not going to be like, oh, we're going to bring Dave into all of our deals, because they know that you have the ability to be competitive. Do you see what I mean? Is it not like either or?
8:43 Speaker 00 It is very much either or. And I think if you have a sharp elbow, people are going to be aware of that and come at you with sharper elbows.
8:51 Speaker 01 Even with 500k checks?
8:53 Speaker 00 Well, I don't think we compete. I don't think we're trying to be...
8:56 Speaker 01 That's what I was saying.
8:56 Speaker 00 Yeah, we're not an or firm, we're an and firm.
8:59 Speaker 01 And an amazing and firm. So I don't think people necessarily compete with Box Group, but I think you can tell that and story as like a counterbalance to like a multi-stage fund.
9:09 Speaker 00 We don't try to compete. I think if we tried to compete, we would lose our ability to work well with others. And I don't think our value proposition is to say, pick us instead of somebody. So back to your question, Harry, why should people pick us? Because they like us. And I think that at the end of the day, that is why people should work with investors. There is a value component to this, but I think all that value gets played out after you accept an investor, not before. And I think the idea that you're going to be able to sort of prove value ahead of the pitch, I think is a nice head fake that a lot of investors try to do, but I don't think is realistic.
9:52 Speaker 01 I tend to agree with David on this, that a lot of this value add is commoditized and it's also often when you talk to founders, it might be like a couple of quick motions to try to win the check and then people kind of fade into the background.
10:05 Speaker 00 You're building a decade-long relationship with a founder, if things go well. And the idea that in a week, a day, a month, however long that transactional sales pitch goes at the beginning of a round, that you're going to prove all of your value in that short, compressed, fake timeframe versus this actual, long relationship of ups and downs and needs and wants, I just think isn't the way to do this. And so how we've built our firm at Box Group is by being consistent. We've never changed who we are or how we invest. We want to build a relationship at the earliest stage and we're there to help founders. What does help look like? It's different every day for each founder.
10:48 Speaker 00 Every founder is going to want different things at a different point in the company's life cycle. Style and the personality of a founder is going to be different depending upon who they are, what their background is, what industry they're working in, what they need in a given moment. So the idea that in that sales pitch, we're going to prove value, I think is just not the way that we approach our business. What we want to do is build a reputation that when a founder asks another founder that we worked with before, they say, we love Box Group. Box Group is our favorite investor. Not necessarily best, favorite.
11:24 Speaker 01 What's the difference?
11:25 Speaker 00 Best is this, what did they do? Name the things that they did for you. Favorite is, I would work with them in a heartbeat because I like them and they are a friend. They are somebody that we go to when we want to talk to an investor without the sort of parent in the room. We want to be the friend in the room.
11:44 Harry Stebbings? How do you be the friend in the room to so many?
11:47 Speaker 00 We're great friends.
11:48 Harry Stebbings? But you have many great friends then, like hundreds.
11:52 Speaker 01 I think that can be done. I have a similar investment philosophy and I think it is really around this like relationship. I think David's spot on, like these, I think these like value ads and these things, I don't know, it might sound kind of impressive, but it just, yeah, it degrades, it commoditizes and ultimately you're not going to get there through like just commoditized services. It really is breaking through to that level, you know, that level of trust. It's the relation ultimately, a fundamentally, like a really human relationship.
12:20 Harry Stebbings? I hear the tears of every venture value add platform operator in the background.
12:25 Speaker 00 I think our business a lot of the time gets summarized in a tweet, in a blog post, in a tech media article or in a podcast as these very abstractable, objective values, data, stats, like summaries, tactics, all of this magical thought leadership gets projected out there. It's like, here's how to do the business. But at the end of the day, I think what Turek said is how we view it. This is a human business. We get to know people, we build relationships. Most of them fail, right? Most of the companies that we back fail by natural statistics.
13:07 Speaker 00 If you're in early stage, pre-seed seed venture, most of the companies you back will fail. And what comes with that failure is a human who had a dream whose company didn't work out. And that's an incredible emotional, psychological letdown. These are mostly people that have succeeded in everything they've done up until that point. And then their company fails. If you, as the human investor, aren't aligned with that journey on the down and on the other side, aligned with the journey on the up, I don't think you're going to be in this business for very long.
13:41 Harry Stebbings? I totally agree with you, especially on the pontifications around how it should be. I think the thing I know now that I wish I'd known when I started was I tried to be one type of investor for years. And it's like, there's no right way to invest. Some do great in one way and some do great in another. But I tried for too long to be someone that I wasn't as an investor. And I wish I hadn't wasted those years. Terence, you said before the show, the seed market is total jump ball right now and the most ripe for disruption. What did you mean by jump ball? And why does it make it ripe for disruption?
14:13 Speaker 01 Sure. So I think this actually applies to both the seed and the venture. And I think we've got like three long trends coming. And then one really recent one, that's just really creating an absolutely really unique market right now. So I think the long trends are, if you look at like the funds, the expansion and the fragmentation of both the seed and in the venture market. It's a story we know well, new managers, all that kind of stuff. But that's been a trend, maybe 10 years in the making. Another trend that's kind of 10 years in the making is generational change. So you're having storied funds with storied partners. They're kind of riding into the sunset. And I think this is both true sometimes even at the Series A and even at the seed. It's unclear like who's going to take the reins. There's some young partners, they've got a really great generational resonance,
14:59 Speaker 01 but maybe not the track record and experience. That's another trend. And I think another trend that's kind of, you know, very fascinating is if you really look at like founders and the, for lack of a better term, like the power and the optionality that they have now, it's really shifted. Like when they, you know, Years ago when they were starting a company, it was really hard. Capital was scarce, tooling, how to do it, all that. And over time, just more and more tools, more and more options, more and more capital, know how, everything. And what you're really having is like, I think the founders went from, or the VCs kind of went from the customers to now the founders of the customers. So those are like really kind of long standing, kind of compounding trends, which I think in even in its own right, could be very destabilizing. And create like a really interesting ordering.
15:42 Speaker 01 The most interesting data point that I get is I often ask founders like, who do you want to raise your series A or your seed from? And there's just no like clear set answer. And 10, 15 years ago, it was tight. And there's a lot of like interesting, just super variance in that answer. And that, that answer is coming from founders. So that's an interesting data point. And then I think AI is coming along and really fascinating market. It's like the brand pairings on who's great at that, who's not great at that. How these companies even raise seed rounds, or even early stage rounds, or even how they're raising ventures, kind of all a little bit over the map. So I think in like two years, like you, you mush that all together. It's ripe for incredible disruption. Or I'd say there's a lot of opportunity there for funds and managers to really take leadership positions.
16:27 Speaker 01 Because there's just so much change and corresponding opportunity right now.
16:31 Speaker 00 The biggest fundamental change is really right before COVID, the shift to online and distributed venture firms. Is the accessibility of founders to a venture firm. So if you go before sort of 2010 through probably 18 or 19, getting a meeting with a top tier VC firm was hard. It took logistics. You probably had to fly to San Francisco. You probably had to go sit in a parking lot and a waiting room, do this weird like march down San Tel Lane. To like these very old stiff firms. And it was a really tight funnel to get in front of them.
17:13 Speaker 00 Coming out of COVID, the accessibility of the multi-stage firm is fundamentally different. You can spin up a meeting, you could spin up a partner meeting, you could spin up an investment decision exponentially. More agile way. And I think that's a huge change in the market. And that's created more founder optionality to raising rounds and raising rounds quicker. And getting in front of more firms in a tighter timeline. That change is real and impactful and has changed the, to Harry, your point. It has changed the way that multi-stage firms have an ability to access the seed market. Because they move faster. I think speed was an advantage before 2019
17:53 Speaker 00 for early-stage investors that has been equalized by all firms across the entire spectrum. And I think that's a huge permanent change that I haven't seen go back. And I think more than anything, that allows founders even more accessibility and optionality when they think about their rounds.
18:12 Harry Stebbings? For me, the big trend we left off there was the scale of cash that so many firms have been able to accumulate. And the transition of venture, as Doug Leone says, from like a boutique high-margin business to a real transactional industry with low margins.
18:26 Speaker 00 I don't think that impacts seed.
18:28 Harry Stebbings? Well, it does impact seed because Andreessen will invest more and more at seed.
18:32 Speaker 00 Doesn't matter.
18:33 Harry Stebbings? Why doesn't it matter then?
