Uncapped #8 | Josh Kopelman from First Round Capital

It was a pleasure to sit down this week with Josh Kopelman, one of the original architects of seed stage investing who continues to re-invent what it means to operate within venture. Josh co-founded First Round Capital, which has invested at the earliest stages in companies like Square, Uber, and Roblox. Some of Josh’s more recent investments include Notion, Pomelo Care, Loyal, and Perpay. Since First Round’s inception in 2004, Josh has invested in 500+ startups and has frequently made the Forbes “Midas List” which ranks the top 100 tech investors. Josh has been a founder three times (four if you include founding First Round). In 1992, while in college, he co-founded Infonautics Corporation – and took it public on NASDAQ in 1996. Josh co-founded Half.com in 1999 and led it to become one of the largest sellers of used books, movies and music in the world. Half.com was acquired by eBay in 2000, where Josh remained for three years. In late 2003, Josh helped to found TurnTide, an anti-spam company that created the world’s first anti-spam router. TurnTide was acquired by Symantec just six months later. We covered: His “Venture Arrogance Score” The role of relevance in venture Making money in disequilibrium Overlooking margin superiority Decision-making as a product --- Timestamps: (0:00) Intro (0:25) Current landscape (4:39) Venture Arrogance Score (10:49) Comparing fund models (14:24) The role of relevance in venture (21:03) Small funds vs large funds (26:36) Making money in disequilibrium (33:57) Overlooking margin superiority (43:17) First Round’s strategy (49:02) Operating like a company (56:49) Future of First Round --- Linktree: https://linktr.ee/uncappedpod Twitter: https://x.com/jaltma Email: [email protected]

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

• 0:00Speaker 00

  It was universally acknowledged, we're in a bubble.

• 0:02Jack Altman?

  Everybody knew it.

• 0:03Speaker 00

  Oh, like the Fed chair irrational exuberance, pets.com sock puppet, like total irrationality. And if you had said, oh no, we're in a bubble and you said, I want to sell and exit now, you would have given up 83% of your profit. You would have made 17% of the total returns you could have made.

• 0:21Jack Altman?

  All right, Josh, thank you so much for being here. I'm really excited to do this with you today.

• 0:24Speaker 00

  I'm excited too.

• 0:25Jack Altman?

  I want to start with the state of venture. So you started first round in 2004, so it's over 20 years now, which is awesome. And you've seen a bunch of cycles and venture has changed like a huge amount in that time. And the lay of the land today is different than it's ever been. It's different than when I was building Lattice even where now we've got not just like one or two big firms, but you've got like six or eight or 10 venture firms that are billions and billions of dollars. And we're not that big of an overall ecosystem in venture. And then of course you have a lot of smaller firms, but it seems categorically different because now you're hearing about firms that are playing different games than we've ever played before.

• 1:07Jack Altman?

  And so I kind of wanted to start by just hearing your reflections of where we are as an ecosystem of venture generally around this dynamic.

• 1:16Speaker 00

  It's been fascinating to watch. So I think we should talk about it two ways. The first way we could talk about it is how is it playing at the GP side and how's it playing at the LP side? Cause at the GP side, right in 2004, you had fewer than 850 funds. If you looked at like active check writers, people that were writing more than one check a year, probably a thousand, 2,000 people. Today, there's over 10,000 funds. You probably have over 20,000 active check writers out there. That, that's a change and I think everyone's commented on it. And look, does it make the industry harder for VCs? Sure. Is it probably better for entrepreneurs? Yeah, more capital out there funding more ideas. I think what hasn't been talked about are these fund size changes and what that means for LPs.

• 2:01Speaker 00

  You know, I think when we started,

• 2:04Speaker 00

  David Swenson pretty much like created the institutional venture asset class. He put us in business at first round at Yale. And you had like university endowments and a very select customer that basically said, we'll take illiquidity in order to get outperformance. And they really like those two matched, right? You needed to have 10 plus years illiquidity in order to get a 20 plus percent IRR. And that was the deal.

• 2:26Jack Altman?

  And it happened.

• 2:26Speaker 00

  And it happened, right? Like by and large, you had real good exits and it really created the asset class. But like, I think there are a lot of smart investors out there and smart VCs. And they said, you know, there's a lot of capital out there. There's capital that hasn't been able to get into this asset class. A lot of capital with like bigger purses, sovereign wealth funds, et cetera. And you know, they might be willing, they might have a different cost of capital. They might, instead of targeting a 25% or a 4X, they might be looking at a 2X or a 12% IRR. And they'll take the same illiquidity. And when you bring new investors with different capital returns expectations, it could be really transformational for the industry. So like the bull case is the Blackstone-ification of venture, right?

• 3:11Speaker 00

  You know, what Blackstone did is say it's not about alpha, it's about scale, right? Let's, let's give an example. If you had a billion dollars and it was a traditional venture fund and it could do 30% IRR, that's awesome. That's like $300 million. And if you had a, now on the other hand, if you had a $100 billion fund and it could do 12% IRR, well, that's $12 billion. That's a lot more than the $300 million, the first. So in terms of a total cash return from an asset under management, total profit dollars generated, like the Blackstone Model 1. And Blackstone, by the way, created an epic business. I'm not like using this in any condescending term. They created, you know, but, but, but definitionally, what they've done is basically bring down

• 3:56Speaker 00

  returns to the minimum acceptable level. Try to generate consistency of those returns and expand the asset class. So the bull case is that like what Backstone did to private equity and other alternative asset classes, these, this new model is going to do in venture. The bear case is, you know, and the story is still unfolding, so we have no idea what it's going to be, but the bear case is you don't get 12 or 14% return.

• 4:23Jack Altman?

  You get like 3% return.

• 4:25Speaker 00

  Or zero or negative, right? Like if you look at the average venture firm, it's negative and like, like venture math is so tricky. Like when you look at like both the duration that's increased, when you look at the total venture dollars, like it's hard.

• 4:38Jack Altman?

  So like, obviously you've thought about this a lot. What's your sort of bottoms up way you think about a firm and its venture model and how it's going to get?

• 4:46Speaker 00

  So I have spent a lot of time on it because like we, every three years we go out and we have to size our own fund. And, and so I, I, I've created something which I don't think I've shared publicly, but I've brought it into.

• 4:58Jack Altman?

  Here we are, breaking news.

• 5:00Speaker 00

  Let's call it the venture arrogance score. All right, so you take a fund, say that fund is a $7 billion fund. Then you look and say, so you need two numbers to understand any fund's business model. First is how large is the fund? Seven billion. The next is what percent of a company do you think the loan on exit? And so like, are they going to own 30% like they did 20 years ago? Or are they going to own 8% or 10%? And like today it's trending to 10% like, you know, whiz, an amazing exit, right? Sequoia owned 10%. Index owned a little more. So like, and, and I would argue that like, when you look at prices and the competitive nature, 10% is like a safe assumption, but you could plug in, you know, you could do the math yourself.

• 5:41Speaker 00

  So if you have a $7 billion fund and you're going to own 10% of the companies that you're in on average, you just figure out, okay, for each turn of the fund, that's $70 billion, right? Like you're, the founders need to create $70 billion worth of value in your basket.

• 5:57Jack Altman?

  Yep.

• 5:58Speaker 00

  For your 10% to be worth $7 billion. So if you want to, now, if you're still aspiring for a 4X gross, 3X net, which is sort of what like the venture long-term aspirational goal was, you're now saying, okay, so for each turn of the fund, that's 70 billion, so call that $280 billion.

• 6:17Jack Altman?

  Right.

