Pod Insights The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch 20VC: Why VC Subsidizes the Wrong Type of Business, Why Capital Gains Tax is Crazy, The Biggest Misalignments Between VCs, Founders and LPs, Why Business Model - Product Fit is as Important as Product-Market-Fit with Chris Paik @ Pace Capital About this episode Chris Paik is a General Partner @ Pace Capital, an early-stage venture firm in NYC. Pace's first fund was $150M and their second was $250M. Before co-founding Pace, Chris was a General Partner at Thrive Capital where he spent an incredible 8 years having joined the firm when they were on their first $10M Fund. In Today's Episode with Chris Paik We Discuss: 1. From Hipster to One of NYC's Best VCs: How Chris made his way from not knowing about venture capital to being one of the most prominent in NYC? What are 1-2 of his biggest takeaways from his 8 years at Thrive? How did they impact how he thinks about building Pace today? What are Chris' biggest lessons from working with Josh Kushner? What did Josh do to spot young talent in a way like no one else did? 2. The Core Pillars of Successful Venture Investing: "Invest in companies that can be described in a single sentence". What does Chris mean by this? How does that impact the type of companies he looks to invest in? "Business Model Fit is as important as PMF". What does Chris mean by this? How does he determine where a company has business model fit? How does Chris analyze his relationship to market sizing? How does Chris think about how willing he is to take a bet on market timing? Why does Chris believe that the more "virtuous" a company is, the less enterprise value it will have? 3. What is Wrong with Venture Capital: The Misalignments: What does Chris believe are the single biggest misalignments between VCs and Founders? What does Chris see as the biggest misalignments between VCs and LPs? Why does Chris believe we should scrap capital gains tax and all be taxed as an income tax? Why do acquisitions allow investors to be screwed over by the acquiring company? 4. The Future of Social and User Generated Content Platforms: How does Chris analyze consumer businesses according to "The Seven Deadly Sins"? Why does he call them, "The Seven Deadly Motivators"? What does Chris believe is the future for Substack? Why does it not have Business Model Fit? What are 1-2 of his biggest lessons from being on the Twitch board? How did that experience impact his mindset and approach to what good is in UGC and social? What does Chris believe is the number one thing to look for in a potential consumer social investment? What do so many miss?
Transcript 12,369 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 The vast majority of direct to consumer brands not suitable venture investments. Venture capital subsidizes business building of companies that should never have been venture capital targets. Venture capital is not responsible for putting a sandwich shop in business. Where does the line stop?
0:19 Harry Stebbings? You are listening to 20 VC with me, Harry Stebbings, and this discussion today was so, so awesome to do. For context, I first bonded with this guest many years ago on an index ventures trip to Iceland for early-stage managers. We've been friends ever since, and so it's taken us a couple of years to make this happen. So I'm thrilled to welcome Chris Pike, general partner at Pace Capital, an early-stage venture firm in New York. Their first fund was $150 million and their second most recently was $250 million. And before co-founding Pace, Chris was a general partner at Thrive Capital, where he spent an incredible eight years having joined the firm when they were on their first fund at $10 million. But before we dive into the show today, are you building enough conviction to outpace other investors in this changing ecosystem?
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2:52 Speaker 02 You have now arrived at your destination.
2:55 Harry Stebbings? Chris, I am so excited for this. I love the frameworks that you wrote. I heard so many great things from Josh, from Jared, from many others. So thank you so much for joining me today, Chris.
3:05 Speaker 00 Thank you for having me. It's a pleasure to be here.
3:07 Harry Stebbings? Now, we're gonna have a great discussion today. I always love a little bit of background, a little bit of context setting. So how did you make your way into the world of venture first? And let's start there.
3:16 Speaker 00 I wish I could say it was intentional and not accidental, but it was more accidental. Truth be told, I didn't even know that venture capital was a thing when I was growing up in college. Probably as a kind of bleeding heart liberal college student, lumped it in and maligned it with all of finance. Oh, like this isn't that actually interesting. It wasn't until I graduated, I didn't have a job, I wasn't sure what I wanted to do, stumbled basically backwards into the tech meetup scene in New York. I remember going to a meetup at Shake Shack back when there was just one Shake Shack. It was like a couple dozen people. It's this meetup called Hackers and Founders.
3:58 Speaker 00 And I just became enamored by the idea of a tech ecosystem that's not Silicon Valley. For better, for worse, I'm a hipster with all like the insufferable qualities associated with it. And the idea of a tech epicenter that wasn't too on the nose was really interesting. But to answer your question, I knew Josh Kushner from college. We were classmates. He was a year above me. And as I was getting my feet wet, trying to figure out what was up from down in tech, I was reaching out to all my friends who were in tech adjacent. And they're like, hey, have you caught up with Josh recently? He's like starting a venture capital firm and he's been angel investing. No. So he and I caught up and I asked him if he wanted help very graciously,
4:44 Speaker 00 started working together. And that was my introduction to venture. Thrive Capital, at the time, it was a $10 million fund. I'd like to think that I got a startup experience, but it just happened to be a venture capital firm because we really went from zero to you name it in a very short period of time.
5:01 Harry Stebbings? You guys really scaled the firm. We want to take lessons from that incredible experience with Thrive to this new endeavor being Pace. What do you think are one or two things that you really took from your experience building and scaling Thrive with Josh and Co. that really impacted how you build Pace?
5:17 Speaker 00 One of the things that Thrive does really well, in my opinion, maybe even better than anyone else in the industry, is it leans into people's potential regardless of their age, regardless of their credentials. When I reflect on the kind of responsibility that I was able to have at Thrive with no justification. The first board I ever sat on was Twitch. I was 25 or 26. I had no business doing that from a traditional sense. I think in an industry where a lot of venture capital firms understandably compensate on the basis of like performance rather than potential and junior investors in venture are kind of constantly struggling and fighting for
6:02 Speaker 00 the ability to lead deals and spread their wings and try their hand at investing. One of the things that we did really well at Thrive, mostly Josh, is identify people who are young, hungry and ambitious and just like really lean into them. Not need to rely on a check the box, cast and call situation.
6:23 Harry Stebbings? Listen, I want to talk about Pace and I want to start just setting the foundations. Why did you choose the name Pace?
6:29 Speaker 00 There were a handful of things that really resonated about the word. One is Pace is not necessarily a fetishization of speed. It is a very intentional rate of resource expenditure to achieve a distinct goal. Where are we trying to go? What do we have at hand? How do we get there? So it's more about the Intentionality behind it, rather than just like raw speed. Sometimes you have to go slow to go fast and vice versa. The other thing that we really liked about it is if you ever watch a competitive race, Tour de France, marathon, you'll have the people that are winning the race, right? Out in front. And if the camera zooms out at all, there's either in the Tour de France, you have like
7:10 Speaker 00 the pace car, or there's a runner right next to lead person, that's the pace setter. Those people are really important to helping keep the people running the race in the right mindset. But those people are not running the race, strictly on the sidelines. Their job is to make sure that when the environment changes, when things happen spur of the moment, that the people that are competing are staying focused and keeping their heads in the game. And we think that ought to be the role of venture investor. We're not running the race. The founders are running the race, but what we can do is help them stay focused, even when shit hits the fan.