18:35 Speaker 00 Because seed is random and seed has shifted, the word seed has shifted from a million to $3 million round to a $5 to $8 million round. If there is a pre-seed or a starter round, if a founder is going to take initial capital, so call that sub $2 million, that part of the industry is so random. And the idea that that deal is exposed and widely available and competitive is unknown. Those things happen quickly. They happen a lot of the times with built-in networks. They happen a lot of the times with friends, with angels, with angels who actually aren't angels, but are backed by funds that raise capital and distribute it to founders that look like angels. Whatever that capital is, that just continues to be random.
19:20 Speaker 00 I don't think you can index seed and I don't think you can aggregate seed into a low-margin product. If somebody could buy the seed market, that's a very different story. We haven't seen that yet.
19:31 Harry Stebbings? But it does matter because if you continue to see These multi-stage funds deploying $5 million checks at seed. That is a fundamentally different product for founders to choose and some will.
19:42 Speaker 00 I don't think the $5 million seed round is a new product. I think there's a nuance. If that's first capital in, or if there's a sub million, $2 million round that happened before that, that's a interesting fact at a individual company level. Not every company takes that million to $2 million round. Some do, some start with a $5 million round. But the $5 million round has been around and existed for a long time. I don't think it's a new product. Again, more accessible to founders.
20:15 Harry Stebbings? Do you guys want to play in those five on 25 rounds?
20:18 Speaker 00 Sure. So shifting away from the human emotional side of venture, which is actually, I think, the art of venture. The math of venture is you have to invest in the best companies. If you invest in the biggest, best companies, you will have great returns. If you are like structurally adverse to funding things with really hard rules, you are limiting the opportunity set of accessing the best companies. If the best company is going to raise a $10 million on a $100 million seed round, and you say no, but that turns out to be the $100 billion opportunity, that was a mistake. If that $100 million seed round turns out to be a $200 million company, that was also a mistake to say yes.
21:03 Speaker 00 But the option of being the $100 billion outcome, you can't just fundamentally say no if you believe that's the one.
21:12 Speaker 01 100% building on that, like the one undisputable law, empirical law of adventure is the power law. The rare thing is not price. The rare thing is conviction and the company. And so if you've got conviction and you found the company, you write that check. 10 million, 20 million, 100 million. You write that check because as David said, it's the exit price. And if that's the winner, that's our game. Our game is to find those companies. And if we're lucky, we find a handful or maybe even one a year.
21:42 Speaker 00 And every time you pass because the price is too high, if that was the right company, that was the lowest price you could ever invest in that company at.
21:50 Speaker 01 Hundred percent.
21:51 Speaker 00 And you should say yes. And if I go back in my career, right, in two thousand ten through fifteen, a ten to fifteen to twenty million dollar seed valuation was egregious. Today, you take a ten all day. If you play out the two thousand fifteen through twenty period, a twenty to thirty million dollar round was egregious. It was like totally off market or the top of the market. But today, that is an expensive but normalized price. And does that mean that the valuation, the returns compress? Only if the exits compress. If the exits find their way over time,
22:34 Speaker 00 not in this moment, not in this depressed public company SaaS multiple market. But if you fund a generational company and the outcome is insanely enormous, you should say yes to whatever that number is at the, at this seed stage.
22:51 Harry Stebbings? When do you think price matters?
22:53 Speaker 00 Series B.
22:54 Speaker 01 It's a totally different game. It does. It really matters in like growth investing, crossover investing, but that's just like a fundamentally different game.
23:02 Speaker 00 Ventures, two different jobs. There's the pre-Series B job, and there's the post-Series B job, and I don't think they have any relation to each other. I think at pre-Series B, you are doing more art, and at post-Series B, you're doing more math. There's maybe some nuance in certain companies where a Series B or C looks like it's an early-stage style risk, and that might be a company being pulled forward. And you saw a lot of that happen in the froth of sort of mid-twenty to mid-twenty-two. But I think traditionally, post-Series B is a different job. Does valuation matter at a portfolio level? Probably, right? If our blended entry point across our seed fund is fifty million dollars, that's not great.
23:44 Speaker 00 If our blended entry point is three million dollars, I don't think we had access to the best companies in that vintage. So I think there Is some middle ground that says at a blended portfolio level, your entry point is going to be reasonable. And your hope as a early-stage manager is that you own the most at the cheapest valuation of the best companies. That's not in your control. And so I don't think it's on me to say, here are our rules, here's our band of things we say yes and no to, based upon these objective rules. It's not how we operate.
24:20 Speaker 01 Just building on that, and it's the way that I run my book of business. If you're just, just to simplify that, you just say you're just not valuation sensitive, right? To David's point, you're gonna have a sampling based on your work of what you saw and picked and won. And some of those might come in at five and some of them might come in at 50. But if you just release yourself from the constraint of valuation and really focus on conviction and finding those special companies, I think that's the better way to do the job.
24:46 Harry Stebbings? Given what we've said here, is it harder or easier today than it has been in the past?
24:52 Speaker 00 It's a hard job.
24:53 Speaker 01 It's hard.
24:54 Speaker 00 Until there's a day when every company applies for your check and gives you plenty of time to get to know them, meet them, and then somebody tells you what the future is and what the outcome of those companies are, and you're like, oh, this is a good company because I know it's a good company. Then it becomes easy. Until then, this is a game of gut. It's a game of, as Terrence uses the word conviction. I struggle with the word conviction because I don't know what it looks like if I'm gonna be wrong most of the time. It's like, is this human? Is this idea, is this market capable as a package of building something of unrealistic scale? Because when you talk about the outcomes in our business and when you talk about changing the world
25:35 Speaker 00 or funding something that will have this enormous behavioral and economic impact 10 years from now, and then sitting here and be like, oh, I knew it. I saw it. I don't buy that. We're going to be wrong most of the time. That's bullshit. That's such bullshit.
25:52 Harry Stebbings? What are the other it's such bullshit of seed investing, guys?
25:55 Speaker 00 Nobody's that great at this. I don't think there's a seed investor that you can find who has figured out how to be right 10 times more often than another seed investor.
26:09 Harry Stebbings? I think there's real skill. When you look at Roger Aronberg at IA, the guy is brilliant.
26:15 Speaker 00 He did mostly, he did some seed investing and a lot of Series A investing. And if you look at the combination, Series A investing is quite different than seed investing. I think Roger is an outlier. Roger invested in an era when he had a thesis and he was able to find companies that fit his thesis with immense conviction and build incredibly deep positions in those companies. And the returns proved themselves out and he went off into the sunset to do Act Two because he was so good at it. So I think there's aberrations, but I don't think if you look at pure seed investing, that there are people who are just mostly right.
26:57 Speaker 01 The longer you're in the game, if you're really honest with yourself, you have to acknowledge, you have to have so much humility on how luck and how random and how, just like any of these companies that you back, if they really like, you can't imagine the success. So I won't be as provocative, David, but I think a lot of the things that is put out on VC Twitter, it is content marketing to make the person seem smart. But if you really get them, whatever, two beers deep, they're going to be like, shit, I don't know. Or at least the longer that I've been doing the game, the more humility I've gained.
27:30 Speaker 00 It's also, we're not building the companies, right? Like, the hard work is being done outside of this podcast and outside of Twitter. The hard work is being done by founders, by their first 10 employees, by their ability to find customers and traction and users. Like, it is so easy to sit here and put out, as Terrence properly said, content marketing to attract people to think that you are this Magic maker of their success. I just don't buy that. Our job is to allow people that are outside of this room to go fulfill their dream.
28:07 Speaker 00 Some founder has a dream, they have an idea, they have conviction and they go out and they go have an N of one opportunity to go build the thing that they are building to a level that again is unrealistic. If you are playing out the outcomes that are required for venture scale, they go do that with blood, sweat and tears. And we sit here and we talk about how we knew it when we met it. And I just don't buy that.
28:33 Harry Stebbings? Well, I mean, we basically co-founded the company by being on this podcast. We, we came up with the idea, we, we were central to product market fit. But okay, I totally get you and I agree with you on the centrality of luck.
28:43 Speaker 00 Say that again. Say you agree with me.
28:45 Harry Stebbings? I agree with you on a lot of things, don't worry. But I agree with you on centrality, centrality of luck. But some people are just a lot luckier than than others.
28:53 Speaker 00 I don't think it's luck though. I think that's a misplaced word. If you don't see it, you can invest in it. And so I think the hard work as a seed investor is meeting with that opportunity set that has a chance to be those outlier companies 10, 15 years from the day you met them. And that is actually the skill.