• 6:17Speaker 00

  And here's where the arrogance scale comes in because say you raise that fund every three years. You know, that's roughly $90 billion a year of exit value that you hope to extract out of the market.

• 6:28Jack Altman?

  And how much is exiting total?

• 6:30Speaker 00

  Well, like, the last decade was the best decade ever.

• 6:33Jack Altman?

  Yeah.

• 6:33Speaker 00

  $1.9 trillion total of US venture, and that includes pharma and everything, like semiconductors, so let's just include it all. So that's an average of $180 billion a year. It's a median of about 100. So if you sit down and say-

• 6:50Jack Altman?

  But outliers matter, so we'll take the average. So it's like, you need to catch half.

• 6:54Speaker 00

  You need to catch half. By the way, to my knowledge, there hasn't been a venture fund that has ever repeatedly caught over 10%.

• 7:00Jack Altman?

  Yep.

• 7:00Speaker 00

  So you're saying that you and your fund, in this hyper-competitive environment with 10,000 funds and 20,000-plus check writers, you are going to capture half of all venture value created every year for the three-year period in your fund, just to generate that. And now, there are two, obviously, ways that could change. Number one is you could say, well, you know, for a $7 billion fund, if you're playing the Blackstone matter game, it's really about total cash returns, not alpha, so you could, like, reduce the 4X gross to a 3X gross to a 2X gross, or however you want to do it, and figure out what that math is. Or you could say that exits are going to go up. You know, like, AI is going to unlock some big things in the total value, which is probably true. But like, even if you take, during the last decade, when that $1.9 trillion came out,

• 7:44Speaker 00

  2021 was the best year by far, you had over $700 billion created that year. Even if you say that's the best year, you're still saying you're going to capture north of 10% in that best year. And by the way, like, 2023 was like, $60 billion. So you're saying you're going, you know, we invest in cycles. So, so I think that, like, for me, like, the, the venture arrogance is trying to figure out what percent of total value created by all founders anywhere in the United States you have to capture for your fund model to be successful.

• 8:19Jack Altman?

  I mean, we kind of collectively all need the totals to go way up, or else the whole industry is not going to make any money at this point, right?

• 8:26Speaker 00

  Well- I don't think people invest in venture expecting the whole industry to make money. If you look at the median fund return, even even like primitive times, like in the 90s, it was the median fund didn't return capital. So like, this has always been a game of outliers. I think, though, the challenge, like, the difference here is that-

• 8:45Jack Altman?

  But does the aggregate returns, though, right? Like, if you invested, if you just bought the entire basket of venture, do you lose money?

• 8:53Speaker 00

  Yes.

• 8:54Jack Altman?

  You lose money if you buy the whole basket of venture?

• 8:56Speaker 00

  Yes.

• 8:56Jack Altman?

  So it's like, you're trying to bet on a good poker player, and we all know there is a rake. It's that kind of dynamic?

• 9:01Speaker 00

  Yeah, I don't know if there's a rake. I think that the challenge is that, like, structurally, there has always been a power law. There's always been, like, a few funds. And now, the question in today's world, does, like, you know, do the benefits endure to the same funds as it always, as it used to do? That's an unknown question. When you look at returns, we call, like, I think we've differentiated between private equity and venture capital. Private equity is controlled, much lower, go-to-zero risk. Venture capital is minority. We have labels for those type of investments. And even in venture, we have labels for pre-IPO, early-stage, late-stage. And all of those have different risk and return characteristics. What's interesting, though, is that as these, like, there are funds that are pursuing the original bespoke venture model, and I'm not trying to pass judgment on either of these,

• 9:45Speaker 00

  and then there are funds that are pursuing the asset under management, like, cash-on-cash game, not the IRR game, right? So scale, not alpha. We don't label them differently. And in fact, the funds that are out there raising these larger funds are almost raising on their track record of being one of the smaller funds. And so, like, the question of what percent, and again, if, maybe a 2X is fine, but instead of 4X. But like, I think there's some combination of expected lower return, because the source of capital is cheaper, and expected, like, let's all hold on and make the bet together

• 10:26Speaker 00

  that the next decade is going to have $8 trillion worth of venture created in the US, rather than two. And maybe that's fine also, but I don't, I don't see LPs actually do- Doing the math and saying, okay, in order for this to work, what percent of all exits am I comfortable with? Am I comfortable with 30%? We've never seen a fund do that over and over. Am I comfortable with 15%? Am I comfortable? And so.

• 10:49Jack Altman?

  In the interest of looking to sort of like resolve what sounds like a big problem, one counter narrative or one sort of, sort of a, when an argument to this could be, there's a lot of private companies that are, that should be public, but are actually staying private. And they're going to be worth hundreds of billions. And so you've got a bunch of companies like OpenAI and SpaceX and Stripe and Databricks and Rippling and so on. You have all these huge companies that are gonna be huge and it's gonna be longer. And so actually you can put 500, 750, a billion into these companies. And there is actually a way to three X a $5 billion fund.

• 11:30Speaker 00

  That makes a ton of sense. I would also say though, as a counter to that, duration really matters. And again, maybe it depends if you're playing the cash on cash game or the IRR game. But like, let me give two funds. Okay, so the fund 10 year life size, first five years capital is called.

• 11:44Jack Altman?

  Yep.

• 11:45Speaker 00

  The next five, like 1X gets it done evenly over the second five. And then like the, there's three, 1X per year. So it's a 4X fund, 1X per year in years eight, nine and 10. So it's a 4X fund back end loaded and distributions, 27.5% IRR. Now let's take a same 4X fund, same 4X fund, same five year upfront capital, same 1X that comes over the, the back end. But instead of 10 years, say it's 18, not 20, but 18. Years one through eight, no returns, 1X returned nine through 18. And then 1X on years 16, 17 and 18. That's a 4X, so 4X funds back end loaded, that's an 11 and a half percent IRR. And it's a 4X fund. So, so now you sit down and say, okay, well, like we just said, maybe they'll accept lower than a 4X. Maybe they'll accept a 2X.

• 12:31Speaker 00

  Well, if a 4X fund over 18 years.

• 12:35Speaker 00

  Is like an 11 and a half percent IRR. What is a 2X fund? What like, you know, I don't know my calculator, but I know it's less.

• 12:42Jack Altman?

  Yeah.

• 12:42Speaker 00

  It's not big and like maybe T bills are a better risk adjusted investment. You know? And so, so I think like the, the argument that these companies are holding on for longer also means that you might have more duration risk.

• 12:54Jack Altman?

  Right.

• 12:55Speaker 00

  And that also is an IRR killer.

• 12:57Jack Altman?

  Yep. If you had like a $5 billion fund handed to you tomorrow and you had to do your best with it, what would you do?

• 13:03Speaker 00

  I don't know. Like I, I don't know if I'd play the game because I, I didn't sign up to play an asset under management. Like I signed up, like I think the, the earliest stage of venture like is, is, I created a fund that like satisfies what I want to do, which is like invest at the imagine if stage when founders are just saying like, imagine if we could do this. And I'm not looking to sort of play the access game, the pour lots of capital. Not, not saying there's anything wrong with it.

• 13:28Jack Altman?

  Yeah.

• 13:28Speaker 00

  Like you could, like founders need that product, like LPs need that product. There's like, there's no judgment there. It's just not the game I want to play.

• 13:35Jack Altman?

  It's a different activity.

• 13:36Speaker 00

  Yes.

• 13:36Jack Altman?

