How I Invest with David Weisburd - E405: Why AI Has Made Venture Capital Harder (Not Easier)

Episode Date: July 20, 2026

The best venture investors don't just identify great markets. They recognize exceptional founders before everyone else does. Michael Gilroy shares lessons from investing at Coatue, Microsoft's M12, Battery Ventures, Insight Partners, and now Marathon Management Partners. He explains what separates extraordinary founders from everyone else, how venture investors evaluate conviction versus consensus, why AI is changing the investment landscape, and how decades of experience shaped his founder-first investing philosophy.

AI has made it easier than ever to start a company, but according to today's guess, that might be making venture capital harder, not easier. Michael Gilroy is the co-founder of Marathon Management Partners, which has $400 million across software and fintech. Michael, your view is that AI has changed venture capital fundamentally. What has AI change exactly? AI is very exciting. Everything we're looking at out today is AI-related or AI-Jason in some capacity.

We like to take a macro lens on everything that we do. A few things are happening on the company building side. One, we have more infrastructure than ever before. You kind of look at the last 10 years. What did it take to start a company, right? And there's all this tooling now across general infrastructure. We go back to even the Twilio era of messaging. And then today, in AI, you can stand up a company really overnight.

The second component to starting a company are IPO potential style founders. So we have Google, Facebook, Amazon, and then the new crop of, like, large businesses, Open AI, Anthropic, et cetera, et cetera, spitting off this talent at a record pace. And so what does this mean for seed and pre-seed investors? We have, instead of two to three companies in every trend, we have 20. And so this makes picking early extraordinarily difficult, but also a lot more exciting, particularly when we're seeing companies go public in the north of a trillion dollar market cap range. Barriers to entry are essentially gone.

Gone, completely gone. You have an idea. You can spin up the product overnight. We have a joke internally, especially when we're talking to IPs and we're talking about this exact phenomena. If even in this room, if the four of us in this room had an idea right now, we can be outselling it in probably a week from now. That's both exciting. And then as an investor, it requires a different level and focus on diligence. And also, at least today, the capitals are also abundant.

Capital is extraordinarily abundant. And so you go back and you look at the last huge technology shift in 1999, there was a lot less capital. much harder to start a company, and then today we have both of those things. So the four of us sitting in the studio, we could start a company over the weekend, and then by Wednesday have a term sheet. One of these platforms out there managing $100 billion of dollars will definitely give us a term sheet or two. You've also said that companies today could go from $0 to $10 million in revenue, and then back to zero.

Is that somehow related? It's absolutely related. And what I would say is the buying behavior has changed dramatically here, right? Let's take security, for example. We're actually just announcing a big security series A today. And you go and you talk to the buyers. For many of these companies, as we were looking at this trend for the last 12 to 18 months, you go and actually get on the phone with the buyer, and they're buying it out of fear, right?

And so it's FOMO-driven buying the same way we have this as investors. People do not want to be left behind. So what does that mean for revenue quality? Revenue quality is much, much lower if somebody's buying it out of fear instead of out of need. And so it's up to us as the investor to spend the adequate time to go in and say, hey, is this a product that is going to be sticky within the organization for years and years from now? Or in six months, are we going to see this hit the cohorts in a really negative way because they just wanted to go out and test and see it? And they actually bought all 20 solutions in whatever subsector was. How do you know as an investor whether company is purchasing software in order to test it versus actually are very interested in it?

Good old fashioned hard work and back channels. Historically, I would go out and look at a trend, particularly in software, and say, hey, miss a CEO, can you introduce us to your three largest customers, and then I'm going to go and do two or three more back channels. Today it's, hey, we need to talk to five of these front door, and then we're going to just pound our networks and get 15 plus customer calls on the back channel and say, hey, why did you buy this? Who was involved in the purchasing process?

How many other existing software solutions inside of your organization are you integrating this with and really going that extra mile. In AI right now, we have a lot of investors that are going on and saying, hey, we have transcripts from customer calls that are readily available. So that means every investor is reading the same transcript. And you lose so much by reading a transcript. One, there's zero edge. If all my competitors are reading the same transcript, who cares? What am I going to learn from that that's differentiated from the market? Now, if I get on the phone or on a Zoom or in person with a customer, I'm going to know when they pause when I ask a question. You and I sitting here looking, you will know if I'm lying if my eyes are darting around the room, the classic touching your nose.

So you need to have that human component of this job. And I think it's very good to lean into AI as a firm. It's a huge part of what we do every day. But we're also leaning into the human component of the business, which is very, very important, especially at the early stage. And today it's even more important because before revenue itself was the signal. Exactly right. Exactly right. what is AI actually solving in the business?

And then also, there are a lot of AI companies being funded that don't really serve a long-term purpose for the business. And it's both being invested in and bought out of FOMO and not being left behind here. So if AI has really changed the nature of early stage companies, how does a venture capitalist invest today? We don't even talk about team because for us, that's a given. You only want to invest in founders that have an obsession. with their end market and what they're building.

Those three core pillars, trend, Tam, and business model. We start with trends. So if you come into our Slack instance, we're talking about trends all the time. At any given time, we're looking at 10 different trends. We're posting research. We're posting different company notes. We're really trying to understand the depth of it.