29:15 Harry Stebbings? But if that's the case, the content marketing that you kind of denigrated just now.
29:19 Speaker 00 Yes, very valuable. That's why I'm here doing my own content marketing. You're going to take this, you're going to summarize this into a 30 second TikTok. We're going to go viral. And I'm going to get the next generational companies to come to me because we made a great TikTok.
29:33 Harry Stebbings? Yeah.
29:34 Speaker 00 Thank you for that. I'm using your distribution rails to my benefit.
29:38 Harry Stebbings? You see why I love him, Terrence. But like absolutely, it is a very strategic tactic to make sure that you see. And I think it is a skill to make content that resonates. Terrence, you do some bangers of tweets. I love your Twitter. It is a skill to make content that resonates with thousands and thousands of founders.
29:57 Speaker 00 Agreed.
29:58 Harry Stebbings? When you think about seed pick win, where are you weakest?
30:02 Speaker 00 Seed.
30:02 Speaker 01 If you just even step back, like when David and I started, like this ecosystem was so small, like the seed deals would almost pass through everyone's inbox, like almost everyone was like. You you almost had like fifty to seventy five percent coverage of any given deal. And it's like, oh, that person did it. And like year after year, just geographies expand, funds expands, relationship. This expansion, fragmentation, geographies, the whole thing.
30:29 Speaker 00 And then tech shifted from a vertical to a horizontal. So the types of businesses that venture and early stage tech venture capitalists were funding fundamentally expanded at a huge level, too. So to what Terrence said, it we had in two thousand and ten through again, like probably fifteen real scaled coverage that today is a fraction of that.
30:51 Speaker 01 It's a fraction of that. I think that's just like a market shift. I mean, there's, of course, people who have better coverage, but like we're just dealing with a much larger, highly fragmented market. And to David's point, a really efficient seed round, too. So like this guy can be raising a round and it's just done in in days. And it's just like the Zoom is done, multi-stage fund, does it? Boom. As as opposed to like driving around, the deals on the market for a couple of weeks. You're you're meeting him multiple times, you're thinking about it. Boom.
31:22 Speaker 00 Get sent out on Angel List, you click Make Intro, it's Uber.
31:26 Harry Stebbings? David, how do you think about that? Given your statement earlier about liking long term relationships, I'm very much, again, with you on that. And I find it very difficult when I'm forced to make a ten year commitment predicated on one meeting and then a maybe a second meeting a day or two later. I find it very, very challenging in a way that series A allows you a little bit more luxury. How do you do that then, given the preference for long term relationships?
31:48 Speaker 00 So see, pick, win. You have to see it in order to pick it, in order to win it. Seeing it, the earlier you see a founder, the better your relationship is when that transactional moment comes into play. And so if you can meet people before they're starting a company, before they're thinking about starting a company, if they're at a university, if they're working at a different company and thinking about starting one, that is the best time to meet them and to build a relationship that you can have conviction when they do show up. For that transactional moment to say yes. I think that is the essence of seed investing. The hardest part is getting exposure to founders at a scale
32:31 Speaker 00 that allows you to see in a given year, in a given fund cycle, enough of those potential great opportunities. The pick, I don't know how to get better at picking when you don't find out the results of your picks for like five to 10 years. How do you wake up tomorrow and do work to be better pickers? You can be prepared in markets. You can be prepared in the businesses and the types of businesses that you're trying to fund. So I come back to it of like, can you build relationships that you get excited enough about to say yes? Because somebody comes to you with their dream, presents it to you. You say, that is magical. You get this feeling of a human that shares with you
33:14 Speaker 00 what they're thinking about and you're like, you are so sophisticated and deep and passionate about what you want to go build, that I have to say yes. You've gotten me as excited as you are to go build this company. Amen.
33:29 Speaker 01 Provocatively, just to start a little bit, like on the pick, I believe actually a group decision is the wrong way to make a seed investment. I really do believe that. If you look at even like the history of, as a quick aside, like the history of venture funds modeled after law firms, partnership model, group decisions. If you really just passionately look at like the decision science of what that optimizes for, it is for consensus. It is for safe. Often these companies at seed stage, and I think the consensus in the group huddle is like, maybe that series B, that's super smart and super valuable. But like day zero stuff, you really round the edges and you can miss a lot of great things because, and I think a lot of this on the picking, in my view,
34:13 Speaker 01 is instinctual, intuitive, hard to explain. David meets a founder, he's like, there's something in his eyes. And you know what? Seed investing, sometimes that's actually the best reason, but articulating that to a group, you know, it's just seeing that X factor in someone is really hard.
34:30 Speaker 00 I don't know who you're provoking because I fully agree with you. We're a team of nine. Everyone on our team can say yes. Everyone on our team can say yes in an individual meeting. We don't vote. We don't try to find group think. It has to operate in your gut. And if we meet this magical founder and she just left her job at a different company, she's coming out of university and my partner, Nimi, Adam, or Greg meet them and they get excited. Or if Adina, Claire on our team meet them, or we have two Claires, which is low probability on a nine-person team. If Claire or we have two junior people on the team, if they meet somebody and they
35:10 Speaker 00 get to this level of conviction, I want to listen to that more than I need to sort of find a way to get group think internally. I think it happens at the edges.
35:20 Harry Stebbings? How often is it eight one, eight no, one yes?
35:23 Speaker 00 We don't vote. We don't keep track.
35:25 Harry Stebbings? I'm just really intrigued, but generally, is it positive sentiment?
35:30 Speaker 00 We don't operate our firm in a way that we actually try to extract that sentiment. The people who are spending time on that deal should make that decision. By people, I mean one or two people. That's great. It does not need to operate at a firm level. I think seed investing, to Terrence's point, cannot be about consensus or group think or safety. It has to be on the edges. Everyone on our team thinks about people differently. We think about spaces differently. We get excited about different things. And my job at Box Group and our job at Box Group is to have people here who we believe can make great decisions.
36:12 Speaker 00 Terrence takes that model and in essence runs the same thing. He just does it, we're not going to talk about it because it's a secret, so I don't want to touch on it. But Terrence takes that decision-making and distributes it to other people outside of the room, founders. We do that in the same room in some way, but we're still distributing the gut to the individuals at the firm who we think are all of us capable of making a decision.
36:40 Harry Stebbings? But just so I understand, you sit in a room, discuss the deals that we have.
36:44 Speaker 00 We don't have a room.
36:45 Harry Stebbings? Okay, you sit in a Zoom, whatever you want to call it, a mutual, shared, whatever, virtual or physical location, because there are transferable learnings that one partner can pass on to another about a space. You will do that though, correct?
36:59 Speaker 00 We talk about things. We don't vote and we don't look for consensus. Not everybody is equally ramped up onto each individual company such that their voice is valid. The easiest thing to do at seed is find a reason to say no. You name a company, you give me an idea, you give me a market, I could tell you the 32 reasons why it's not going to work. That's not the job. The job is to squint and see the one reason it's going to work and say yes when it matters. And the yes is so much more important than the no. The cost of omission at seed is so much more expensive than the cost of commission. And
37:43 Speaker 00 if you say no to the wrong company, you blow your returns. If you say yes to the wrong company, it's a rounding error in your model.
37:51 Speaker 01 To jump in on this, I think this idea of like conviction, it's very intuitive and it's probably empirically weak and it can crumble. You can crush it and it conceptually is super easy. David's point, here are 20 reasons why this won't work and they're super rational reasons. The market's low margin, blah, blah, blah, all this stuff. You can crush any of those ideas so easily. These voting mechanisms or even these group meetings, either explicitly through voting or implicitly through cultural norms, often just crush those flames. I think there's some cheesy Johnny Ive quote about ideas, they're so fragile when they're early, but I do believe that about startups. They're super fragile, right?
38:33 Speaker 01 And so I think to do the job well is you actually want to celebrate empower people to make those instinctual decisions, even if they are a little bit unreasonable.
38:44 Harry Stebbings? Are the discussions then not just doubt generators in the people making decisions?
38:48 Speaker 00 We structurally push our group to not allow that. We have vocabulary internally, we say like throwing a grenade. You're not allowed to throw a grenade on some deal. It doesn't help if you come in and you just have this loud no. Everybody who is excited about it, the level of pushback that you need to have to say, I cured that grenade and I reject it and I'm still a yes. I don't think that's where the best decisions get made. I think that's where group decisions get made, especially if you have a firm where people have been around longer, or if people are newer, or if people are thinking about harder, newer, interesting spaces.