  Do you think this, so this whole conversation we're having about return compression, professionalization, big funds, blah, blah, blah. It's very interesting to me as an investor, I think LPs should care a lot about it. Should founders care? Is there any reason or maybe like, yeah, what, if there are reasons, what are the reasons that a founder should care about this? Does it change the dynamics of working with those firms in any ways? Is that, does it matter at all? Or is it just like, this is all good, there's more money?

• 13:57Speaker 00

  I don't know. I don't think founders have to worry about it, like to some degree. Like did founders love it when there's more cat? Like when SoftBank came out with a $100 billion fund, that was a good thing for founders. When it went away, okay, the capital got filled elsewhere. But like, I don't think it changes. And by the way, I don't think those VCs sit down and say, I want to fund mediocre founders with mediocre returns. I think they're playing the same aspirational game, but they understand that like if you're deploying that much capital, returns are probably not going to be the same.

• 14:23Jack Altman?

  One of the things that has struck me is imagine two funds. One is a $500 million fund and it does great. And it hits like a 15X. So it returns $7.5 billion. LPs are super happy, GPs are happy, everybody's happy. There's another fund that's a $5 billion fund.

• 14:43Speaker 00

  Yep.

• 14:43Jack Altman?

  And it returns. 1.5X, it also returns 7.5 billion dollars. Obviously, the returns are different. People have a different amount of happiness. But maybe the GPs kind of make similar amount of money. But.

• 14:54Speaker 00

  GPs made more in fees.

• 14:55Jack Altman?

  Yeah, the GPs made more in fees. So maybe that kind of balances out. So I don't really know. Maybe I'm really equal with it. But what strikes me is the $5 billion fund probably has more relevancy. Like, I think that firm, at least at a snapshot moment, probably is choosing what areas get capitalized. They're out and about. You hear more about them. They have more partners. There's more people. They're more in the mix. They're around more deals. You see them in the news more. They're choosing what areas get invested in and they're deploying dollars. And so it seems like there's something twisted about that a little bit. But you've seen this play out a lot over 20 years. And so I'm curious to hear like a more nuanced discussion about this.

• 15:38Speaker 00

  You're calling out a very real phenomenon. So, look, in public markets, if you want to invest in public markets, anyone could access any stock, right? So like, if I want to buy IBM or Nvidia, I could buy that. There's no, there's no credential that's required to gain access. But unlike public markets, private markets are very different. Access is highly competitive. And so founders are going to judge based on who is a really active investor? Who's super connected? Who has other founders in their portfolio that could be helpful? Who has a lot of experience because they've deployed a lot of company adjacent? Like, and so relevancy, as you define it, actually like it often creates access.

• 16:21Speaker 00

  And to some degree, like I've long said, in venture, activity begets activity. The more you write checks, the more relevant you are to other founders, the more founders refer you, the easier you have winning. There's the, an effect called the Matthew effect, which is based off of some proverb in the book of Matthew where that like, you know, to those who have that more will be given. And it talks about how like compounding often happens based on like, it accelerates advantages. You know, in sports, people talk about the hot hand, right? Right? So like, oh, when. Steph Curry is like on fire and sinking threes. There's the hot hand. It's actually called fallacy or phenomenon because there's a debate.

• 17:02Speaker 00

  The hot hand fallacy is that like, oh, like because he sunk, like he was three for three in threes. The next one has much better odds of going in like there's proof either both ways. MIT just came out and said, maybe there's a little proof, but in venture, it's a hundred percent true. And the reason why is like, ultimately, the reason Steph Curry makes fifty five million dollars a year is because when he shoots, he hits a lot of them. Like if Steph missed all of his shots or eighty percent of his shots.

• 17:28Jack Altman?

  He get paid less.

• 17:29Speaker 00

  He'd get paid less. But in venture, like if I'm a fund and I'm stroking checks, I'm just hitting three, taking three after three. You get credit for that, for attempting the shot. You don't get judged on whether that shot landed, right? So, so to some degree, while Steph's only going to get paid if his, if his shots go in, some of these ventures get real compounding. And because of the venture on like private markets, there's the gossip mill. The speed of where like, of where it's like a reputation for a firm or an individual can be created by activity.

• 18:00Jack Altman?

  Yes.

• 18:01Speaker 00

  Or destroyed by activity is super, super fast.

• 18:05Jack Altman?

  There's also a dynamic of just like you are part of the most important companies or you're not. And that doesn't include, how many other investments did you make that did or didn't work out? What price did you pay, you know, to get into that investment? You're just.

• 18:19Speaker 00

  So I, I agree with you there. The asterisk I'd say is like, over what time period?

• 18:23Jack Altman?

  Exactly.

• 18:24Speaker 00

  So like, there was a period of time, twenty eighteen to twenty twenty one, where if I asked our founders who are series B and later, what funds you wanted the most in? What, what, when I look at who they asked us to introduce them to the most, Tiger and SoftBank.

• 18:38Jack Altman?

  Kind of funny tidbit on that. There's, um, I have some, uh, some friends of mine said something along the lines when like, you know, there were a bunch of firms leaking their returns and like, or they got leaked, let's say. I don't know how they got out, but you know, these returns got leaked. Some of them look really, you know, good, some look whatever. But people are like, oh man, wouldn't founders should just want the people who have the high returns? And I was like, and you know, I'm still fresh enough off last, I'm like, why, why would I want? Why do I want a VC with killer returns who's going to give me a bad price and dilute me more? I want the one with the 1X, 1.5X, who's happy enough to get by so that I can, you know.

• 19:15Speaker 00

  So, but like, so, yeah, I agree, but like Tiger and SoftBank 2020 couldn't have been more relevant. And so I think that you have a two by two grid of like relevancy and returns. So you can sit down and say like, if you have relevancy without returns, it's not enduring.

• 19:28Jack Altman?

  Yep.

• 19:29Speaker 00

  And by the way, there are also people with very different strategies who might have returns, but the hype to substance ratio is different, right? Like if I look at, like, I'm not an investor in these funds, but like, if I look at Founder Collective, like from what I know, they've

• 19:42Jack Altman?

  Supposed to be great, right?

• 19:43Speaker 00

  Epic return fund after fund, and it's so hard to do that. I wouldn't say that they play the hype game. They play like the activity game. They're just good investors.

• 19:51Jack Altman?

  Yep.

• 19:51Speaker 00

  IA Ventures, same thing. We invested with Altos and Roblox.

• 19:54Jack Altman?

  Yeah.

• 19:55Speaker 00

  Like, under the radar, epic. And they like, I would have put Green Oaks there, except now they've kind of become more relevant because they've gotten attention.

• 20:02Jack Altman?

  No, that's right.

• 20:02Speaker 00

  They've been pursuing that strategy. So, so I don't think there's any one way to play it. But I do think long-term, long-term, like to have an enduring franchise.

• 20:12Jack Altman?

  You need good enough returns.

• 20:12Speaker 00

  It's about like checks deposited rather than like checks cashed.

• 20:20Jack Altman?

  It's almost like, I think what you're saying is they need to be sufficiently good to continue playing the game. It's not that they need to be so outlier great that that's what creates.

• 20:29Speaker 00

  I, yeah, I, I aspire to create something. And so I've put, I, I, we tried to hopefully be relevant to founders, but we tried to do it in a way that like aligns our incentives with our LPs, right? Like our partners make almost all their capital through carry rather than fee. Like we have, you know, small fund, but we have 50 employees because we want to invest our fee, not cash, not take it. But yes, I think there's like the model, there's so many different models and there's no one correct way, right? Someone could look at like at our model and say, we're going to make much less than a $7 billion fund.

• 21:03Jack Altman?