7:46 Harry Stebbings? I love that in terms of the pace maker. And you're absolutely right in terms of that analogy. The most important thing is the partnership behind any fund. You chose an equal partnership, which is a very deliberate decision. Why did you choose an equal partnership? And why was that the right decision for you?
8:01 Speaker 00 Pace is an equal partnership for, I would say, two primary reasons. One is, I'm sure you've heard the line, "Show me the incentives, I'll show you the outcome."
8:09 Harry Stebbings? Sure.
8:09 Speaker 00 How do you incentivize people to do their best work? How do you get people to act like owners? This phrase, like, act like an owner is so important in making people exhibit the right behavior. What better way to actually make people feel like owners than actually make them owners and make them equal? The distance between a 51-49 split is way more than 2%. Like, it might as well be like 80%. And we think a lot about designing the system and designing the incentives that encourage and elicit the desired behavior. The other thing that I think is really interesting about the equal partnership model, it's really attractive from a recruiting and retaining great talent.
8:51 Speaker 00 So in a world where the vast majority of firms are hierarchically structured, and going back to firms compensating on the basis of performance. Not potential and really long feedback loops where you know if you have an Olympic athlete, the day before they win gold, they know they're great. They are fully confident that they can win gold. And then the day after they win gold, all of a sudden, the entire world's, oh, my God, you're so great. In a world where the feedback loops are similarly super, super long, there are a lot of people out there that know they're great, that know they're gold medalists, but maybe aren't seen by where they are at or the rest of the world as gold medalists. We think that an equal partnership structure is really attractive and a great weapon in recruiting those kinds of people,
9:35 Speaker 00 particularly before they're acknowledged as gold medalists. And then from a retention perspective, I don't think there's a construct out there that is better suited to properly retain and incentivize great talent.
9:45 Harry Stebbings? I do want to ask, you also chose a very deliberate decision not to have portfolio added support, which in this world of venture value add and services, again, goes against the grain quite a way. Why did you decide not to have the portfolio added support services model of venture? Why was that?
10:01 Speaker 00 You can't pay someone else to go to your kid's soccer games for you. And maybe that's too paternalistic of a view. When a founder chooses to work with us and we shake hands, the implicit contract is that we show up. The person that they're talking to, that they want to join their board, is the person that is going to be spending time with them. That means we're not just like tagging somebody in and sending, hey, like, we sign up to help this company out and then all of a sudden, they're interfacing with somebody they've never met before. In a venture capital firm, there are things that are meant to scale the GP, like the investor, and those are questionable. Really, they're not necessarily helping the companies. They're helping the investor, not really helping the companies.
10:45 Speaker 00 We think that venture isn't an asset that is meant to scale. It's pretty hands-on. You roll up your sleeves. You choose a handful of relationships and companies, and we believe in a fewer, deeper relationship approach. On the back of that, I think it makes more sense for us to fully commit to every company that we invest in, rather than try to build out an apparatus that makes it easier. For us to deploy more capital.
11:11 Harry Stebbings? You say fewer deeper there. It really correlates to the type of model that you go for in terms of portfolio construction. So I do just want to dig in on that before we move into frameworks, which is just how big is the fund? And how do you think about average check size, ownership requirement, number of companies in a portfolio? Just to give us a perspective on that.
11:27 Speaker 00 So we just started investing out of our second fund. Fund one was 150, fund two is 250. Portfolio construction, we believe in more of a concentrated approach. You want high teens, low twenties companies and a portfolio for more concentrated model. And in order for that to work, you need to own a lot of the companies that you invest in. We target 20% ownership when we invest in a company.
11:51 Harry Stebbings? Chris, do you get that? Because I target Mila Kunis as my girlfriend and I'm still single. Okay. So like my question is, when do you get 20%? Like honestly, I never see that.
12:02 Speaker 00 We've been successful at hitting our ownership target in 70% of the companies we invested in. Now, rubrics are meant to be broken. It's funny, in venture, I feel like everyone says, oh, like my best performing companies, I own the least of, or my best performing companies, I pay the highest price for. Yes, if you have a really high bar of conviction, necessarily the highest conviction things that you get comfort with are the ones that you break the most number of rules on. So the ones that you pay the highest price for, you own the least of. But that doesn't mean they're inputs into it, right? It's not, okay, if you pay a really high price for a company, like high price companies are good or low ownership is good. It's really like you shoot for the stars and even if you miss, you land on the
12:42 Speaker 00 moon. I don't think anybody will exceed anything than their heist expectations. That's our framework of approach. You establish your rules to know what your exceptions are, but it's not just lip service. We actually do really focus on it.
12:54 Harry Stebbings? My question to you is, let's say we go for 20 companies. You have 10 each between you and Jordan. That is a lot of companies now you're on fund two to be managing and on top of if you're in the high touch game without any services. Is that truly scalable? You think about it. If you add another 20 companies, you'll soon be at 20 each with board seats. Is that scalable?
13:14 Speaker 00 The short answer is yes. The longer answer is Jordan and I don't view our As the only investors at Pace, we have ambitions of growing the firm considerably. I would love nothing more than my last day at Pace to be Pace's best day ever. Jordan and I have issued terms like co-founder. We think that I robs future partners of the firm from agency and ownership. That's one saw for the bandwidth thing. The other saw for the bandwidth thing that isn't that common across the industry is we take our time. The investment period for Fund One was three and a half years. I know firms that have raised funds and deployed them and that raised another fund in the same calendar year.
13:58 Speaker 00 We're happy to take our time and be patient, be patient for the right pitch. And that helps alleviate that bandwidth issue because companies become successful, they get acquired, your bandwidth constraints roll off, or the companies go under.
14:10 Harry Stebbings? I have to agree with you. We're a three-year deployment period and I'm just looking at every deal we didn't do last year because of price and go, thank God. I am so grateful to have not done deals for the first time in my career. I do want to discuss the companies themselves, because you wrote a brilliant tweet recently and it was completely the opposite of the way I think. So I ask every company that I meet, Chris, I'm giving you a billboard in Times Square. My friend, what are you going to put on it? Captivate the audience. And you tweeted, invest in companies that cannot be described in a single sentence. So very different ideas. Why am I wrong? Why do you believe in investing companies that can't be described in a single sentence?
14:51 Speaker 00 So let me first say it. I could be wrong. Like, that could definitely be the wrong advice. I think there's a big difference between consumer marketing and describing the actual essence of what a company is doing. Consumer marketing 100% requires a very pithy, concise description. When you want to engender word of mouth or in a sales pitch, you have to be able to develop a very succinct description with hooks about the core value propositions of what the company does and what it builds. But in totality, if everything that a
15:29 Speaker 00 Company is doing and building can really be accurately described in a single sentence. It's probably too one dimensional. It's probably not ambitious enough. It probably isn't doing enough. Zooming out, I had a blog when I first started in venture. I wrote a bunch of posts, but I stopped blogging because I thought to myself, who am I to blog? This is insane. I don't have anything worth contributing. Even worse, I'm paranoid at the idea I could put something out there and it would influence somebody to make the wrong decision. So I very much ascribe to the kind of Hippocratic oath, first, do no harm. And I think a lot of investors can do a lot of harm. One of the things that I take issue with in the venture world is I think a lot of people put a lot of thoughts out there, taken as gospel.