39:32 Speaker 00 This gets challenging, right? Like AI, nobody knows the answer to AI, like how the market plays out, where the value gets created, what the best 10-year-out companies look like, other than probably like Vinod Khosla, he probably knows the answer, or someone like that. But we, we don't have perfect answers. We don't know the future. If you knew the future, you would be higher percentage correct than any seed investor is going to be. And so the more that you allow for negativity to creep into conversations amongst a firm, the, I think, less variance you will have in outcomes and the safer you will play. And I don't think that that model works at seed.
40:16 Harry Stebbings? Do you really have to police that? Because natural human condition can sometimes be they wake up on the bad side of the bed, whatever, whatever, for some reason, they're negative. Do you have to police that? Because that's hard to continuously instill.
40:29 Speaker 00 I think it's way beyond that. And I think you bring up a good point, right? Like someone's individual mood on a specific day, the weather, the political climate, all of those factors go into gut. And if you cannot find zen, some focus, some operational place that you are making clear-headed decisions from, you are likely going to be on tilt, to use a poker analogy, and bad decisions will happen. And so if I look at The firm, we have again nine of us. I believe the job is to try as best as we can to all of us on a daily basis, operate in some form of evenness.
41:14 Speaker 00 And I think that's really hard. But when I look at Box Group and I look at the evolution of what we've built here, staying consistent to where we play, to how we do the job. Those are really important holds to allow that equilibrium, that zen to happen. If we instead, every fund cycle changed our strategy, changed how we operate, where we invest, like the style of investing, you have no ability to actually get better and to try to find that zone of clarity to make investments from.
41:49 Harry Stebbings? Can I ask you, Terran, speaking of the zone of clarity to make investments from, you know, you obviously have a founder-led model in terms of the investors on the front lines. Why do you think founders make better investors?
42:01 Speaker 01 So the otherwise models, there's two. There's the founders making the investments and there's myself making the investments. The founders making the investments, I think it's a really simple, I mean, I mean, it's C pick win. The C is off the charts. I mean, they're about to dinner, they're in their chats, like the amount of like founder community and camaraderie is just incredibly high. And there is differentiation and offer there 100%. So they see, and then they also win, right? So you could just take those two pieces of like, let's just take picking outside, pull it out for a second, but just seeing and winning, they are a standard deviation ahead of David and I and we just have that.
42:35 Harry Stebbings? Do they even need to win though? Cause they're not competing, are they?
42:38 Speaker 01 Sure. I mean, sometimes like the rounds are closed or there is like, do I take this founder's money? Or there are sometimes on the edges, tight situations and you know, founders of exceptional companies with exceptional reputations, they see and win without exception. And I would even argue that they're very, very good at picking. And I'll tell you why, like most founders are just investing in people they know or in things they know. And that I do think that they're either investing in their networks or they are being sought out by someone building an analogous company or that that's somewhat in their domain. Founders are rarely chasing heat at YC demo day at some random thing and they're not playing that game.
43:20 Speaker 01 So I think you've combined that, that unfair scene, that natural high accuracy picking and that winning, they are very good investors.
43:28 Speaker 00 Building on what Terrence said, his requirement is picking the right founders. So I agree that they win on seeing and they win on winning. If Terrence picks bad pickers, the model falls on its face. But Terrence picking great founders actually makes the model, as he said, beyond a standard deviation, better than everyone else's model. And so I don't think all founders are inherently great pickers. And I don't think all founders are inherently great investors. I do think all founders see better than investors do.
44:03 Speaker 01 Do you agree with that, Terrence? I agree with the see and the win on the pick. I think most world-class founders do naturally invest in their own networks and in their own domains. And if they do that, it is high-accuracy picking. And there are, sure, there is a subset who are going to run around YC Demo Day. And you know what? Those folks should probably stop building and go raise a fund. Do you have a reserves model, Terrence? No, provocatively, and maybe we might get a little bit of attention here, David, opportunity funds. But on balance, I don't think reserves and follow-ons. I think it actually hurts seed investing, and it hurts seed investing in two ways. One is it depresses DPI, so on the financial side. How does it do that?
44:47 Speaker 01 You know, you have whatever, a dollar to invest primary, a dollar for follow-on, maybe even a dollar fifty. So even if you look at all that on a dollar basis, you're almost more of a growth fund there. But anyway, that's an aside. So you're taking capital and you're trying to put it into Series A companies. There is adverse selection there that the best companies sometimes are really difficult to get in. That's not to say that you won't get in, because, you know, legal prorata and all that. But will you get haircuts? Absolutely, just like everyone else is getting a haircut. So now less dollars are going into the right companies. Then you also have this weird compounding factor that just because they raise a hot Series A, that might not be the right company into this idiosyncratic walk in seed. That sleeper that kind of went from seed rate is a nothing Series A and all of a sudden explodes at Series B.
45:32 Speaker 01 Anyway, so there's all these compounding factors that I think on balance, if you just did a one check, it would just increase your total DPI. Because playing that prorata game is very, very, very difficult, a different game, and it's rife with landmines. That's one effect. And the second effect, and I won't want you to answer your question, is just on a relationship factor. Very clean when you're just like, hey, listen, here's my check. And we don't have to answer with the founder, whether you're investing or not investing. And all those reasons, you're just super supportive. Do you think you can even pick the winners at such an early stage? But I think that's the point. I think post series B, these things become not only like, they become painfully obvious. And it's picking is not the thing. It's just access, right? I mean, you just up to series B.
46:17 Speaker 01 It's super hard, right? And so you're really putting a tremendous amount of capital on this really, really hard game. And a game that if you're doing the job well, which like David articulated, it's, it's a totally different game than whatever. Running cohort analysis or customer reviews and all this kind of jazz, which is a little bit more on the later stage. So I don't do it and I think it's a net benefit. I, I do think it is a hangover of there are some conventions that LPs want to hear. Some of them have good rationale. Some of them I think can be fairly questioned, but like the convention is have 30 to 50 shots on goal. Have a reasonable reserve strategy. So be concentrated, have some reserves. Like you go to talk that to an LP, they don't think.
47:00 Speaker 01 If you say, hey, listen, we're going to do no reserves or maybe have larger portfolios. You're getting out of outside those norms and they're harder conversations. And because they're harder conversations, a lot of managers say, I'm just going to have the simple conversation because that's how it's done. But if you empirically look at it, I think it's better. David, how do you feel?
47:18 Speaker 00 Our job is to make great decisions with every check that we write at each step of the way. And so is everything that Terrence said inherently accurate to a good level? A hundred percent, but it doesn't mean that you can't be great at follow-ons. It means you have to be great at follow-ons if you have capital that needs to do follow-ons. And so our job is not to say fundamentally, we don't do this. And our job is to say structurally, every time a round comes together, we're saying yes. Our job is to from a like LPs give us money to deploy into companies in a way that gets them the returns that they expect. And for our business, our job is to generate the best returns we can get.
48:03 Speaker 00 And so from our Our opportunity fund or follow on fund, A, it slants early. We don't want to be growth investors. We want to be venture investors. And so we want to put money into the best opportunities that we can in a given fund cycle. If it means we're slower to deploy our follow on fund in a given moment, or we're quicker to deploy it, I think those are the variables that we can control. Our job is to get as much money as we can into the best opportunities.
48:32 Speaker 01 This model will work. If you establish that relationship at the founder at day zero, you can knock on the door at series B and get a reasonable slice, 100%. So if you do your job well at A and you establish that relationship, that trust, people never forget the people that bet on you early, and they will do that versus yet another growth fund coming knocking. So it is harder, but if you do it well, the cycle does work.
48:57 Speaker 00 I don't think anything makes this job easy. To me, it gets so muted in people looking at what venture capitalists do from the outside and assuming that there's this endless set of opportunities. There's this endless set of access that you can just get into this game run, to what Terrence said, the generic playbook of 30 to 50 companies, high ownership, reserves, follow on, and you're suddenly going to be great and have magical returns. Just like the company side of it, there's a power law dynamic on the venture side of it that needs to be accepted and understood. The best firms in venture have the highest probability of being the best firms in the future.
49:42 Speaker 00 Because brand matters, the quality of investors at that brand matter, and they're going to see and win better than the challengers are.
49:51 Harry Stebbings? Given our agreement that the best companies or the highest caliber companies are not always obvious, David, what have been some lessons for you in terms of most effective resource deployment on reserve allocations?