  Okay, so the dominant sort of venture theme right now, basically around these huge funds, getting bigger and bigger. And I think, you know, we didn't talk about this right now, but I'm sure we'd probably agree that the prisoner's dilemma, correct move is to just kind of keep scaling for those groups. And so that will be like The dominant thing most, you know, I saw some chart, you know, the top 10 venture firms are now raising like a very large percentage of overall dollars. So that's the main thing. There's this separate, you know, thing of, you know, there's a bunch of small firm, small, let's say, sub 500, sub 700, some number like that, that is like small enough where you'd say, you know, they can still, the venture arrogant score is not going to be crazy and they can still drive like old school returns and things like that.

• 21:44Jack Altman?

  In the face though of those bigger groups that have different incentives, can play the game differently, can therefore pay differently at a seed or an A, like all these other things. What does that, where does that leave a firm like yours or mine or whatever? Who is trying to basically exist in the, in the context of that? What's our dominant strategy?

• 22:10Speaker 00

  Well, I think honestly, we're very aligned with our founders in that like our, we only eat if our founders create exceptional wealth, right? Like, like if their founders are exceptionally successful. Whereas like a lot of these other funds, like they're making more in fees than, you know, than is, than was imaginable 10 years from now. So I think like from an alignment perspective, it works incredibly well with founders in that like, our whole focus is to like, is to find ways to be the best potential partner to those founders, to help them create something massive and not to settle for that 3X or that 4X return.

• 22:50Speaker 00

  You know, I think that, I remember going back to Tiger, how Tiger, there was a 2021, they, they almost did an investment a day, every day. They clearly did one every business day. I think it was 320 investments that year.

• 23:03Jack Altman?

  That's a lot.

• 23:04Speaker 00

  It's a lot. And they had a whole series of, we have all of these consultancies and experts, et cetera. That all that only scaled to the extent that they could raise their next fund. And so I think that like, to some degree, our, our, our approach is like, we don't, we really try to be like, just focus on what we could control. Could we be the best potential partner for the first two and a half years? Could we invest a meaningful amount of our fee stream into things that accrue value to our founders? Could we avoid the conflict that comes from sort of saying like, From the founder thinking that we're going to want to pile tons of additional capital in and therefore we're not truly aligned with them and trying to maximize the value

• 23:49Speaker 00

  for the next round, create an auction, maximize the long term, either short term value for the next round or long term value.

• 23:54Jack Altman?

  Yep.

• 23:55Speaker 00

  But I'd say in general, this industry has gotten far more competitive for all funds, yours, mine, any size.

• 24:02Jack Altman?

  You've settled on doing something like 70 or 80 seed investments per fund cycle, is that right?

• 24:08Speaker 00

  That's my right, yeah.

• 24:09Jack Altman?

  How did you get, can you, can you explain a little bit about like why you concluded that? Was that just a preference thing? Did it just match the model? Did you have some assumption of we're going to hit about this many? Like, how did you think about getting to that sort of shape?

• 24:21Speaker 00

  Yeah, I mean, it's a little bit about like, we want to have, make sure we have time diversification, so we aspire to invest over two, at least two and a half, but ideally three years. We know that we're, we are ownership focused, like we, we, we are, we assume that we're going to get between 12 and a half and 15% on the way in. We typically take pro rata in the A. And so like our model, if you do our math, it's like we're trying to end up with, you know.

• 24:47Jack Altman?

  Seven or eight?

• 24:48Speaker 00

  I'd say eight, eight to nine percent ownership on exit. You know, do we always end up there? No. Have there been times where we had 15? Have there been times we've had six? Sure. But, and so, you know, we look at our math and say, that's one thing. And then you, then we also just look at the mortality rate, the mortality rate of the industry, like the mortality rate from C to A, A to B, B to C. And we understand, like, we've been doing this so long that like, you know, it's like, these, these startup founders are like running marathons and there are so many that have great times at the third mile. There's so many that have great times at mile 10. And they're also like marathoners who sprain their knee at mile 21 and don't finish, just like we've had plenty of companies that have gone on to be worth, I think we've had more

• 25:32Speaker 00

  than a half dozen companies that are worth over a billion dollars that went on to be worth zero. So when you sit down and look at the, like, the mortality curve.

• 25:39Jack Altman?

  It's like you need a basket that make it to a billion and then a sub basket's going to make it all the way.

• 25:43Speaker 00

  That's right. Like, you have to assume that there's going to be either founders that could have exited for 10 billion that choose to exit for one, founders that you thought were going to exit, but they hit a curve ball and like the market shifts or changes. And then it also matters, by the way, when you exit. Like, to some degree, when a company exits matters more, like, I don't think that people understand the.

• 26:07Speaker 00

  The hyper concentration of, of, of returns in our industry.

• 26:16Jack Altman?

  Well, they're very unintuitive because you always forget that you can add another zero. And it's like, very hard to believe it until, you know, it's like, um, I, I can't remember who I was talking about this with yesterday. But, um, basically it's like, you know, an eight billion dollar outcome is like so outlier. But 80 is also possible.

• 26:33Speaker 00

  Yep.

• 26:33Jack Altman?

  And like 800 is also possible.

• 26:36Speaker 00

  Yeah. And like the, the, every industry has a harvest cycle, but I think VC is, has a hyper harvest drive cycle. And I use hype intentionally because it's like hype driven and hyper harvest. Some data from one of our LPs, I went back to an LP who's been in the business for a while. If you became a VC in March of 1980 and you had a 20 year career to March of 2000, which was the dot com crash. And I asked like, what percent of your profits would have been generated in each year?

• 27:02Jack Altman?

  Almost all in 99.

• 27:04Speaker 00

  So 1% a year for the first 17 years, 83% in the last three. And why is that important? Cause the last three, it was universally acknowledged, we're in a bubble.

• 27:14Jack Altman?

  Everybody knew it.

• 27:14Speaker 00

  Oh, like the Fed chair irrational exuberance, pets.com sock puppet, like total irrationality. And if you had said, oh no, we're in a bubble. And you said, I want to sell and exit now, you would have given up 83% of your profit. You would have made 17% of the total returns you could have made. Fast forward to first round, we've been in business 20 years. We've generated over 90% of our return in a 36 month period of time. And during our 20 years, so, and, and, and so we don't make our money in equilibrium. Like you, you have the fear cycle, but you also like, we don't even make our money in the green cycle. We make our money in the extreme fucking green cycle. We make our money when like Chamath is on CNBC every week pumping a different spec.

• 27:57Speaker 00

  When there's like NFTs and crypto and corporate venture, like for the last 40 years, all of those returns don't come from equilibrium. They come from like irrational disequilibrium. And the hardest thing that I've learned is like, Is having the discipline to hold on.

• 28:16Jack Altman?

  Until then.

• 28:17Speaker 00

  Yeah, like we had a company that we partnered with the founder of Looker. They had a great exit in 2017, 2018. They sold to Google, I believe, for $2 billion. And it was like a good multiple. It was like 18 to 20x like next, next 12 months ARR. Had that company held on for three years, same numbers, just different multiple. That company, Looker, would have the same exact company, just the multiple expansion. That 2 billion would have been 8 to 10 billion.

• 28:42Jack Altman?

  Wow.

• 28:43Speaker 00

  Just, just diff- the difference between 2021 and 2018. And so like having the strength to hold on for a founder and a funder, like you know those movies? Like where you see the like the war movies with the people in the foxhole and like with the bayonets and everything? And there's some like commander telling his troops as the enemy approaches.

• 29:01Jack Altman?

  Like hold on and you're like, no.