16:13 Speaker 00 And there's this kind of fetishization of distill down what you're building, make it punchy. Your pitch actually be 12 slides. And I think that makes it easier for us as investors to process a lot of information. When we're like, hey, entrepreneurs, put your business in a box and so we can check them all off. I fear that leads people to over rotate in the idea generation phase, create things that are too simplistic. Anytime a company is successful, it spawns a countless number of X for Y's. Uber is really successful, so I'm going to start Uber for X for Y's. One of the challenges is it's easy to describe successful companies when all is said and done in a single sentence.
16:53 Speaker 00 That is clear because they have established the category and developed the vernacular to be able to describe what it is that they did that was so hard for them to describe in the beginning. Airbnb is easy to describe in a single sentence retroactively. They pioneer the sharing economy. But if you were to describe Airbnb in the beginning and tried to explain how it affects real estate prices in markets because it changes the calculus of economic return on homeownership, like that would be impossible to describe in a single sentence. And I fear that focus on pithiness dampens the imaginative scope of founders.
17:35 Harry Stebbings? I totally get that, especially when you say there about how pre-creation and Dominance leads to consumer understanding where, as you said, Airbnb, everyone knows now, sharing, okay, I'm going to borrow from someone else and pay a toll for that usage. It makes me think of something that your partner said. Your partner Jordan said, but you're world class when it comes to isolating companies and businesses down to their core atomic value swaps. Now, this sounds incredibly intelligent. What does he mean by this?
18:02 Speaker 00 It's really like essential value exchange between a company or product and whoever is on the other side. Let's say you walk into a convenience store and you buy a candy bar for a dollar. That atomic value swap is you are exchanging a dollar for a candy bar, which is presumably giving you one dollar or more of value. And that's a sustainable value exchange. And so when you apply that to interactions at a company or product level, that's what the concept of atomic value swap is. It's like, how do you describe what is being offered? The perception of value of what is being offered? And then how fairly compensated the party is that's offering the value
18:47 Speaker 00 for the value that's being delivered? One of the challenges that has like historically plagued online dating, for example, is how do you appropriately price helping somebody find their life's partner? Virtually no amount of compensation. If you actually find your life partner on a online platform, there's no way that platform is being appropriately compensated for the value that is delivered to you. On the flip side of that, there are a lot of marketplaces that perfectly price the value that they deliver. So most marketplaces actually perfectly price the value that they deliver.
19:19 Harry Stebbings? Okay, let's actually just dig in on that. So they perfectly price it. Okay, Instacart for you versus for a low income worker, respectfully. The price and value ratio are actually misaligned. The time that you save in store is 30 minutes. To you, that could be a thousand dollars. That value capture retrieval. To the low income worker, it's probably six dollars. So actually, there isn't a perfection of pricing because the value is subjective to consumer.
19:49 Speaker 00 Instacart isn't a marketplace. The genius behind Instacart and DoorDash and other companies like that is that they perfectly price discriminate laziness and the value of a leisure hour. Generally speaking, people are a little bit more price sensitive when it comes to utilitarian things. If you're buying two apples and one apple is $1.50 and one apple is 25 cents and you think they're the same, you're probably, you're gonna buy the 25 cent apple. But what's the value of time? And so I would see DoorDash and Instacart are really good at price discriminating people's leisure hours and how they choose to spend it. Going back to the idea of the atomic value swap, let's take Twitter.
20:32 Speaker 00 What is Twitter's atomic value swap for a user? Twitter's promise to a user, distribution. You show up to Twitter with ideas, content. You contribute your content to Twitter and in exchange Twitter offers you a meritocratic environment that can reward your contributions with engagement and distribution. It doesn't offer you anything else. Notably, it doesn't offer you any economic reward for your contribution. It just promises to compensate you in distribution of your thought. That's different from a platform like YouTube. YouTube actually compensates you economically for the content you contribute to it. So those are two different value propositions.
21:15 Speaker 00 The other thing, you can view that very diametrically opposite to something like a Substack where very explicitly people are creating content with the idea of monetizing it, not necessarily just for distribution. Most companies that we understand as social networks do that. They incentivize the incremental contribution of content with the promise of distribution with no expectation of economic return in exchange. And as a result, they incentivize and attract the incremental marginal content creator because as the network grows, the prospect of attaining distribution within that network increases. On a consumption side, the consumption atomic value swap is easier to isolate.
21:59 Speaker 00 It's like, I want to be entertained. I'm willing to spend this iota of time in exchange for this unit of entertainment or knowledge or whatever. Lean back and lean forward consumptions are slightly different, but in general, most media competes with each other for the incremental minute of user attention.
22:18 Harry Stebbings? You mentioned laziness earlier. I loved something in the frameworks, which I always think back to when I'm investing in consumer today, and it's the seven deadly sins. You said the seven deadly sins are actually the seven core motivators. What are the seven deadly sins? Just to get a framework, and how do they apply to the world of consumer for anyone thinking that we've taken a very dodgy religious turn?
22:39 Speaker 00 Sure. Seven deadly sins are pride, envy, lust, gluttony, greed, sloth, and wrath. These have not changed over millennia. These have withstood the test of time. So we're talking about survivor bias. The seven deadly sins, Darwinistically proven. I actually think the seven deadly sins are really core motivators. They describe why people do things. And I would go for, as far as to say, like, honestly, they're the only reasons why people do things. I think it's possible to distill down any individual behavior that anyone takes and bucket it into one or more of these seven deadly sins.
23:22 Speaker 00 I kind of subscribe to the Kantian school of thought that altruism, or when we do things that are perceived as virtuous by society, it's things to serve our own ego. It's things to fuel our own sense of pride and create a form of ourselves that we think more favorably about. I think another way you can describe it, perhaps less third rail-y, is the seven deadly sins are ways to describe self-motivation. And at the end of the day, most people are inherently self-motivated.
23:53 Harry Stebbings? So when we think about that and we think about the ways to motivate people, how does that fit into your thesis around consumer investing? What you like to see, what drives consumer behavior, and what you look for in an enticing consumer investment? Just what's the tieback to investing?
24:08 Speaker 00 Yeah. This is like probably contentious. One of my frameworks is I think that the virtuousness of a company is inversely related to its enterprise value. We have to all agree that we are investing within this framework of capitalism. When we think about enterprise value creation, I think it's easy to be susceptible to like things that appeal to our own sense of ego of like doing good in the world. But the problem is there are these things called nonprofits that are designed not to create enterprise value that do incredible work. I would argue that nonprofits are maybe the perfect example of that inverse correlation
24:48 Speaker 00 between enterprise value or capturable enterprise value and virtue created and done by an organization. And let me test our framework that I have is, you know, the more that a company leans on or touts or suggests that it is doing good in the world, virtuousness in the world, that's great marketing, but when the rubber hits the road and like translates into enterprise value creation, not as advantaged.
25:12 Harry Stebbings? Sorry, help me understand why? Because the opportunity cost of that like virtue value creation, then the traction, the enterprise value creation? Do you know what I mean? I'm just thinking back to Danny Offside, hey, you can do good and make a lot of money in the same vein.