50:03 Speaker 00 I think our strategy on reserves is to try to put capital into companies right before the market realizes how good a company is. Is that easy to do? No, but nothing's easy. And so all of these questions and answers, the the goal is to take everything and make it a soundbite and take everything and make it a tactic or or an easy to learn lesson. But it's not. It's this nuance. So a company, and not every story is that. Not every company takes a long time to figure itself out. Some companies start and they just work. And they work from the beginning. And yes, there might be a hiccup later on.
50:45 Speaker 00 But the path from seed to D actually might be smooth. You should probably lean into that company if it's a great one. Equally, the company that raises a seed takes a long time to figure out how to get product market fit, how to get revenue, how to get traction. You wanna sense that they are moving towards that great opportunity. And you wanna sense it before an outsider realizes it or other insiders realize it. Do I have many examples of each of those like cases? Yes. Can I figure out what the next one looks like because of the history? No, I don't think you can. In our seed portfolio, we have about 150 companies.
51:29 Speaker 00 I truly don't believe in pattern recognition at scale. I think there is nuanced pattern recognition. But I view each one of those companies as an individual relationship, as an individual journey, as an individual idea, in many ways, an individual market that they're operating in. And we have to understand the nuances of each of those factors of each investment we make and build each of those relationships at a quality level that scales.
51:59 Harry Stebbings? David, what's been been your biggest reserve allocation mistake? And what did you learn from it?
52:04 Speaker 00 I think the hardest part in an early stage model is when to switch funds. How much of the fund should be deployed into initial dollars versus how much of the fund should be saved for reserves? As a fund manager, our goal is to invest as much money as we can into companies versus into management fees. And so If you take a hundred million dollar fund just to make the math easy and you have a two percent fee, twenty million of your hundred is management fees. And so if we only invest eighty of the hundred, we don't have enough dollars at work. Our goal is to get a hundred or a hundred ten or a hundred twenty million dollars of that hundred into companies. Yet it's seed recycling is going to happen at an egregiously later date.
52:49 Speaker 00 How do you figure out how to get that extra twenty, thirty million dollars back into investments? I think that's really tricky. And so that's one.
52:58 Harry Stebbings? Is that even possible really with M and A and liquidity markets being where they're at today? It's so much.
53:04 Speaker 00 It needs to be if you want to have great returns.
53:07 Harry Stebbings? I agree, but I'm just like, given liquidity markets, given IPO markets, given M and A markets, especially M and A markets. We're not getting the M and As we used to five, seven, eight years ago that used to be able to recycle cash so much quicker.
53:19 Speaker 00 This is hard. It's all hard and you have to figure out creative ways to do that. And if that means you have thirty cents, forty cents back on a dollar of a company that shuts down early, you deploy that. If you're spending your management fees in the back end of your fund, that's another way to do it. But I think one is sort of figuring out how to get as much money of the fund into companies. And at what point do you say we've deployed enough initial dollars? That we should switch to sort of the next fund? I think that that is really hard in a scaled model. I think it's much easier when you say we're going to fund thirty companies, we're going to reserve one to one.
54:00 Speaker 00 So the math is very straightforward. For us, it's not as straightforward and I don't know the right answer. So when I think about reserves, I would say over reserving is the bigger mistake than under reserve.
54:11 Harry Stebbings? You often say about being the favorite, the favorite, the favorite. Is it difficult if you're the favorite and you want to sell secondary? Is that not a bit of a tough conversation to have?
54:21 Speaker 00 We don't sell secondary.
54:22 Harry Stebbings? Terrence, do you? And do you not think secondary will be an ever increasing part of early stage managers providing liquidity back? In a time when liquidity is really appreciated?
54:32 Speaker 01 As a general rule, no, no on secondaries. I do think you need to kind of hold to, to really make the fun math work. I think you just need to hold. I do believe secondaries. I mean, if you look at the charts of it, like what it's been doing, talk about something that's been compounding, like the secondary market has been slowly compounding and just like. The amount of LPs are willing to do it now, these various organizations that email you every day about this company and that company, they're compounding. The VC funds becoming registered, right? You know, and so now they can buy more, more common stock as a result. So I think if the M and A market does contract, we'll see if that's like really long term, but maybe. I do believe the secondaries are going to be a really robust option.
55:14 Speaker 01 And then, yeah, the company is at five, $10 billion valuation and you want to sell off some portion of it as a seed investor. I don't think from like a relationship standpoint, I have done like one or two secondaries over the years. It's like, I think if a company is at a certain level, selling off a tiny bit is fine. I think if you're like wholesale, you know, as a seed investor, if you're wholesale taking the position off at like series B, that's weird. Company is at 10 billion and you're taking off 20% of your position. I don't think that is as odd for the relationship, but I generally don't do that for just the return profile.
55:49 Harry Stebbings? David, at a stage like Terrence said there, $10 billion, does it not just make sense to take 20, 30% off? Return a great amount of cash and still ride the upside. I genuinely love to understand why not.
56:04 Speaker 00 Does it make sense? Sure. I think if you believe that is the outcome size of that company and there isn't another 10x or 5x on the table, sure. But I think to Terrence's point, the compounding at the end is so much more valuable than the compounding at the beginning. The path from zero to 1 billion is impossible. The path from 1 billion to 5 billion is more predictable and it's more easy to see at a given moment. But do we like fundamentally reject the idea of ever doing a secondary? No, but I don't believe our job is to figure out how to hack the system.
56:45 Speaker 00 Our job is to figure out how to back unique outlier, long-term generational companies. And if you look at the time that it takes to build those companies. Have to stick with it sort of till the end.
57:01 Harry Stebbings? I remember I had Brian Singman on the show from Founders Fund. He said, we consistently underestimate the power of the next double. And it's the move from five to 10 billion dollars.
57:10 Speaker 00 It doubles your seed return. That's the easiest math in the business.
57:15 Harry Stebbings? What else is really hard? If understanding when's the right time to cross over into funds, what else is really hard?
57:20 Speaker 00 Keeping yourself relevant. And I'm old. I need to understand what's coming. And what's coming today is different than what was coming yesterday. And the spaces that technology impacts and, you know, software ate the world. Is hardware eating the world? Is software and hardware together eating the world? Is AI eating the world? Like, how do we compete in AI against experts? How do we compete in science? How do you compete in all of the spaces that we as a firm spend time in? How do we understand what we should be excited about and what we shouldn't?
58:02 Speaker 00 And how do we, you know, get into the next network? I think the next network of great founders exists somewhere. And our job is to find that network and be relevant in it. And so every day, the panic that we have is, are we seeing things and are we understanding them? If you don't understand them, you're probably not looking in the right places to see them. And if you see them and you don't understand them, you're going to miss them. And so it's this very complicated start every day from scratch in this business. I think the one thing that does matter and help is that network compounds and brand compounds.
58:42 Speaker 00 When I look back, founders that we backed 15 years ago, five years ago, two years ago. If we build that great relationship with them and they're willing to send us their friend who's starting a company, those things matter.
58:56 Harry Stebbings? Do you worry that our supply of great founders is impacted by the ability of AI to reduce costs in a number of different ways? Meaning that they don't need the seed round that they used to?
59:07 Speaker 00 No.
59:07 Speaker 01 If there's one round, and I think this is like an interesting topic, like how funding dynamics and whether you need B C. But I think if there's one round that is will be essential forever, it is that first round. It is that like, I need money to get going. Sure, there's gonna be founders who are, this is their second show and they can self-fund, fine. But like, as a persistent basis, like the one round you need is the one to get going. And then, sure, you AI and other tooling, I mean, I've seen this across my own portfolio. These companies can become and get scaled, they can become hyper capital efficient, hyper profitable. And venture capital is kind of really optional to them. And I think that's actually like beautiful. I think that's actually like where you actually want to get.
59:46 Speaker 01 And it's often how I guide my own founders is like, I think it's the right way to look at venture is like, raise that initial capital. And if you get to the point where venture capital is optional, you can dip in and dip out, that's the ultimate. You know, you choose your own destiny, you control dilution, you can control your board. You can grow when you want to grow, you take on more and then you don't. You don't necessarily need to take it every step of the way. And if AI will do anything, I think it'll just make companies that much more capital efficient. Seeds seeds not going anywhere. And I think that's also why, you know, some of the multi-stage funds continue just to to look upstream. Because I think that's partially understood.
1:00:26 Harry Stebbings? I want to move into a quickfire round. While while we're on the seed will always be the most important round. I think that's a good a good transition to a quickfire. You've both, I'm sure, been given much advice in your investing career. What's the best investment advice that's stuck with you most?