• 29:02Speaker 00

  Hold on, like there's someone who's getting triggered.

• 29:04Jack Altman?

  They're so close.

• 29:04Speaker 00

  And they're like, hold, and you, you want to hold on till they get very close that you could hit as much as you can.

• 29:09Jack Altman?

  Yeah.

• 29:10Speaker 00

  But you don't want to wait too long till you get overrun.

• 29:12Jack Altman?

  Yeah.

• 29:12Speaker 00

  And like an adventure.

• 29:14Jack Altman?

  It's crazy.

• 29:14Speaker 00

  The temptation to sort of exit early is, is like so value destroying that you'd almost rather the other sin, which is like, hold on a little too long.

• 29:24Jack Altman?

  And, and totally.

• 29:25Speaker 00

  And it's a really hard thing in this business now.

• 29:28Jack Altman?

  Like it's also very tough because as the founder in that situation, you're like, wait.

• 29:32Speaker 00

  Founder's an ed of one and like.

• 29:34Jack Altman?

  Yeah. And it's the founder's call.

• 29:36Speaker 00

  No, no, secondary.

• 29:37Jack Altman?

  That's what I was about to say.

• 29:39Speaker 00

  Secondary changes that, makes it a little easier.

• 29:41Jack Altman?

  A funny thing you said earlier is I remember I, you know, I've like, um, you, you'll sometimes hear VCs complaining about founders taking secondary and they're like, this is misaligned. They're getting paid and we're not. And what just occurred to me as you were talking earlier is if they've invested $150 million into the company, they actually are getting paid $30 million over 10 years just by their LPs, simply for having written that check. And so, you know, it's all a little unclear sometimes when you really pencil it all out.

• 30:10Speaker 00

  Yeah. And so, look, I think there's a difference between a founder taking some secondary to enable them to enable them to have a different risk profile, like.

• 30:18Jack Altman?

  I think you want in the situations where they don't feel like they need to sell in order to lock in, you know, sort of securing a great life based on like a lot of years of hard work.

• 30:28Speaker 00

  Of course, of course, I have no issue with it. I think that alignment makes sense, but I don't think that people understand the like, the extreme concentration of exits. And so, so put it another way, like you don't control when you exit and you don't control when a founder exits and you don't control whether the multiple is 20 times next 12 months ARR or 80 times next 12 months ARR. But like, I think that there are signs of froth that you want to look for to at least get an understanding. Like, it's very hard in the moment to get like that map, which says you are here to know where you are.

• 31:03Jack Altman?

  It's funny because like usually when people talk about being, you know, a startup investor, you're talking about picking birds out of flocks and like it's individual companies.

• 31:11Speaker 00

  And I think that's most of it.

• 31:13Jack Altman?

  But, you know, a lot said something really interesting, which I thought was really right, which is there's a lot of value to just picking the right theme. And if you just call it on AI at the right time or hard tech at the right time or robotics, hopefully at the right time or whatever, there's actually a lot of alpha just in getting that theme. And then if you focus on that at the right time, you're probably going to hit something. And you're saying another not bird in the flock point, not to take away from the bird in flock.

• 31:37Speaker 00

  Bird is very important.

• 31:39Jack Altman?

  But like, there's also a lot of value.

• 31:40Speaker 00

  The when.

• 31:41Jack Altman?

  Yeah, exactly. Of the when. And so if you think of these things of like, what can you actually be good at? You can try to get better at picking birds out of flocks, but there's a lot of other value to these other dynamics, too.

• 31:50Speaker 00

  That's right. And I don't think a lot of VCs, so many of the funds are so new and so many partners are so new that I missed it. Like, it's taken a long time for me to understand the hyper harvest like concentration and the like, the fact that like, we don't make our money in equilibrium. We make our money in disequilibrium.

• 32:12Jack Altman?

  Okay. So let's pretend that. 18 months from now.

• 32:16Speaker 00

  Yes.

• 32:16Jack Altman?

  It's hyper harvest time.

• 32:17Speaker 00

  Yes.

• 32:17Jack Altman?

  And you realize because there's tons of IPOs, M and A's popping off, valuations have gotten stupid. You realize we're in that situation.

• 32:24Speaker 00

  SPAC 2.0, whatever is out there.

• 32:26Jack Altman?

  CNBC is popping off.

• 32:26Speaker 00

  ICOs.

• 32:27Jack Altman?

  All of it. There's like a new product. What do you do now, knowing, knowing all these cycles? What is your behavior now, 18 months from now, when you're like, we are in a harvest moment?

• 32:37Speaker 00

  You don't want to be like, I think, to me.

• 32:39Jack Altman?

  Like you're not calling founders saying, sell your company.

• 32:41Speaker 00

  No, you're not. And you're not top ticking the market. I think there's a difference. Like there, there are times in many of these companies, they're so large that there's constant tender offers and secondaries. So I think as a fund manager, if there's opportunities, it's something to look at. And I don't think you're going to top tick, right? Like, um, we did not top tick in some of our earlier exits, but we were able to take a 1X or a 2X of the entire fund off and still be very long in that company. And so I think like that locks in.

• 33:11Jack Altman?

  Yeah.

• 33:11Speaker 00

  A legacy that locks in a return that, um, and also given the, what we just talked about, the time impact of IRR. It shortens the, the time to pay back if an IPO might be six years from now. But in general, I just like, it's also important just to show the founder the math, sit down and see like, how can I be aligned with the founder? Look, if there's no tender, we're not looking to sell. We're not looking to be competitive with the company. I think you're going to want to sit down and say, like, explain to the founder, have the founder talk to other founders who sold before, maybe sold too soon, sold too late, IPO'd too late. But in general, like my natural instinct, I have to hold myself back from, which is, oh, we're in that. Okay, this is the frothy part. Now's when we have to, and I think you oftentimes just need to hold.

• 33:54Jack Altman?

  Totally.

• 33:55Speaker 00

  Just need to hold.

• 33:55Jack Altman?

  Yep. Um, before we started this, we were just chatting about, uh, the Marc Andreessen Software in the World piece. Which you reminded me was like written like around when I graduated from college or something.

• 34:06Speaker 00

  Yeah, it was like, depending on when this comes out, it's probably about 5,000, literally I Googled it this morning, 5,000 days ago. So you had just graduated Princeton.

• 34:14Jack Altman?

  I love that. And so what, where are we now? So talk, talk to me about like that. Did it play out? What do you see it as?

• 34:19Speaker 00

  Yeah. So what's interesting is I think that was one of the canonical pieces that shamed, like that changed almost the entire industry's framing. Like you could almost look at, what was the venture industry before it? We funded software companies and what's the venture industry after it? And, um, and so many people, like yourself included, anyone, yourself. You know, or younger, only knows the world in which software is eating it. And to a large degree, software has eaten the world. What's in like, you know, like if you, it's massively impactful. And he was right in so many dimensions. What's interesting is if you read that actual piece, it mentions the word software 52 times. And like, the basic gist of the piece was like, look, software ate advertising.

• 35:03Speaker 00

  Look at Google, look at Facebook, software ate this and it has like 90 plus percent margins. So it got software like margins. But what's interesting is while the word software appears in the piece 50 times, the word margins is just assumed and appears there once. So it's like, the assumption is that when software eats an industry, it has superior margins. And as a result, like the whole industry accepted that because it made sense. We saw it. Therefore, we expanded as an industry, our aperture as to what's fundable. Like previously, a clinical care company, whether it's like smoking cessation, weight loss, like physical therapy, with human practitioners, never would have been a venture business. A bank wasn't venture fundable. An insurance, a health insurance company wasn't, a sneaker company, a shoe company, a salad company.