25:26 Speaker 00 What is this not saying? I'm not saying that companies that are successful can't do good. That's not what I'm saying. Let me take a step back. One of the things that I wanted to define is I think society perceives virtue as when somebody is not acting economically, right? If I were to, for example, give away money, that's something that is not economically rational, but society would view that as virtuous. So if you describe virtue as an individual or a company acting not rationally economically or not doing something that homo economicus would do,
26:07 Speaker 00 the logical conclusion that behavior does not lead to structurally better enterprise value creation. It can be effective in marketing. It can be effective in recruiting, but from a core business model perspective, or you distill down the atomic value swamp of a company, there isn't a ton of room, perhaps no room, to internalize virtue into that core atomic value swamp as a company.
26:31 Harry Stebbings? So when we think about this atomic value swap and we apply it to those seven deadly sins or seven core motivators, and just to retrofit it to the real world so we get it, you obviously worked on Twitch at Thrive, it was one of your great investments. I want to understand, how would you bucket that in terms of where it sits in the seven deadly sins or seven great motivators? And how would you retrofit Twitch to that model?
26:52 Speaker 00 Sure. On the consumption side, it's entertainment. It's like some form of sloth and envy and pride. On the content creation side, it's some form of pride and greed. And I don't think that describing it that way is actually bad. Again, I think the seven deadly sins suffer from a branding problem. But like most user-generated content networks, it is incentivizing content creation by offering distribution and also economic return, because Twitch, like YouTube, pays their content creators. On the consumption side, it's just competing the same way that YouTube and Twitter and TikTok and Instagram, that all compete for entertainment.
27:33 Harry Stebbings? Can I ask you, you said before about new content, new G C platforms, essentially infranchise or encourage a previously disenfranchised creator. What did you mean by this? And how do you think about that when investing today?
27:46 Speaker 00 Yeah, I think the current state of the world is the don't want to seek output of the efficient market. So one of the things I ask is, what are the very good reasons things are exactly the way that they are? Because every single actor is constantly trying to extract maximum value from the existing set of how things are. And so if you are trying to create structurally new value, one, I think the best way and is proven in the success of user and content networks, is you have to empower a previously disenfranchised set of creators. So people that were structurally disadvantaged. If you look at the most popular content creator on TikTok, I think it may no longer be the case, but definitely was for a very long time.
28:30 Speaker 00 Charli D'Amelio is a, she made a name for herself. Creating dance content and dance as a form of media was structurally challenged in Instagram and Snapchat because audio, music, which is so core to the content consumption experience, was never an endemic part of either of those platforms. And so when you look at TikTok, audio is structurally a part of the atomic forms of content. And when you include music, all of a sudden, dance is elevated from this thing that like you enjoyed, but then you had to opt in to turn the sound on. It is elevated from being this kind of second-class citizen on Instagram
29:13 Speaker 00 that rewards aesthetics or Snapchat, which like doesn't really have, has built up distribution mechanisms, to being a first-class citizen of content on a platform like Musically. Jokes like, oh, I'm sure you have a face for radio. It suggests maybe people that aren't good-looking enough to be successful on TV because of the challenges of what we reward as society can be enfranchised in a format that actually doesn't need them to be good-looking.
29:42 Harry Stebbings? Chris, is that a subtle suggestion that I'm doing the right medium? If so, I appreciate it and you and my mother are thoroughly aligned. And thank you. No, I totally agree with you there in terms of the encouragement or inspiration to a previously disenfranchised group. I think there's another important factor, which is the market timing itself, though, and being right on market timing. How do you feel about the importance of why now? A lot of people are like, wow, great founders, they can win it into existence. How do you feel about why now?
30:11 Speaker 00 I think the best analogy I can come up with for success in startups is you're surfing a wave and half the battle is making sure you're in the water when the wave comes. That is really important because if you see the wave coming, you're still on the beach, there's no way that you're going to get out there in time to be able to surf it. And so I think that goes into the importance of timing. The other thing is no surfer really can make waves. You don't have the power to change the actual tide. I think that That great founders are incredible at putting themselves in the position to surf waves and then also are able to navigate and surf waves very well.
30:54 Speaker 00 They're great at recruiting, they're great at having money, they're great at managing. But I don't think anybody can make waves themselves. You can just surf them. Maybe you're really good at identifying them.
31:05 Harry Stebbings? Chris, I used to be in the camp of it's all about the founder. Now, honestly, I'd much rather a really great market. And I take a much more market centric approach because I've seen how difficult it can be when you're great in a shit market. How do you feel about market versus founder centrality, honestly?
31:23 Speaker 00 I think I probably tend to agree with you. There are a couple of adages. One is, I feel like it's Warren Buffett. Warren Buffett has this line of, I like investing in businesses that can be run by a ham sandwich, which suggests the durability of businesses themselves. If businesses get up and running, if businesses are at scale, there's a lot of momentum and inertia in companies. And particularly if they have moats and they're taking advantage of moats, sometimes companies can just be successful, period. It doesn't even matter who's running them. The other kind of cut of it that may be elucidating is if you have the world's greatest founder and you put them in a market that doesn't have any demand or something that's like impossible, structurally impossible, it doesn't matter how good they are. They're just not going to be able to create something that the entirety of capitalism,
32:08 Speaker 00 the entirety of the Darwinistic state of the current economy is structurally against, too heavy of a lift. Conversely, you can have markets, we're going back to the wave analogy, you could just be like accidentally in an area and then you get taken because it's that powerful. You reflect on the dot com boom or there are plenty of people who created a lot of value and it was almost certainly beta. One of the questions I like to ask people is would you rather invest in an A plus business with a B plus operating team or a B plus business and an A plus operating team? And I think people's answer to that will often indicate their stage preference.
32:53 Speaker 00 Most people who invest really early might skew to the team answer. And then people that are a little bit later will probably favor the business. I tend to agree markets are a huge input into outcomes, particularly in venture.
33:09 Harry Stebbings? Can I ask you, we mentioned there about being in the sea or being in the ocean for that wave coming. There's still an element of timing. You've got to have your board ready. How do you think about market timing risk? Many people said that you see very ahead of the curve into the future. Transprowny Chris, I don't like market timing risk. I want a product where if we put it in market, I know we got demand. So how do you feel about market timing risk?
33:32 Speaker 00 I agree. Being too early is just as bad as being too late. In many ways, it's like rock, paper, scissors where you have to be just one step ahead. If you're multiple steps ahead, you lose. If you go out to surf at midnight, you're toast. I completely agree that market timing is really important.
33:49 Harry Stebbings? But you take that risk much more than me. So how do you think about your relationship to market timing? Cause you do take.
33:55 Speaker 00 Yeah. If we're using the surfing analogy, if you go out at 5am instead of 6am, like maybe you're taking incremental market timing risk. It's still in the realm of timing the market properly, not completely disregarding some of the factors that you don't have control over. It's not being hubristic and saying, okay, I can go out at nine or 10pm and I'm going to make these waves and like, I'm going to surf them. I also recognize I'm taking this surfing analogy way farther, considering that like I have never surfed and so maybe everything that I'm saying is completely wrong.
34:29 Harry Stebbings? This is not the Billabong. Thank you for listening.
34:31 Speaker 00 But I would say the closer you are to the change, truly, the less it feels like market timing risk. I would describe waves as the process of a truth going from a truth being spread from very, very, very small consensus to global consensus. What do I mean by that? Let's take, I don't know, what are some macro trends? Mobile, cloud computing, let's take AI. The vast majority of the world woke up to AI in what? November when ChatGPT was released, so many smart people have been working on AI for years prior to that.