1:00:39 Speaker 00 Investors invest. Our job is to say yes, not to say no. And our job is to communicate that decision to a founder in a transparent and quick way. And our job isn't to waste people's time and our job isn't to mislead people. And I think as I've looked at this business for years, there's there's people that come and go that are just wasting founders' time. Our job is to not waste their time. And our job is to give them money and get out of their way until they ask you to do something. At which point you should try to do it as best as you can and as quick as you can with as little friction as you can. And so my job is Investors to invest and it's to give people money and do what they ask me to do.
1:01:22 Speaker 01 Another bit of advice that also sticks in my head is founders that are going to be the most successful need do the least, which is also true. And it does inform, you know, the way that I invest. I do think if there's anything that you can sort for, at least in myself, is I do to really try to kind of underwrite and pick really special people, whether they build something amazing, who knows? But at least in my belief that they are sometimes, you know, special.
1:01:46 Harry Stebbings? What's your biggest advice to managers out raising today?
1:01:49 Speaker 01 The cold water plunge, just the shock to the system for any seed manager is that we live in this. Our front office job is so fast and it's like deals get done very, very, very quick like. And you're just used to this like introduction to meeting, being within days, decisions, this all. And you think like that's the world that capital moves, but there's this whole other world, which is the LP world. And they're patient and you get an introduction and their first meeting might not be for three months. And you just gotta just like, this is going to take a really long time. There's a different sort of protocol and culture around this and it's going to be hard.
1:02:30 Speaker 01 It's not hard in terms of like intellectually hard, you're just going to get hundreds and hundreds of no's. And you just have to slowly crank the turn and it's just realize that fundraising, especially fun ones can take time. And you have to be patient, 12 to 18 months is fine. People not meeting with you for a couple of months is fine. People taking months, if not sometimes a half a year to reach a decision. It's not even fine, it's normal. I think that's like the hardest thing to understand if you're a hungry angel investor who's only dealt with like the front office. Like the back office just moves in a totally different pace.
1:03:04 Speaker 00 For a new fund manager, my advice is have a reason and a vision. Why are you doing this? Why are you starting a fund and where's it going? Because if fund one is the vision, define that. If fund one is not the vision, define that. And so you don't just do this because it's easy to do, because it's not easy to do. And the timeline for ROI on this business is egregious. And so have a reason and have a vision.
1:03:29 Harry Stebbings? What was the worst no that you've said? What no do you regret the most?
1:03:34 Speaker 00 It's going to be something in the past year that we said no to, that we know better to have said no to.
1:03:42 Harry Stebbings? There must be a specific company, right? Ah.
1:03:44 Speaker 01 You still don't know, like, these things could even be a 10 to 20 billion dollar and still flame out. Like, you don't know until it's end. The thing that I get most upset of is if I'm just not true to, like, the style of investing that I do, that sometimes you might get caught up in, like, around or you're not investing in a way that's true to yourself. Like, that I really beat myself up of. If I play the game the way that I believe you play the game and I miss, fine. But sometimes, I mean, you're just not being true to your principles, that's when I beat myself up a little bit.
1:04:18 Speaker 00 I answered this with a specific answer on a stage once and the founders got furious that I named a name. And I, I thought it was a compliment. I thought it was like, I screwed this up, what a mistake. And the founders were pissed. I don't want to just avoid that because I don't want to not bother somebody. It said, to what Terence said, like, the no's that look bad today might not be wrong tomorrow. So I literally try to wake up every day and find myself in that zone of clarity to get these, the picks right. And we screwed up something in the past year and I don't know which one it was and how many. And those are the ones that haunt me.
1:04:55 Harry Stebbings? You can be an LP in a seed fund, a series A and a growth. Which ones are you?
1:05:01 Speaker 00 I think there's a power law dynamic in venture that is very hard to break. And I think the best firms will continue to be the best firms until they are suddenly not, mostly on internal errors and unforced errors. And it's not that challengers don't emerge. I think there are some great firms that have started in the past 10 years to challenge the establishment. But I do believe that the best firms remain the best for a long time.
1:05:32 Harry Stebbings? So why don't I give you a hint here, David? I'll say adjacent for the seed, which is Nico Wittenborn. I would say benchmark for the A and I would say thrive or Sequoia for growth.
1:05:43 Speaker 00 You're picking favorites.
1:05:45 Harry Stebbings? It's content, David.
1:05:46 Speaker 00 I am a collaborative seed investor. We work with everybody. We have no favorites and internally, we don't view anybody as other than equal. No, I, I think you can name buckets in each of those categories that are of quality. And on a given deal, they're all relatively equal. And I think we like working with a lot of people at each stage. I think the second tier VCs are uninteresting. And I think the third tier VCs are harmful. But I think the best ex firms at each stage are good enough to not need to overly rank them.
1:06:26 Harry Stebbings? Terence.
1:06:27 Speaker 00 But I think the second and third.
1:06:28 Speaker 01 Well, I, I think the more interesting point as opposed to naming names is I think brand is a very interesting, like not well discussed, not well understood, but probably the most potent currency in venture. And I think it takes a really, really long time to build it. And then I think once you have it, I think it's very, very durable, but it can slowly degrade. And directly relevant to seed investing, I remember did this, I was like curious like, why are founders choosing multi-stage funds versus a great just pure play seed fund? And the best answer I actually got was, the most consistent answer was around brand. And it's like, hey, listen, if Sequoia does or whatever, if some top tier fund does it, and I need to then hire, that brand means something to that engineer.
1:07:13 Speaker 01 And in terms of validating it, in a really like, so brand is, and I think that's why multi-stage funds can play at the seed stage. But if their brand degrades or even dilutes or is less ambiguous, then you have this tension which gets into this other thing around like signaling and all that. But they trade off their brand. It's not well studied, it's not well understood, but I do think it's like the most important factor or one of the most important things in terms of like playing this game well, because it determines what you see and how well you win.
1:07:46 Speaker 00 I'll give you a fun soundbite though. I don't believe in signaling. I think it's a fake word and I don't think it exists in this market.
1:07:51 Speaker 01 I am going to disagree on that one.
1:07:52 Speaker 00 There we go. We found our disagreement.
1:07:54 Speaker 01 I know. We've been agreeing too much.
1:07:57 Speaker 01 All right. Company's doing incredible. There's no signal. Company's doing crap. There is no signal. Company is doing okay. There can be signaling in that.
1:08:06 Speaker 00 Kinda. Andreessen doesn't pick up the phone to a Sequoia-led Series A and be like, "Hey, Sequoia, what do you guys think about this deal that we're maybe going to preempt the B for?" So a stale deal, a deal that's been in market, that's went to market to try to raise and failed to raise, has a ton of issues. If you want to label that as signaling issues, that's just a misplaced word.
1:08:31 Speaker 01 Signaling is often defined as the multi-stage fund does the seed and doesn't do the Series A.
1:08:37 Speaker 00 No one expects the multi-stage fund to do all their Series As if they bought enough in the seed. I actually think that's the perfect stage where signaling is irrelevant and not a factor. Benchmark, Benchmark does a seed, or they incubate something. Index isn't calling Benchmark and be like, "How's that seed doing that you did?" And the founder's not like, "Benchmark passed on our A. Are you willing to do it?" It's this lack of perfect information that everybody's operating on. Everybody wants to move quicker than their competitive set to get ahead of what they have convicted themselves to believe is a deal they want to do. Nobody's calling each other. Signaling doesn't exist.
1:09:18 Speaker 01 No one's calling each other, but they do know if you have money from a multi-stage fund, the posture of that fund, especially if that fund has got a great brand, can determine the general deal velocity, the general deal heat. Okay? So now if you say, "No, you back your company," and it's like, "Hey, listen, I took money from whatever Sequoia," and the founder's like, "Yeah," and they're wanting to preempt me again, that deal is going to get done in days.
1:09:47 Speaker 00 But they might not have wanted to preempt that. That's a bluff. That's like a founder's soundbite.
1:09:53 Speaker 01 I think good founders on balance tell the truth. I really do.
1:09:57 Speaker 00 Sure, but again, that's your example A of good company. Sequoia leads the C. They want to preempt the A. That's in the top decile or quartile bucket. The bottom half, let's call out as irrelevant too. It's that second quartile. Again, I don't think there's perfect information. I just don't think anybody knows what the existing investors think until a deal is stale. Until the deal has been fully in market, fully went out to raise a round, and it's obvious that the existing investors are not saying yes. That is when signaling happens, but that's a failed fundraise or a challenged fundraise,
1:10:39 Speaker 00 which one part of that is some version of signaling, but that's well after the actual signaling is sort of relevant.