• 35:48Speaker 00

  None of these companies were venture fundable before. And but because the belief that software is going to eat the world, it expanded the definition. What's interesting is at least to date, there are clearly exceptions. There are clearly plenty of companies were software rated and they generated meaningful margin superiority. But by and large, the, the margin test hasn't played out, which is why you saw a lot of those.

• 36:12Jack Altman?

  You're saying most industries had the same margin they always did?

• 36:14Speaker 00

  Even with, with, with the higher R and D software expense, right? So like, you saw sneaker companies building national brands. The founder did everything he expected. You had a pair of Allbirds, I had a pair of Allbirds. It was worth $4 billion because it was valued differently. But ultimately, when you value it as a shoe company, it's like 50 million today. And by the way, I'm not throwing stones at anyone. Like, we funded like tons of companies that have like in insurance in all of these areas where we believe that they would get meaningful margin superiority. Therefore, you get meaningful multiple superiority. And that's why we could justify investing in these at software prices.

• 36:51Jack Altman?

  Yep.

• 36:51Speaker 00

  To date, you haven't seen the margins.

• 36:56Speaker 00

  That justify the superior economics. I think that's a host that like we're still working through that. When you look at the 2020, 2021 funding excess, you have a lot of companies that were funded at a margin expectation of margin superiority, which maybe now have like slight superiority or equivalence. But as a result, like the multiple is going to go back to the traditional industry that they're in. Like, is it, are you an insurance company? Or are you a software company?

• 37:23Jack Altman?

  Right.

• 37:23Speaker 00

  And they're just, they're, they're, it's almost like a lost six to eight years to just catch up. While the company continues to grow, if they can grow to catch up. Now, there's plenty of footnotes, like and asterisks, like there are companies where they have got massive margin superiority. There's the AI asterisk, which is like now finally with all of the productivity gains of AI, you might massively see margin superiority come when software eats the world. But like historically, like just when software eats, well, like when the world eats software.

• 37:54Jack Altman?

  Yeah.

• 37:55Speaker 00

  It hasn't, I think our assumption treated it as gospel. I know my firm did and almost every other firm that you would get margin superiority and multiple and valuation superiority, which hasn't translated.

• 38:05Jack Altman?

  Was margin superiority, the only thing like, you know, because as an example, Eight Sleep.

• 38:13Speaker 00

  Yes.

• 38:13Jack Altman?

  You know, they're, yeah. Imagining Eight Sleep without software is a goofy experience. You could do it.

• 38:19Speaker 00

  Yep.

• 38:19Jack Altman?

  It'd be all right.

• 38:20Speaker 00

  Love my Eight Sleep.

• 38:21Jack Altman?

  It's definitely better. And maybe the software is not helping their margin, but it's helping the product experience.

• 38:25Speaker 00

  Totally agree.

• 38:26Jack Altman?

  So we're getting more, we're getting more value.

• 38:28Speaker 00

  But like, but go back to the examples even used in that piece, right? He, he says like Electronic Arts and Nintendo are stagnant and Zynga is the future.

• 38:36Jack Altman?

  Yeah.

• 38:36Speaker 00

  Like Zynga had a very good exit. They raised $2 billion in private and public markets, exit for 12.

• 38:41Jack Altman?

  Yeah.

• 38:42Speaker 00

  But like those two stagnant and stale companies Nintendo and Electric Arts are like, are worth 20 times that amount, like $130 billion.

• 38:50Jack Altman?

  Yeah.

• 38:50Speaker 00

  I'm not saying that software is not.

• 38:52Jack Altman?

  Yeah.

• 38:52Speaker 00

  Creating transformational change. Of course, software is creating transformational change. It's creating opportunities for businesses. But the question is, if Eight Sleep ultimately is selling a mattress and doesn't have margin superiority against a mattress, how is it going to be valued?

• 39:06Jack Altman?

  There's um, it's reminding me of a point that I think, you know, like a Peter Thiel point around basically, you know, we see all the, you know, there's all this frenzy, but on the real metrics of like, you know, like are are the homes, you know, high integrity and nice, do we, how quickly do we travel, you know, like, you know, what's the quality of life, like, how long do we live, like, all these things, it's like, you know, what's really happened, you could paint a version of the world where we're kind of all like scurrying around building software, but like, our food tastes the same, our houses look the same, our cars are maybe a little bit more like, smart, but like, they're basically the same.

• 39:46Speaker 00

  Yeah, like, they're better products. I'm not saying that the products aren't better for consumers, right? Like, you know, an AI native bank is probably a much better experience than walking into a branch. An AI-based insurance company, which could do prior auth so much without without the phone calls, like-

• 40:01Jack Altman?

  Tesla's a better car than a 2002 Mercedes.

• 40:03Speaker 00

  That's exactly right. I'm not saying that the products are transformationally better. And like, society in general is like massively benefited. I think Mark was right on most of the piece. The point I'd say, though, is like, if you sell a car, that's a better car, and you have the same margin as like GM or Ford, maybe you don't, like, but like, if you sell a mattress, and you have the same mattress as Certa, same margin structure as Certa's and Certa and Sealy's, like, how are you going to be valued?

• 40:29Jack Altman?

  Well, I guess the only way you'll get a better value is that you have higher growth as a result of a better product.

• 40:34Speaker 00

  That's right.

• 40:35Jack Altman?

  Yeah.

• 40:35Speaker 00

  And and if that's how VCs underwrite companies, totally fine. But if VCs say, I'm going to underwrite this company by giving you a 20x multiple when the industry today has a 3x multiple, there's some real embedded assumptions there about profitability and future profits.

• 40:52Jack Altman?

  What's the assumption that people are making with AI right now, do you think? Like, what is the underlying, what is the implied premise going into the way everybody's investing in AI right now that we'll just need to see if it's true?

• 41:05Speaker 00

  Look, I've been through so many disruptive cycles. I mean, I was in college, you know, pre-web browser. When I was in college, I didn't get, I had to go ask for an email address. I got one of the first email. Like, you've seen the mobile cycle, cloud cycle. Like, this cycle is probably amongst the most profound. So I'm like, an AI bull. I think that the key question, you know, I think if you're seeing anything like we're seeing, I believe that you're going to see massive scientific improvement in, like, healthcare, curing disease, energy, like, you know, improving access to education, improving access to mental health, and all types of health. Like, I think AI is going

• 41:46Speaker 00

  to cause profound, like, profound societal changes. But like, the vast, a large number of companies that we see every day are going to be, let's take this job, it's a line in the Bureau of Labor Statistics employment, structural engineers, it is like, medical billing, it's X, Y, and Z, and we could use software to, you know, to improve outcomes, improve productivity, and reduce the number of humans that are needed to do that. How that plays out societally is going to be really interesting.

• 42:17Jack Altman?

  Does it change the categories of companies that you're investing in right now as you're thinking about this? Like, are you, are you to some extent trying to imagine what some of these impacts are going to be, and then looking for a bunch of stuff in that area? Or are you still just going, find the founder, find the bird?

• 42:34Speaker 00

  Yeah, we, I don't think we're smart enough. Historically, we haven't been smart enough to say, like, by the time something is such an obvious theme, or obvious enough for us to figure it out, it's too late for seed-stage investing. So, like, so much of what we pick are people and problems. We're trying to find, like, the right founder who has the right set of experiences, skills, and characteristics to, like, pursue a really interesting and juicy problem. We don't, we don't, we don't really focus on their solution. Because the time we see it, the solution is often wrong. So for us, it's more people and problem than solution.