35:12 Speaker 00 One could have argued that there's like market timing risk if you were in AI in October of last year. But the vast majority of people that have been spending time in this space understand that is just not the case. It hasn't become consensus yet, but it is inevitable that it will be.
35:30 Harry Stebbings? You said something before, any company that is pure execution risk without any market risk is not a suitable venture investment. Now I saw this and I thought, no, that's so wrong. I tweeted it because I thought it sounded smart. But if you look at Tesla, greener movement, greener transport, a nicer car at affordable-ish cost. There's no market risk there. There's no, if you produce a car like this, there will be sufficient demand. There's only execution risk on ability to build, ability to produce at scale within cost and budgets. So help me understand this one. Any company needs that market risk to be a suitable venture investment.
36:10 Speaker 00 First, I would contest the idea that Tesla had no market risk.
36:14 Harry Stebbings? Tell me, I'm happy to be wrong.
36:15 Speaker 00 Sure. So I think there are many different ways to look at Tesla. What if Teslas were a million dollars each? Would it be as successful as it is today?
36:22 Harry Stebbings? Of course not. No, time is a tenth.
36:25 Speaker 00 What if Teslas had 10-mile radius?
36:28 Harry Stebbings? Sure, but our hypothesis is if we can provide a car that is sustainable, green energy, and is sufficient for the majority of the population at an affordable price, then there will be sufficient demand and there is no market risk.
36:41 Speaker 00 I think that's huge market risk, right? It's like, that's not proven. It's certainly if you were to walk into the office of any big auto exec, they would be like, no, that's crazy. You know, you have structural infrastructure, gas stations every half mile. You have all of these things that advantage internal combustion cars. I would say there was tremendous market risk creating Tesla. It was impossible to say that there would be millions, tens, hundreds of millions, billions of dollars of demand from consumers for electric vehicles.
37:16 Harry Stebbings? I'm really sorry, dude. I don't get you. It's good for the planet. It's cheaper than fuel. It'll look great.
37:23 Speaker 00 There are plenty of places where it's not cheaper than fuel. If you exist in a place that is off-grid, and particularly a decade ago, two decades ago, electricity was more expensive. There are places where electricity is more expensive to deliver per unit of energy than fuel. In a post-economic first-world country, yes, electricity is, and like we have economies of scale production. We can get something that's cheaper than fuel, but there are.
37:50 Harry Stebbings? Chris, I'm not planning on supplying casters to Lesotho in Africa. Okay, of course, we're giving them to the UK and to France and Germany and the US. Like, that's where we're going.
38:01 Speaker 00 Yeah, so I don't see how you could view Tesla as not having market risk. You're like introducing a product that doesn't have structurally validated demand. And the hypothesis, even the use of the word hypothesis, suggests that there is market risk.
38:20 Harry Stebbings? Well, I think everything has a hypothesis before you introduce it to market. When I have a jumbo company, I have a hypothesis that they will wear green and orange jumpers frequently enough that they will see that atomic value in it and buy it from me. Everything is a hypothesis until there is a concrete transaction.
38:38 Speaker 00 Yes and no. I think in venture, we're so primed to think that way. The vast majority of the world, the vast majority of the economic, like, transactions that happen in the world happen in things that don't have a lot of market risk or wouldn't have market risk for a new entrant. So for example, I want to make ball bearings. There's no market risk in making ball bearings. There's entirely validated demand. That doesn't mean that there isn't money to be made in making ball bearings, particularly if I have an advantage, a cost advantage, in making ball bearings cheaper or faster or better than other people. But like, the demand for ball bearings is and will be constant. That is, that's not changing.
39:23 Speaker 00 The demand is very well understood.
39:26 Harry Stebbings? Different size of the fans on this one, but it's okay. It's good to have a difference of opinion, my friend. A question for you, though, is how do you think about market sizing risk?
39:35 Speaker 00 Just going back to like market risk versus execution risk, you're wearing a polo shirt. The demand for polo shirts is well understood. I could start a business also creating polo shirts that would not be suitable for venture because there is no market risk in making a polo shirt. It's incredibly well understood demand, especially if there is nothing structurally different about the product. That being said, there is money to be made.
40:01 Harry Stebbings? But I disagree completely because it doesn't have to be structurally different about the product. It could be structurally different about the go to market, about the brand. It could be that this means something different to each user. It could be that we provide it in a completely different go to market. These are all part of the company, not the product, which make it venture backable.
40:18 Speaker 00 So I think one of the challenges is the conflation of like venture backable with creating value. There are plenty of companies out there that can create value, can create a lot of value that aren't suitable as venture investments.
40:34 Harry Stebbings? So is Warby Parker a venture investment? Is Allbirds a venture investment? Is Hims? These companies wear like Viagra, glasses, shoes, fantastic products, but that would fit your thesis.
40:45 Speaker 00 I would say the vast majority of direct to consumer brands not suitable venture investments. You could argue that something like a Hims was surfing a regulatory change where telemedicine was empowering a category of like demand expansion. That's maybe a more acceptable rationale for a suitable venture investment. But I don't want to pick on Allbirds, but like what's Allbirds market cap today?
41:11 Harry Stebbings? It's 179 million.
41:12 Speaker 00 And that's the one successful company in maybe hundreds that have tried to do the same. I am making the argument that venture capital is not the right capital instrument for the the growth of those companies. Even if you were looking at like Blue Ribbon Sports, Nike, they're like debt. These are great capital instruments to help these companies grow and you don't. Need the pressure and cost of capital associated with venture capital to help them grow.
41:41 Harry Stebbings? I get you, but on the flip side, I've seen this firsthand with my brother's business. He runs a more traditional business that would not be venture backable in ways. And you're like debt and I'm like debt and he's like, yeah, but debt providers are not willing to take on risk profiles. When we don't have cash flows going back five years, when there's uncertain value on expansion into the US. When there is a level of uncertainty that you know Nike saying, hey, we're going to expand beyond trainers to apparel. The banks go, well, you don't have five years of financials. And so the financial instruments that aren't venture capital don't suit the product. And so venture retrofits itself to that, I think.
42:19 Speaker 00 I think this is increasingly happening with the glut of venture capital and dollars chasing returns. Venture capital subsidizes business building of companies that should never have been venture capital targets. Venture capital as an industry is not responsible for this zero to one of value creation everywhere. Venture capital is not responsible for putting a sandwich shop in business. Where does the line stop?
42:48 Harry Stebbings? I don't know. I agree with you. I had the founder of ButcherBox on the show recently. And ButcherBox does 600 million in revenue, very high quality revenue, the leading brand and category in the space. If you project out to a three, four years' time, they'll be at a billion enterprise value of three to four billion. That is the one that's done it, the all time leader. To me, that really shows a space which as an asset class is not a venture asset class.
43:14 Speaker 00 Did ButcherBox raise venture capital?
43:16 Harry Stebbings? Never.