1:10:48 Speaker 01 It was my job to write C checks from a multi-stage fund for a while. And I'll tell you the thing that was very important when our companies went out, and I really believed index did an incredible job of this, and I really took a point of doing this well, is arming them with a very clear answer on like what the internal posture is. Because the question is undoubtedly asked when they're in those pitches room. Because there's a pitch, who the investors are, boom, there's a great multi-stage fund. Great. What's Sequoia doing? The question comes, right?
1:11:17 Speaker 00 I think that stopped five plus, maybe longer ago, because I think the market moves quicker, and I think that everybody is panicked that somebody's going to get to the deal ahead of them. And they're not going to get that perfect information.
1:11:33 Harry Stebbings? I definitely think that question is still asked. I'm sorry. And my question then to you, Terrence, is how did you arm them? Because that's a difficult one to answer.
1:11:41 Speaker 01 Honestly and factually, right? You know? And really, as best you can, also like getting firm numbers and saying like, yes, this is what we're going to do. And that was on balance like really good, right? And that's the best that you can do. But there can be tricky situations there for sure.
1:11:57 Harry Stebbings? Terrence, you agree with me, Terrence, that the question still gets asked?
1:12:01 Speaker 01 The question, I believe 100% the question gets asked. I mean, just like the questions like, what are your insiders doing?
1:12:06 Speaker 00 If a firm wants to do a deal, they're not asking that question. They're doing the deal. If a firm wants to do a deal, they are going to move. If you have a multi-stage firm on your cap table that can lead your next round, and a new multi-stage firm shows up to explore your next round, very rarely are they like, will you get the answer from the other firm before we make a decision? Because if you do that, you will lose the deal. And so there is a speed and aggressiveness factor that has changed the way the market operates in these follow-on rounds that I think has removed that, again, outside of a company being in market for too long, at which point all these factors play out.
1:12:49 Speaker 01 Which goes back to my original point. At the top end of the market, it doesn't matter. Bottom end of the market, it doesn't matter. It's when the company's doing okay, it can create complications.
1:12:57 Speaker 00 I don't think the word signaling is the factor there as much as it's like, somebody needs to decide that they want to underwrite this next round. And whether that's an insider or an outsider, I don't think those two things play as tightly together as the word signaling alludes to.
1:13:16 Harry Stebbings? David, are there any other BS elements that you think have predicated that you'd like to debunk?
1:13:20 Speaker 00 I don't think outside of the top five to 25 VCs individuals that VCs can magically impact a company. Most of those investors join your board at Series A or B, those five to 25, whatever the number is. And the rest of the investment sort of world is a commodity and probably a negative. I think founders view too often the person that is willing to lead the deal as potentially good versus potentially neutral or bad. There is just like a handful of people that are magical, and everyone else is totally fine and is just money.
1:14:00 Harry Stebbings? Do you agree with that, Terrence?
1:14:01 Speaker 01 Yeah, I agree with that. I would even say as far as like, I think it's very applicable even at seed. I would even go a step further at seed. I actually believe like, The best investors, like for a company to truly be incredible, it has to come from the founder. It really does. It's like a real creative process. Like analogy, I've been kind of playing around recently. It's like you're a patron, they're an artist. They gotta paint that picture. You're not opining on the creative process at all. And they have got to really, really do that. And if you're a good patron, you're supplying the money, supporting them and all that. And this idea that the VC, this notion of like coaches, and there's all these really nice metaphors, but I think it's actually too intrusive. And I think the really best ones, you gotta let the founder pay.
1:14:46 Speaker 00 I don't believe in coaching.
1:14:48 Speaker 01 There you go. So I mean, but even if you like unpack coach, it's like selecting players of the team, calling plays.
1:14:54 Speaker 00 I don't believe in the word coaching or mentors. I believe in relationships and I don't think that you can take these hierarchical words and apply them to relationships.
1:15:04 Harry Stebbings? Do you not think you can have a mentor, someone who has been there and done it before? And you have a relationship where they impart a higher degree of wisdom because of their experience than you do to them?
1:15:14 Speaker 00 It's a friend. I think the best versions of those relationships are back and forth and not one sided. Do I believe in coaches at a scale? I think that word coach can be friend, shrink, a variety of versions of that. Like, do I think that coaching has helped CEOs get better? Yes, but if that needs to happen pre-series A, to Terrence's point, I don't think that's going to help. Leadership, figuring out how to impact and inspire great culture, those things can be helped from the outside. And I'm not dismissing that industry fully, but I think the idea that the success of a company is dependent upon outsiders is nonsense. The success of a company is dependent upon employees one through 10.
1:16:02 Speaker 00 10 through 100 and the founders. That is what will make or break a company. The investors, the outsiders, the advisors, the mentors, the coaches. That part of a company building is an amplification of what's naturally being built internally.
1:16:20 Harry Stebbings? Do you think investors can make a company?
1:16:22 Speaker 00 No.
1:16:23 Harry Stebbings? So I had Brian Haldigan, the CEO of HubSpot on the show. And he said that it was a absolute needle mover, having Sequoia. The level of talent they were able to get, the customers they were able to get.
1:16:33 Speaker 00 But HubSpot was right before that outside impact. And again, you're talking about the single best or one of the five best investors in the world at this asset. Again, back to where I said, there's a handful of people inside of a handful of firms that can move needles. Outside of that, I don't think that the outsiders have this magical impact. And later on, they can move bigger needles than earlier on. The seed creation of a company has to come from a founder. There's like random examples of incubations that you can try to apply value to the investor. But that was a founder. It was still a founder inside of that incubation that actually was the reason it worked.
1:17:18 Harry Stebbings? Do you think the brand of Sequoia or any of these top, top, top funds is so strong that it actually impacts their loss ratio? And what I mean by that is because, yeah, because the firm brand is so strong, there are so many capital sources that will do it. And quite often, companies just need cash to find PMF, to find customers, to find a landing pad.
1:17:37 Speaker 00 I agree with that. Yes. What else do I want to debunk?
1:17:41 Harry Stebbings? Terence, any debunking for you, my friend?
1:17:44 Speaker 00 If you go back to the power law in venture, most VC funds will fail. I hope ours doesn't, but most will. I operate every day under the panic that the investment we make tomorrow is the ability for our firm to continue to succeed in the future. If we aren't willing to understand our vulnerability in the power law dynamics of venture, we're in trouble.
1:18:08 Speaker 01 And I think this is the exact mentality you need to win and stay relevant in the game. Like, you know, over the years, like, I've had these interactions with super famous investors and the level of like intensity that they swarm around things and the hunger. So I do think you need this. I think that's what it requires to be great, absolutely.
1:18:28 Harry Stebbings? What's the biggest misalignment between VCs and founders?
1:18:31 Speaker 01 I think it really gets around these conventions of like what the VCs sell to the LPs and what the founders want to buy. And so what the VCs sell to the LPs is like, hey, we're going to buy 20% of the company. We're going to have board seats. We're going to have like, they, they, they sell a very specific product and that doesn't always like fit what the founders wants to buy.
1:18:52 Speaker 00 I think that the biggest misalignment is that most VCs aren't good. All VCs aren't created equal. If you take money from a not great VC, there's going to be this enormous misalignment.
1:19:04 Harry Stebbings? Is it a misalignment if they're not great? They, they just sit, sit down and shut up is what most do.
1:19:08 Speaker 01 Give up a board seat and then control and then boom, you're out on the ground.
1:19:13 Speaker 00 They like, they like do all this stuff and you're like, just get out of the way. The company's either going to work or not work and you are not the reason for either of those two things. If anything, you're the reason it's not going to work.
1:19:22 Harry Stebbings? But that's a bad VC. That's like not the not great. The not great is the average, which just does fuck all and goes to Tahoe.
1:19:28 Speaker 00 Nope. They like think they have answers. They're like, I spent 42 minutes this morning reading an article that I'm going to forward you that you're obsessed and deep in this industry for the past like seven years. Did you see this? And how, and please respond to me with what you think. It's like, thanks for your help.
1:19:45 Harry Stebbings? Is it helpful to send portfolio companies new competitors that arise?
1:19:49 Speaker 00 On TechCrunch? Yes, on Tech. You should read TechCrunch all day and then just forward out the articles to the companies that are relevant to that article. That is super valuable.