• 43:10Jack Altman?

  One of the things I've Curious about is you've stayed like extremely disciplined relative to your opportunity set, meaning like most great seed firms evolve into multi-stages and growth firms and all the rest of it. And I know that, you know, you do it, you've done this because from the beginning, this is what you love and like the, the early stages are what light you up.

• 43:34Speaker 00

  And my partners as well, because they, they opted into this mission as well.

• 43:38Jack Altman?

  First round is on one end of the spectrum of, of sort of this focus. Another firm like First Round that I also respect deeply is like Founder's Fund. And one of the things they've done incredibly well is just like real concentration. And you also, you know, in order to concentrate in big ways into your winners, first you gotta have big winners that can absorb that kind of capital. But you have had that. And you've also had the, you know, infinite LP demands and all the rest of it. Have you ever thought about doing that and concentrating hard into your winners? Because it's right there. I'm just thinking on the back of this whole conversation, you've got all these ingredients, it's sitting right there for you. You let some growth firm come take this thing that you've worked on for, you know?

• 44:22Speaker 00

  Well, the founder worked on it, right?

• 44:23Jack Altman?

  Yeah, but, you know, of course.

• 44:25Speaker 00

  So yes, have we thought about every three years when we raise another fund? And, and have we increased our, our reserves for later stage? Sure. So like we, you know, in the beginning, the majority of our fund was initial investments. Now the majority of the fund is some level of reserve for follow-on. I don't know if we're good at it. I don't like, I think that I could say to a founder right now, that I think there are few firms as good as First Round to be your partner for the first 24 to 36 months. The hunt for like massive product market fit, building culture, building team, figuring out pricing, positioning, all like, all of that stuff, I feel like that's our power alley. I don't know if we would be the best partner for founders at the later stage. And

• 45:08Speaker 00

  maybe we're just like a dumb provider of capital. But for us, like, I, I just feel that our And I also feel alignment with the founders.

• 45:17Jack Altman?

  There's that.

• 45:18Speaker 00

  Which is that like.

• 45:19Jack Altman?

  You're never on the other side of a new deal.

• 45:21Speaker 00

  Founder doesn't have to like feel like they're pitch, they have to get, only give me good news and bad news because they want the big check. I don't have the big check.

• 45:27Jack Altman?

  That is a big problem, actually. This is actually a big problem with the multi stages in general is now that they're so big, like they never get to their target. There's no such thing as getting to your target ownership once your fund is big enough. You'd always rather have more. There's no such thing. So any great, large, multi-stage firm is always asking, should I just, I have 30%, why, why would I not want 40 if I think this is going to be huge? They always do want it. So I do think that is a tricky thing for founders to navigate.

• 45:54Speaker 00

  I agree, but I also, and maybe, maybe we're sub optimizing. Like if I sit down and look at the decisions that we had to have created a lot of money, they're clearly the companies we missed on, right? Like we missed on Airbnb, we missed on others. But there are also companies like right up there, which are on like the series B or C round in an Uber, Roblox, Square, and all these other companies that we were in. I think there's something about the purity that speaks to our mission, that speaks to our founders, the alignment that comes from it. And like, to some degree, like, I didn't set out when we created First Round, we didn't set out to say, how do we build an institutional fiduciary investor? We said like, the imagine if stage, when a founder is just like looking at the

• 46:38Speaker 00

  world, seeing something different, saying, imagine if, those are two powerful words. In fact, the most powerful words probably ever spoken, right? Not just in business, but like, imagine if no taxation without representation. Imagine if all children, like social movements, government, everything starts with a founder saying those two words. And so for me, what excites us is like, the stage where we get to like be partners in imagination. And, and to the degree that we are leaving money on the table by not like, I'm okay with it.

• 47:10Jack Altman?

  You started two companies before First Round? Is that right?

• 47:13Speaker 00

  Three.

• 47:14Jack Altman?

  Three. So this is your fourth?

• 47:15Speaker 00

  Kind of.

• 47:15Jack Altman?

  Yes. Does it feel, now that you've, you know, you've really been doing it and you've been through, I mean, I hope, hopefully it's got many more than 20 years to go in the future, but you've definitely really done it. And does it feel qualitatively similar? Or is it, does it just have a different texture than building a company?

• 47:35Speaker 00

  So there's a lot that's similar, right? Like, I believe that we're in a very competitive industry. We have customers, our founders, we have investors, our LPs. We have a product that we need to put out to win. I'm in sales.

• 47:51Speaker 00

  You know, like, so, and, and I also think, like, like, in startups, you're never done inventing. Like, the best founders are both inventing and executing. And so I think First Round today is very different than it was five years ago and 10 and 15 years ago. And I think First Round five, 10, 15 years from now will be very different. So I like the canvas and the ability to sort of still feel like the hand on the paintbrush and create our own imagine if. What's different, though, is the way that you create value is you create value in partnership with other people. You create value, the KPIs are really different. Like, when you were an operator, you knew weekly, monthly numbers. You felt like you did something and you saw a result.

• 48:36Speaker 00

  And you could look at cause and effect in very short term. I think in venture, like, it's such a long game. And there's so many, like, interim points along the way. That's what feels different. But the, the concept of, like, I'm trying to build something, I'm trying to build a culture, I'm trying to build something differentiated, like, trying to find a hole in the market.

• 48:58Speaker 00

  That I still enjoy, and I think that's like a similar feeling.

• 49:01Jack Altman?

  Can I ask you about Brett and his role a little bit?

• 49:04Speaker 00

  Sure.

• 49:04Jack Altman?

  Okay, so one of my closest friends is Brett Person, who does a role at First Round, which is pretty unique, I would say, which is that he's a, a full partner, not investing. And I think very few firms have had the courage and foresight to create that kind of role. Can you talk about why you have that? And, because to me, it's one of the things that creates such a lasting durability, but I'm biased.

• 49:33Speaker 00

  I think we stumbled into it. And it was, it's been one of the most impactful things we could have. So Brett started as an intern.

• 49:40Jack Altman?

  Yeah, can you, and also, I want you to describe what the role is in your work, because I've actually never heard you describe it.

• 49:44Speaker 00

  Sure. So I think, like, you know, when you look at, like, most venture firms just operate like investors. We're a group of investors that sit around a table, make investing decisions. And as a result, most venture funds are very poorly run. Right? Like, there is no strategic planning. There is no R and D. There is no, you know, like.

• 50:04Jack Altman?

  Yeah, like if one of your startups ran like the most venture firms, you'd be like, what are you doing?

• 50:08Speaker 00

  Like, yes, like, like if you sit down and say, like, how do we create our value? We create our value like in many ways, like a large part of the value, even though we have, we have an incredible team that is working hard every day to help our companies win. Like so much of the value creates gets created just by like the way we make decisions. Yet most venture firms like don't even think about decision making as a product. They're like, if Amazon deleted every customer database once a week, it would be malpractice. Their valuation would like drop in half. But like every venture firm each week gets together, has like a great IP, like their discussion, et cetera, and just walks away and like, it's not catalogued anywhere. It's not learned from anywhere like, so I think like what we believe at the firm is that like, we want to operate like a company. We have products, we have experiments, we have like sprints and cycles.

• 50:52Speaker 00

  We have engineers that are building things. And Brett runs all of that. And by the way, he also sits in on our investment team because being around for, I guess, 18 plus years, he has.

• 51:03Jack Altman?

  I mean, you also probably have to to do the other stuff well. There's probably no other way.