43:16 Speaker 00 If you think about what venture can help create that would never be possible bootstrapped. It's companies that are not revenue generative in the beginning. There are plenty of companies that just actually dig a J curve. There is some hole of development or product building that needs to reach some point of scale. And then it can come out the other side and create money and be fairly compensated in value exchange for what it's putting out there. If you're in the business of like making widgets. And selling widgets like ButcherBox or other companies, you have the luxury of revenue from day one. You don't structurally have a J curve in your business building. Maybe you have a self-imposed J curve because you're leaning into growth
44:01 Speaker 00 and then you're growing unprofitably and you're investing in OpEx and that's going to create future scalability and then your margin profile changes in the future. But there are plenty of companies out there that have revenue from day one, don't need venture capital. Can it make them grow faster? Sure, but is it existential to their existence? No.
44:20 Harry Stebbings? So that's the line then, where it is existential to their existence, that is the line where then venture capital is the right financing model.
44:28 Speaker 00 If the company literally could not exist without venture capital, that's probably a good criteria to suggest that it is within the realm of venture capital.
44:37 Harry Stebbings? Do you believe in defensibility? Everyone talks about defensibility. Investors like to see defensibility. I think it's largely bullshit from day one. I think it's built over time in process with customers, with team. Do you agree? Or do you think defensibility can be very present on day one?
44:51 Speaker 00 I think the recipe for defensibility can be very present on day one.
44:56 Harry Stebbings? What does that mean?
44:57 Speaker 00 If you were to look at the system design behind companies that ultimately developed moats at scale, it's not something that like happens magically overnight once the company is up and running. It's like embedded in the core product from day one. And so I think it's possible to evaluate a company early and see the future potential of defensibility in the form of a moat. I don't think people accidentally end up with moats and defensibility.
45:22 Harry Stebbings? You think they're deliberate about it?
45:24 Speaker 00 Yes, I don't think anybody oopses their way into a moat.
45:27 Harry Stebbings? I did like, I did 10 references before every show that we do and we've now done 2,000 shows and now I have 20,000 references. It's an incredible data moat on a generation of venture investors. I never intended to do it at all. I just did it to ask better questions.
45:41 Speaker 00 Did you oops your way into a moat? I don't think you did. You were very intentional about the way in which you approached your craft and the content you create. And that led to a structural advantage, whether it's brand, distribution, and I would argue that like it was very, very intentional. I think it may be nice to think about it as effortless competency, but I think you were being appropriately rewarded for a ton of hard work.
46:09 Harry Stebbings? Thank you. I appreciate that. Chris, we've gone off schedule, but I've loved this. And there are other elements where you're like, it's just wrong the way we do it in venture. It could be the type of companies we fund. It could be our theory around defensibility. There are other elements where you're like, ah, so wrong that way.
46:23 Speaker 00 Venture writ large encourages any and all forms of entrepreneurship to be best for venture capital. Venture capital as an industry benefits when the most number of people are trying the most number of things. Because as a business, venture kind of picks the winners and invests in them. The more number of shots on goal, the better. But I also believe that there are just some kinds of businesses that just won't work. I know we're in the business of exceptions and that is 100% true, but that doesn't mean that everything is correct to be tried. Does that make sense?
47:02 Harry Stebbings? It does. And so does this go back to what we said about kind of investing in the J curve where you have to have that? Otherwise, it's fundamentally impossible to scale. Or is there an alternate meaning?
47:12 Speaker 00 It dovetails with that. Like, think about how many founders are misguided to start companies? Because they look to the current ecosystem of venture funding and use those data points as inputs into companies to start. Great founders don't listen and also our survivor bias of entrepreneurship isolates and rewards and creates narrative storytelling around people that like didn't listen. But in many cases, there are very strong structural reasons why companies could exist when they existed. For example, let's take mobile social networks or user-generated content networks. There's a very clear reason why.
47:54 Speaker 00 The order of founding went from Twitter first to Instagram to Snapchat to TikTok. And it is because as mobile as infrastructure and bandwidth in its earliest stages supported the lowest packet size, text, and then next compressed images, Instagram, and then images and true form video, and then video and audio. There's a very clear reason why it had to happen that way. And so like TikTok couldn't have been started before Twitter. I think venture heavily incentivizes everyone to try everything all the time and it's good for venture. But I am increasingly interested in trying to apply greater frameworks of approach and
48:39 Speaker 00 theory onto business evaluation because I do think that if we can increase the efficacy with which we guide entrepreneurship writ large, just think about the returns that could happen. If we reduce the heat loss of entrepreneurship, even though venture capital as a business is structurally advantaged for like maximum shots on goal regardless of heat loss, if we could reduce the heat loss of entrepreneurship, I'd be amazing.
49:04 Harry Stebbings? Do you not think the venture capital product is just pretty broken? I know we're going broad now, but like, you know, the alignment with LPs is largely not there. You see that with the fundraisers that we've seen over the last few years, you know, but neither feed a carry model makes it incredibly profitable as a business to the point where you can make NBA player salaries as a GP with large funds. There is this huge misalignment there. There's a huge misalignment in LPs who don't get carry in any of their vehicles who are optimizing for not getting fired. Structurally, the industry is fraught with breakages in my mind.
49:38 Speaker 00 Yes, I agree. It's one of those situations where like, show me the incentives, I'll show you the outcome.
49:42 Harry Stebbings? Exactly.
49:43 Speaker 00 It has to be regulation, right? It has to be regulation. Regulation is probably the only answer. For one, I think it's kind of crazy that whether it's like venture or hedge funds or private equity, that there are people who can co-mingle their labor value with capital value, right?
50:00 Harry Stebbings? What do you, what, what, sorry, what do you mean by co-mingle labor value with capital?
50:03 Speaker 00 So people that deploy capital as their job are compensated for their labor value in deploying that capital as capital value. So NBA players, right? NBA players, they create value. It is their like labor value. They are taxed at income tax level. They don't get to enjoy capital gains taxes in the value that they're creating. What's crazy is that people who are deploying capital as their job, if they're successful, the vast majority of their returns are taxed as capital gains, not labor.
50:38 Harry Stebbings? I'm not like, this is crazy.
50:41 Speaker 00 That's crazy. That's so broken. So if I were to think about the system design, the system design of society, if you were to look at the current state of the financial world, venture capital, private equity, hedge funds, as a brain drain, that is this massive sucking noise on smart, ambitious people because they've realized that, oh, this is a dominant strategy in this version of capitalism and in this regulatory environment, you probably should tax carried interest like income tax. That would break that structurally different incentive mechanism and then it would diffuse talent elsewhere.
51:20 Harry Stebbings? Would it?
51:20 Speaker 00 I do think it would cool what is an overheated attraction to the industry.
51:27 Harry Stebbings? Chris, can I ask, well, your fundraisers, I mean this with total respect, but like you're a young girl manager and yes, you spun out of Thrive, which is blue chip for blue chip, but like, how was LPs response to you?
51:38 Speaker 00 I don't know if this is something that you experienced as well, but for better for worse, when you go out to raise money as an emerging manager, there's nothing you can do. Like you can't change what people say about you behind closed doors. There's nothing you can do to change that. There's nothing you can do to change your track record. So when an LP does reference calls, when they dig in and they do diligence, there's nothing you can do to change the data that they're going to harvest and come back with. And so in many ways, that's all it is.
52:08 Harry Stebbings? No, because you can change the perception of that data, which is just as important as the data. And so I will say. When I know that data is going to come back, maybe not great. I will caveat and say, hey, if you were to do references on me, you would probably hear as a weakness that Harry is incredibly short on time. He runs two businesses at the same time. That's a con. I'll caveat it so they're not surprised. They're expecting it. They know that I'm self-aware and I'm probably looking at ways of solving it. Solving for their expected outcome of that data for me is as important as solving the data itself.