1:19:59 Harry Stebbings? It could be in a channel that you've seen. It could be someone that's told you about a company. Is it valuable or not? I actually think it is.
1:20:07 Speaker 00 Yes.
1:20:07 Speaker 01 I don't think it's valuable. First of all, I think founders have such an awareness of the market. Like you might get to them like 12 hours, maybe a few days before, but they're, they're going to see it, right?
1:20:16 Speaker 00 So I, I would just, I would take your question and reposition it. Is it important for founders to understand the competitive landscape of what they're working in? Yes. Is it your job to like be the first informer of some random two-person startup? No.
1:20:30 Harry Stebbings? But being in the markets that we're in, we know when a company gets funded well before TechCrunch does anything. We can say to our founders, just to let you know.
1:20:38 Speaker 00 There are two really interesting people starting something in your space. I just wanted to let you know.
1:20:43 Harry Stebbings? Yeah.
1:20:43 Speaker 00 Yeah. Very, very helpful.
1:20:45 Speaker 01 Asymmetrical knowledge of this of like, hey, listen, this one raised or this one raised this much. And that's like, not general knowledge, but it's known because of what you do. That's helpful.
1:20:55 Speaker 00 Or this company is doing well, or here's why I, I believe they're doing well. Those things are valuable.
1:21:00 Speaker 01 Yeah, yeah, that's valid, but like.
1:21:02 Speaker 00 You don't think forwarding TechCrunch articles is valuable, Terence?
1:21:05 Speaker 01 I think you've been dating, I don't even know if TechCrunch, I don't even know. I haven't read that.
1:21:09 Speaker 00 Don't be mean to Yahoo. Apollo owns Yahoo. You can't piss off Apollo. They can acquire you and then you're in trouble.
1:21:15 Harry Stebbings? Do you take cold inbound?
1:21:16 Speaker 00 Yes.
1:21:17 Harry Stebbings? Have you ever?
1:21:18 Speaker 00 And the amount of deals that we've, so like back to what have we screwed up? If I looked back at the quality deals that showed up in our inbox that we missed in that like. And sometimes we see it a year later and it comes through a, a warm source and we're like, oh my God, it was sitting there like. This is an interesting deal or like this was sitting in our cold inbox and we screwed it up. That's happened. And more often than I would assume.
1:21:43 Harry Stebbings? How do you feel when investors say, well, your job is to hustle in many respects as an entrepreneur and a founder? You should have the ability to hustle into a warm intro. Many say.
1:21:53 Speaker 01 Not, not a bad, but a great cold email is a form of hustle. Absolutely. One that's like human, snaps to your attention, personable, boom. That hundred percent is a form of hustle.
1:22:04 Speaker 00 Very different than the copy and paste blast, like hello at.
1:22:09 Harry Stebbings? Do you like a deck?
1:22:10 Speaker 00 Yes.
1:22:11 Speaker 01 I don't care.
1:22:12 Speaker 00 Very much. I think a deck or a product is a way that a founder can articulate the thing in their head. It takes the idea and puts some picture around it. And I think it's really valuable to understand thinking.
1:22:25 Speaker 01 I'm much more of a bet around the person in the general space, but they do need to like convey an authentic, original vision.
1:22:34 Harry Stebbings? Will you do an uncapped safe?
1:22:35 Speaker 00 Yes.
1:22:36 Speaker 01 I put certain provisions around them that they, if they don't raise at a certain point, that it would like convert at something at some point, but I generally, generally don't do it.
1:22:45 Speaker 00 We will, we will do an uncapped safe, we will catalyze an uncapped safe. Yeah, I don't think my job is to have stupid rules. I think my job is to invest in the best companies in whatever mechanism possible. And the probability, if it's the best company, is at the point when we are investing and the price we are investing at is the best and lowest point in that company's trajectory.
1:23:09 Harry Stebbings? Final one, where's the seed market in 10 years, guys? If we do this in 2034, are we still going to be talking about signaling multi-stage funds? What's the discussion then?
1:23:18 Speaker 01 It's this, but like more of it. Maybe there's some like, I don't, I was like, maybe there's some like robotic, whatever API stuff maybe in 10 years, but I think it's just everything that we see, but just more of it.
1:23:30 Harry Stebbings? I never understand that with AI, people, the fear of AI, because I'm like, AI is predicated around pattern recognition and data. And the whole point of what we do is the anomalies.
1:23:39 Speaker 01 Yeah, maybe, maybe you could apply, but sure, you apply, they take a look at your Twitter, your LinkedIn, what you did, where you did, and they spit out a score and you get 500K or not, maybe.
1:23:49 Speaker 00 I think 10 years from now, the bigger firms are bigger. There are in many ways less big firms. I'm not convinced that that dramatically impacts the way that the seed market looks in that a 10 or 50 or 100 million dollar fund betting on the right company can be an amazing financial return. And until there are no seed rounds, which I don't think is the future, I think the seed market will still be up for randomness. And it doesn't mean that randomness is easy or randomness is predictable, but I do think that the seed market looks pretty similar and that the multi-stage firms are permanently part of that.
1:24:34 Speaker 01 To build on that and to bring it back to like the, just to kind of pull it full circle. I think the core of seed investing is what David and I talked about is this relationship and betting on people early. That's not going anywhere. How you might have some differentiation, any differentiation, I also believe is just basically a market efficiency inefficiency. And if it gets, if it's attractive enough, it will get filled. So yeah, there might be some like differentiation around that here and there. If there's enough kind of edge there, other people do it and then it just becomes less of an edge. But the core of what we do is this very human, very personal thing. But I, I don't think that's going to be replaced by AI in terms of like the core thing.
1:25:15 Speaker 01 If anything, I think being the human in the room is going to be more important and just really.
1:25:21 Speaker 00 I, I think the, the spays eye of conviction that there will never be efficiency in is the seed market. Because starting something is not efficient. Starting something is messy, it's ugly, it takes blood, sweat, tears, it takes vision, hunger, dreams. And if you are a founder with a, a thought, a dream that you wake up with, getting going is the only thing you think about. Not the efficiency of the financing market to allow that to happen. And so I truly look at the future with optimism and I don't think people are going to stop dreaming. And I don't think ideas are going to stop coming.
1:25:56 Harry Stebbings? David, I worry that we actually agreed a little bit too much in this show.
1:26:00 Speaker 00 Let's do a round two.
1:26:01 Harry Stebbings? Let's do a round two pay-per-view, baby. Terrence, if you don't know, we actually are best buddies. We just do it for the views. It's, it's basically like the boxing, the boxing promos where they like get up and fight in the weigh-ins. Seriously, guys, I've loved doing this. Thank you both so much for being so brilliant. David, thank you for putting up with me for a third time. Geez, well done. Hopefully my interview's got a little bit better.
1:26:23 Speaker 00 You didn't remember one of them. It was unmemorable.
1:26:27 Harry Stebbings? Terrence, I've loved having you on for the first time, but seriously guys, it's been fantastic.
1:26:32 Speaker 01 Thank you for having me. It was fun, a lot of fun.
1:26:35 Harry Stebbings? My word, I have to say I had so much fun doing that. I want to say huge thank you to David and Terrence for being such good sports there. If you want to see the full episode in video, you can check it out on YouTube by searching for 20VC. I always love to see you there. But before we leave you today, Hive is the marketplace for private stock. Whether you run a fund, lead an investing syndicate, or invest solo, Hive gives you unparalleled access to some of the most exciting companies in the world, all before they go public. Think Flexport, Reddit, and Airtable, alongside many other companies I've featured on the show. Secondaries are so much easier with Hive. Stay on top of the private market with free access to volumes of real-time market data and enjoy Hive's automated trading experience with thousands of trades across hundreds of unicorns.
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1:29:20 Harry Stebbings? As always, I so appreciate the support and stay tuned for an absolute banger of an episode this coming Wednesday.
Previous 20Product: Top Five Product Lessons from Creating Snapchat "Discover" and "Chat", How to Hire the Best Product Talent and Why Case Studies in Interviews are not Helpful & How AI Impacts the Future of Product Design with Will Wu, CTO @ Match Group Next 20VC: The Chess.com Memo: The Most Untold Story in Startups; Scaling to $100M Revenue, 150M Members and 700 People, All with Zero Venture Funding | Erik Allebest, CEO @ Chess.com Page updated October 26, 2026 · transcript and summary are machine-generated