• 51:06Speaker 00

  That's right. So I think for us, like the way we can operate as a company is to have like a CEO, like, and Brett basically fills that role. It's someone like, and there's a difference between a maker's schedule and an unmaker, like, right? Like, you know, you and I, founder, there's a round happening, we have to jump on it. The ability to sort of sit and think, the ability to like experiment with, with products, whether it's first round review, whether it's our angel track, whether it's our product market fit method, whether it's sitting down and saying, how could we help founders like raise their next round? And what product could we build to do that? And so thinking, doing customer discovery, thinking in terms of product.

• 51:44Jack Altman?

  Bridgewater does this. There's like, you know, when you join Bridgewater, there's like, you know, there's the investment side, there's the management side. And it's like our, our only product is the way we make decisions. And so we're going to observe each meeting. We're going to like, give ourselves feedback on the quality of that meeting. You know, because you're not making pieces of software, you're not making a physical product. So what else do you have?

• 52:03Speaker 00

  And I think that in hindsight, when I look back at decisions we made X years ago. Memory is such a bad artifact to rely on.

• 52:11Jack Altman?

  That is one of the things I wonder about is because you don't get the feedback for so long. And so if you go back, you know, like seven years ago in that meeting, we passed for this erroneous reason.

• 52:20Speaker 00

  There's a lot of learning.

• 52:21Jack Altman?

  There's a lot of learning, I guess.

• 52:22Speaker 00

  There's a lot of learning. And like, so one of the things we do, right, like we'll prepare, you know, the point partner will prepare a write up in advance, share it with the other partners. The founder will come in and we'll, we'll, we'll, we'll talk about the opportunity in themselves. And then after they leave, we actually created a 36 question rubric that every partner, every investor first round answers on their laptop prior to conversation. So prior to getting any outside bias to understand what the senior partner says or the junior, and they answer all 36 questions. So now every partner has to do their job, which is like state their point of view. And then we have a facilitated conversation where you're actually going like having a like trying to find not the points of agreement. We all think the market's great. We don't need to talk about it.

• 53:05Speaker 00

  But like if two people, really smart people who I view like I chose as partners, one of them thinks the market is great. One of them think the market is awful. Like that is a really juicy topic. And, and the other thing is it's great for like, you're doing a case study almost every time. Every partner now gets to see what every other partner thought in 36 attributes on the founder, on the problem, on the product, on the, on the market dynamic, on the traction to date, all of those things. And it, and it just creates a fabric for real robust conversation. And it also creates a game tape to be able to look back on and say, huh, what did I not see? Or what did someone see in the meeting, but they got outvoted, right?

• 53:46Jack Altman?

  Have you ever experienced a downside of running the firm this analytically? Or do you think it's purely a positive? It just takes a lot of work.

• 53:54Speaker 00

  I don't think, we're not trying, I'm not trying to say we make decisions by algorithm. I'm just saying we capture the root of our decisions, right? Like, so does it take time? Sure. Maybe it, you know, maybe it slows the process down and that has some opportunity cost there. It, it might cost us some partners who are not good at verbalizing. Like if a founder, if, if someone says, I just think this is an amazing founder, they're spiky.

• 54:16Jack Altman?

  Somebody who's high intuition, but can't defend. And what they think is

• 54:19Speaker 00

  Like a black box AI which who says the answer is X but can't show their work.

• 54:23Jack Altman?

  That makes sense.

• 54:23Speaker 00

  Would have a really hard time in our model.

• 54:25Jack Altman?

  Yeah.

• 54:25Speaker 00

  But instead, like what this gives you is you get to unpack every other investor around the tables like thinking and model each week. And when you bring in new investors, they could go back and look at the game tapes for the last for one of the companies over the last decade.

• 54:40Jack Altman?

  Why is it so rare to have the Brett role at firms?

• 54:43Speaker 00

  It's expensive. Um, and most firms don't view themselves as companies. They they don't sit down and say, I need to invent, I need to create. They just say, I need to invest. And by the way, there are plenty of firms that just invest and do very well. There's a lot like I'm talking an opinionated way about the one thing I know, which is our model. But that doesn't mean I have a negative opinion of other model of other models. But at least from our perspective, so much of what we do has been created like so while I might be a co-founder of the firm technically, I view Brett as like a founder of the firm because so much of what's been created. All my partners are founders of the firm. Um, so much of what's been created has been their ideas and and

• 55:25Speaker 00

  and a willingness to invest for a really long term, right? Like, so the ability to say, we want to try this hypothesis out and we'll fund it for years. Like when we start, so deferred gratification, I think is a really good thing in founders and in funders. Right? Most founders experience extreme deferred gratification when they're starting something. They they can make a lot more money and have a much easier life taking a job at Facebook or OpenAI right now. But instead, they're going to defer gratification today for something long, long term. I'm like, as a firm, we've done that. Like when we started out, um, almost every venture firm says, all right, what's my management fee? That's the scale of what I could spend. Yeah, no startup says, what's my series A round? That's the scale of what I could spend.

• 56:08Speaker 00

  They they invest ahead. So when we started, like, I didn't want to limit the scale of the opportunity to the scale of our fees.

• 56:15Jack Altman?

  Yeah.

• 56:15Speaker 00

  So we operated at a deficit for seven years. You know, and and the GPs funded the management company like almost $8 million of our own capital in the beginning just to get started. And like, so, so much of what we try to do is like that deferred gratification. It creates a real alignment with LPs. And at least for us, the way that we see our firm, which is we're a firm that has products, that has services, uh, that's running experiments, that's iterating and learning. You you need someone like a Brett to really quarterback that.

• 56:46Jack Altman?

  Yes, I think it's great. It also feels like it's set up for the future. Maybe that's like a topic we can we can rap on is when you think about what you aspire for first round, are you at a place where you're now like, we found our zone and now we just want to be it's Jiro Dreams of sushi now and we just want to be perfect at this. And this 20 years from now, the success cases that first round looks a lot like it does today, but we've just had exceptional funds. Or is there like a is there like a forever game in a direction that you're not there yet on? Like what's?

• 57:21Speaker 00

  Yeah, I think I don't think in this industry you can be complacent. I don't think I don't think in this industry you could say I've unlocked it.

• 57:27Jack Altman?

  There's no Jiro?

• 57:28Speaker 00

  There's no Jiro. Well, well, the definition of what is good sushi will be very different and what the market wants and what the market needs five, 10 years from now. So first round 2025 is very different than first round 2015 than 2004. And it would be rude to say, we figured it out now. It'd be like wrong, hubris to say, we figured it out now, like, and 10 years from now, it's going to look the same. Like AI is totally transformed the way we do our job internally and it's going to transform it in the future. And so, so I think what we've tried to create is an iterative company that invents and creates and is like deferring gratification to think, to look around corners and to say, what do we want to build in the future? So I hope that's the machine we built rather than a machine that could just crank out the

• 58:13Speaker 00

  great like the old, you know, you see these like 80s bands.

• 58:16Jack Altman?

  Yeah.

• 58:16Speaker 00

  Not like, you know, they're just saying they came out with, they had something, a great idea years ago and they keep singing eight, six, seven, five, three, oh, nine, like touring the country like, I don't think we could be an 80s band like we can't just keep cranking out like what worked in the past. So I think what we've tried to create is like a process and a machine and a team and a culture that will evolve and grow to to create the hits 10 years from now, 20 years from now, we don't even know what type of music that's going to be.

• 58:46Jack Altman?

  Yeah, that's amazing. All right, well, Josh, this is phenomenal. Thank you for making the time for this.

• 58:51Speaker 00

  No, thanks so much. This is a lot of fun.