52:40 Speaker 00 So yes, and what is the goal? Is the goal to hit a number or is the goal to find aligned investors? Because if the goal is to find aligned investors, you actually want your investors to have as high fidelity of data as possible. And then regardless of their interpretation of it, say yes or no. If the goal is to hit a number, then the perception interpretation of that information matters.
53:07 Harry Stebbings? But in perception still, even if you have aligned investors where you think they are aligned and they are aligned to you. But as you said, you can't control the data that they get in. And so like if they are aligned and they are truly aligned, getting ahead of it, showing that you're self-aware is not like some strategic manipulation of data and perception. It's just a, hey, Chris, I want to caveat ahead of time. This might come back and I don't want you to be put off by it adversely.
53:30 Speaker 00 Yes, but wouldn't you strictly prefer an investor that saw that as a feature, not a bug?
53:37 Harry Stebbings? Yes, but some just like don't on initial reaction. And then they go to their partnerships and they say, oh, we got this back in their partnerships. Who don't know you as well and don't have granular data go, oh, that's bad. Oh, I'm not sure about that. And then the data manipulation and contortion happens inside partnerships, internal discussion happens. And what was a very pure data point, which is, oh, Harry's quite busy or oh, Chris is quite busy. Turns into, oh, well, actually, you know, there, there's not enough bandwidth and there's real partnership. All of these things because of their partnership discussions.
54:08 Speaker 00 So when we were fundraising, we had kind of a mantra, which is optimize for alignment, not outcomes. In many situations, people, companies can optimize for outcomes rather than alignment. And that over-rotation over time leads To misalignment.
54:24 Harry Stebbings? So how did you then deliberately, I'm fascinated here, love that. How did you then deliberately optimize for alignment over outcome?
54:32 Speaker 00 We were as transparent as possible with every single investor that we spoke with. And in our Fund One fundraising presentation, we had a slide that says, this is what we think Fund One will look like. This is what we think Funds Five and beyond will look like. You, as an investor, are, yes, assessing what we are trying to do in this moment in time. But we are also very intentional. And we're trying to give you as much forward information as possible about where it is that we want to go, what we want to build. And we want to make sure that you're also aligned with this future of the firm. Because the relationships that we're establishing are not one to two year relationships.
55:14 Speaker 00 Our goal is for future GPs of Pace to have as good of relationships with the investment professionals at our LPs as we do, decades in the future. And so if that is the goal, you have to be able to find institutions that are aligned with the future strategy of the firm.
55:34 Harry Stebbings? Chris, how many LPs do you have?
55:36 Speaker 00 We have about 12 institutional LPs in Fund One and 15 in Fund Two.
55:41 Harry Stebbings? How many meetings did you take for Fund One?
55:43 Speaker 00 Probably 50, something like that.
55:46 Harry Stebbings? What was the most common reason they said no?
55:49 Speaker 00 So interestingly enough, LPs have really hard jobs, right? When we invest, we at least get to invest in assets. We're like, okay, well, I think this is a good business. And regardless of the management team, I think it's a good business. LPs have to invest behind judgment. They're trying to fit a curve to a single data point if it's the first time that they're meeting you. And that is an impossible task to ask somebody to do. Like, how do you extrapolate a curve from a single data point? That's impossible. Most of our LPs for Fund One were people that we had longitudinal relationships with, that were able to fit that curve over a much longer set of data. I don't know if we got to a yes for any of our LPs in Fund One, where we met them in the process.
56:32 Harry Stebbings? I would say like Booster has a brilliant article, Invest in Lines, Not Dots. And I meet two new LPs every week and I ask them for recommendations each. And I'm not fundraising, but it means that now, you know, I've met them over years also with my deployment pace.
56:46 Speaker 00 And the LPs that joined in Fund Two, we developed relationships with over the deployment of Fund One.
56:52 Harry Stebbings? Chris, did you do a first close, second close? How do you feel about the closing mechanism?
56:56 Speaker 00 We did a single close for both funds. I recognize that there is some ego signaling involved in that. At the end of the day, the only thing that matters, the thing that helps you do what you want to do. And there are many ways to skin a cat. That's entering the world of micro optimizations.
57:11 Harry Stebbings? What's the biggest misalignment between LP and GPT stage, do you think?
57:14 Speaker 00 My gosh, how much time do we have? So probably a handful of things. One is, it's not clear to me that management fees were really intended to stack over multiple closed-end funds at increasingly high denominations. Even if you look at like hedge funds, right? Sure, management fees on top of a large AUM, but there are redemption mechanisms. There isn't structural cantilevering process of capital, the way that there are with closed-end funds. So there's that. I would say excruciatingly long feedback loops. There's the adage of like venture capital firms take forever to die because they're just so long in the tooth.
57:53 Harry Stebbings? How could you change that, though? Because that's just company maturation timelines. How could you solve that?
57:58 Speaker 00 Let's imagine a world hypothetically where there was carry clawback across funds and management fees were all to the dollar rationally budgeted. What would the venture world look like then? Let's say incentives were actually aligned. If you lost money in another fund, that could be clawed back against carry from prior funds.
58:18 Harry Stebbings? I've never heard of that cross-fund carry clawback.
58:21 Speaker 00 Right, for better or for worse, like that's just the state of supply and demand in the LP-GP ecosystem doesn't support that, doesn't clear the bid. It's a mechanism that theoretically could exist with enough dislocation between supply and demand, but it doesn't currently.
58:36 Harry Stebbings? What happens to the multi-billion dollar funds that raised massive, massive funds in the last few years? And are sitting on 25 years of history, bloated teams, bloated partnerships?
58:48 Speaker 00 Definitionally, I don't think all of them make it. Here's the thing, like it's gonna take a long time. It's gonna take a decade plus for this stuff to unwind, but they're gonna get lost to the sands of time.
58:57 Harry Stebbings? If you could change one thing about the world of LPs, what would you change? Like, I think GP commits are just inherently wrong in a lot of ways because they prohibit a huge amount of diverse but brilliant people. They're not proportional to wealth and there's arbitrary numbers placed on 2%, 3%, 4%, ridiculous.
59:14 Speaker 00 I agree with that, whilst also simultaneously agreeing with the intention to align incentives.
59:19 Harry Stebbings? Totally get that. Agreed. But it should be proportional to wealth. There should be flexibility of mindset around it and it should be viewed in a different kind of paradigm. Final one, and then a quick fire. Is there anything more broken on the GP ecosystem that you think is important to highlight? Or any misalignments between founders and investors? I think this is a really important one for founders also to hear. Where are founders and investors misaligned? An example would be liquidity. Sometimes it is in the interest of the investor to sell when it may not be in the interests of the founder for them to sell at that time.
59:49 Speaker 00 One of the biggest areas of misalignment between founders and investors is probably management incentive in an acquisition. Management incentive in an acquisition is basically when the acquiring company says, "You, the management team, will have this compensation package when you join." None of that is going economically to your cap table. And so as an acquirer, you can be like, "Hey, company X, Y, and Z, we actually want to give you a massive management incentive for us to acquire a company." In this hypothetical situation, we're gonna give $0 to your cap table. That's a huge misalignment of incentives between founders and investors. Where the founders are like, "Awesome, this is gonna be great for me."
1:00:33 Speaker 00 And then investors are like, "I'm stuck holding the bag because we helped build this business or get it here." There are always opportunities for misalignment. That is a very large example. To your point, driving the prioritization of liquidity, particularly from an investor perspective, is another area of misalignment. I think the areas of maximum misalignment are when it feels like the reputation does not carry over in between iterations of the game. Or that's the final iteration of the game that any one participant is playing. Because then people are incentivized to maximize the short term rather than long term.
1:01:08 Harry Stebbings? Chris, I want to do a quick fire round. So I say a short statement and then you give me your immediate thoughts. So what's your biggest investing hit and what did you learn from it?
1:01:16 Speaker 00 I would say like probably the company that I was able to be involved with that is the most publicly well-known is probably Twitch. Gosh, I learned a lot about what it takes to be a good board member. I learned a lot about how to navigate hyper competitive environments.
1:01:31 Harry Stebbings? What did you specifically in those cases, if you were to distill one or two things, like the importance of staying calm on a board, the importance of like product marketing differentiation, if you can drill down and extract that?
1:01:41 Speaker 00 I think that a great board is meant to be a mirror to the founders. Very rarely is a board supposed to offer prescriptive advice. In the same way that if you were to ask advice from somebody you really trust, oftentimes they would just ask questions to help you develop confidence that you are making the right decision. And so in many ways, a great board is meant to reflect as clear thinking back to the operators, the CEO, the leadership team, not necessarily introduce net new information or be prescriptive. If I'm doing my job well, I'm half therapist, half coach.
1:02:22 Speaker 00 On navigating competitive environments, seeing Twitch firsthand gave me one of my mental frameworks. Companies or platforms that start with the explicit strategy of poaching, like economically incentivizing supply from another platform. You see this in like companies starting and they're offering kind of creators or the supply like minimum guarantees economically incentivizing them. That strategy does not work because you are fighting an uphill battle and going against gravity. At Twitch, we saw countless competitors, inclusive of Mixer, Microsoft's competitor, throw massive minimum guarantees at streamers on Twitch and they all failed.
1:03:04 Harry Stebbings? What's the future of Substack?
1:03:06 Speaker 00 Substack is an interesting company where I Don't know if they have business model product fit. I think it's pretty clear that they have product market fit, but it's not clear to me that they have business model product fit. Any other piece of software that looks like Substack, you would assume does not charge a percent of revenue, particularly at the scale that Substack does. So like, for example, let's take Shopify. Could Shopify as a business justify charging 10% of GMV? And why can Substack?
1:03:41 Harry Stebbings? I think Substack can because of the intangible value on cost of time to create versus the tangible value of cost of goods to sell. If it costs me $10 to make this bracelet, I can actually put a COGS on that versus the three hours it took me to write that piece of information that I don't price efficiently, is mispriced, is unknown price.
1:04:04 Speaker 00 I think that can work at small scale, but at large scale, it inevitably begs the question, is this worth what I'm paying? I would expect that business model to have a leaky bucket at the top. At best, get margin compressed at the top. So the people that have the most distribution, that are the best for the platform from a marketing perspective, dramatically negotiating down their economics. So if you look at like card processing, Stripe, Adyen, the biggest customers don't pay the rate card. They negotiate down from the rate card of whatever 3% and 30 cents to interchange plus, and so you get margin compressed.
1:04:43 Harry Stebbings? What's the biggest investing miss or mistake? And what did you learn?
1:04:48 Speaker 00 I think one of the things that I have learned about myself as an investor, and it's pretty idiosyncratic, is I make the best decisions without leverage or help. So as an investor, I don't work with an associate. I don't have an associate. I don't have a principal. I don't have an analyst. I think it's because in the past, I've been in a position where I didn't do the customer calls. I didn't myself do all of the diligence, and it was synthesized into information that was digestible and presentable to make an investment decision. I hadn't done the work myself and through that I've learned I should not be in those positions. I should force myself to do the work myself.
1:05:28 Speaker 00 And if I don't want to do the work, that is a really strong input into my inherent level of conviction.
1:05:35 Harry Stebbings? I think you're so right. I think it's also so important to be the one taking the references, to be digging in deeper, to be hearing that tone change, which says enough but doesn't say everything. And to really be feeling that full experience, I think it's really important. Okay, tell me, if you were to invest in one seed specific firm, which would it be, Chris?
1:05:54 Speaker 00 Does Y Combinator count as seed? What's seed?
1:05:56 Harry Stebbings? Seed is someone who primarily does seed investing. It could be in Bold Start, it could be Floodgate, it could be Sousa, it could be True, it could be First Round, it could be Unkork, it could be Better Tomorrow Ventures, A Ventures in New York.
1:06:10 Speaker 00 I'm like very personally fond of the folks over at Box Group. Spent a lot of time with them.
1:06:14 Harry Stebbings? Love Tish. Hit me, my friend, other than Thrive, because that's obviously family for you. Which multi-stage firm would you invest?
1:06:20 Speaker 00 This may just be because in my investing career, I had like the most overlap with the firm. And maybe it's because they funded us meeting at first time, but maybe Index to avoid the kind of boilerplate answer of Sequoia.
1:06:32 Harry Stebbings? If you could choose one board member to be on your board as a founder, who would it be? I know they bring different things, but you can only have one and they are amazing that you've worked with. Who is it?
1:06:42 Speaker 00 I had the opportunity to sit on a board with a guy named Craig Sherman, who works at a firm called Miratac, and I really enjoyed working with him.
1:06:50 Harry Stebbings? I want to finish on one final one. You mentioned the five fund vision for Pace. What does Pace look like then in 30 years' time, Chris?
1:06:58 Speaker 00 Pace is five or six perfectly equal partners. I am no longer there, continues to focus on platonic ideal venture capital, Series A, is involved with some of the most powerful companies of its generation.
1:07:10 Harry Stebbings? Chris, my friend, I absolutely love this. I cannot thank you enough for going off schedule so much. But you've been a star and this has been such a good discussion.
1:07:20 Harry Stebbings? I absolutely love that one with Chris. If you want to see the full video in video on YouTube, you can search for 20 VC and you'll find it there. Likewise, you can find the transcript for the show by signing up for our newsletter on 20vc.com. But before we leave you today. Are you building enough conviction to outpace other investors in this changing ecosystem? Tegus helps VCs get under the hood of their investments quicker, map evolving markets with deeper research, monitor the financial health of portfolio companies and even source new deals. Tegus is trusted by top firms like Redpoint and Spark Capital for everything from expert calls and transcripts to quickly surfacing insights across filings, comps and benchmarking. Find out why a majority of the top venture funds are using Tegus
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Previous 20VC: Alex Rodriguez (AROD) on Investing Lessons from Warren Buffet, How a Meeting with Magic Johnson Changed His Approach to Business and The Single Best and Worst Investment Decisions he has Made and Why AROD Is Not Buying More Real Estate Next 20Sales: How to Scale a Career While Scaling a Family, Strategies and Specific Tools To Help Maintain Work-Life Balance, What Companies Can Do To Empower Parents To Be Their Best Selves & How to Prevent Parental Leave Being an Inhibitor To Your Career Page updated October 26, 2026 · transcript and summary are machine-generated