And, hey, is this a trend that's going to stick around for a long time? Yes or no. Okay, great. Trend is fantastic. We're going to have a little bit of wind behind our sales as we're building the business. Now, how big is the market? Do we need to go and capture 10% of this market to return the fund, or can it be 50 basis points, which is the best possible outcome there?

And then lastly, is business model, right? We want a company that's going to trade at a premium to NASDAQ multiples at scale and our maturity when they're starting to compound because we want to get paid. If we're right and we get to a company with billions of revenue, we want to get paid on that. We don't want something to go out and trade at one time's because it's a terrible business model. And obviously things change over time, but our view, particularly at the early stage, if you saw for all of those things, they're going to have growth capital readily available to them, and they're going to have public market capital also readily available to them. So that's kind of the way we think about the world. Oftentimes you're investing at the seat stage or sometimes series A stage. How do you go about sizing a market today? What I would say is, and this comes out of my experience working at one of the largest and best hedge funds in the history of the world, we like to think about market size first in terms of market cap.

Right. We're obviously seeing today in AI, there are a lot of new markets being created. Although I would argue you look at something like any of the big labs, this has existed under a different name and a different product style, but these markets have existed for a long time. So if I'm underwriting Anthropic today at the Seed, I'm going and looking at Google and Amazon, so on and so forth. Now, we start with Market Cap. There are going to be many cases where market cap doesn't exist because we have this new technology just like we saw with the internet. And then we have to be really thoughtful about exactly what it is they're doing, right? So I'll talk about the AIification of services businesses, lawyers, accounting firms, so on and so forth.

I was talking to a good friend, a tier one firm that everybody in this room would know extraordinaryly well. And I said, hey, how are you thinking about market size for this business? And it happened to be in the AI for accounting trend. and they said we look at the total number of accountants and their salaries all over the world and that's your tam and look you may end up being right in situations like that but we take it a step further and we say hey okay what does accounting actually mean right is it audit is it tax is it you know opening and closing books what exactly is it and then let's go out there and then look at the end of the people there and the efficiencies there back into an acb and so we're just taking four five or six different cuts and layers to this TAM so that we don't end up in an end market where maybe it's a huge number in a different example from an accounting if they're selling into manufacturing or something like that it's a very top heavy industry so the market's very big but if I don't get the top five customers who cares the long tail is very small I don't want to be in a business

particularly at the early stage where if we find out by series B the top five customers either don't want it or they're going to build it themselves then the TAM is really small. And so it's really understanding the layers and detail of that underlying Tam and making sure we can capture enough to return the fund. Tam has been one of the most difficult things for venture capitalists to underwrite famously Uber wanted to disrupt something like 25% of the taxi market. And they ended up beating it by an order magnitude of 10. How do you differentiate business models that will grow as the technology is introduced versus ones that are in step? This is similar to the anthropic example that I just gave, right? You could have looked at Oracle.

There's so many companies that were doing something very similar, and I think the best investors can discern that, right? So I look at Uber, and hopefully we would look at that today and say, well, do people take taxis in every city every day? Do people enjoy driving in these short routes across Manhattan or anywhere, right? And you can say, well, it's a combination of taxi services. Black Car Services, potentially some Metro or public transportation, and then our own transportation, right? That would be the way to nail that and to see it in a different way than other investors did at the Series A.

So I don't actually view that as this brand new Tam creation with Uber necessarily. I think if you really took a step back and looked at it, you could get there even at the seat. You oftentimes value companies at the gross profit level versus the ARR level. Why do you do that so early? one of my favorite topics right now. So let's think about if we were sitting in a business school class right now, which was a very long time ago, where did revenue multiples come from and why do we use them? We look at revenue because gross profit was virtually the same across most SaaS businesses,

right? Let's put in a band of 65 to 80 percent, but the mental model was at scale and maturity, this company is going to get to 80 percent gross profit. We take out all the cogs, which I think we know well. And then I come from the world of FinTech and payments. As you look across FinTech, there are so many different business models out there. In fact, if you look at the multiple variants in the public markets, the variance of financial services from a multiple standpoint is larger than any variance across any other sectors. So health care, internet, consumer, software.

And so in FinTech, we only use gross profit multiples because I can be looking at a business at 70% growth profit or 10%. It doesn't mean the 10% gross profit business is any. worse, but it does mean they're different. So taking revenue multiple there makes zero sense. Today, as we're looking at software, this is now the same thing as it was historically in Fintech, right? I can be looking at a company that's at, by the way, negative 10 gross profit, which will probably stay away from, all the way up to 70, 80 for the folks that have a business model that lends itself to that. From there, why are we using multiple A or anything above earnings multiples to begin with? Many of these companies aren't earning it. And so it's my job,

particularly at the early stage, just say, hey, today we're at, call it 50% gross profit or 80. For both of those companies, I'm going to say, what is the net income conversion off of that gross profit? So what does it cost to on GNA? What does it cost to sell this product? And then at scale, when this thing is compounding, what do I feel like steady state and maturity earnings potential is for this company? If they go public, at some point in time, they will trade on earnings. and obviously market dependent. That is the fundamental issue or mistake I think many people are making across the industry today.

And again, I've been very blessed to have a range of experiences from Canaan, which is a traditional early stage firm, and then CO2, which is a multi-product, large platform, but started as a hedge fund. If you had to distill some of the factors behind why some of these AI software companies have more gross profit in long term than others,

what are some of those factors? We segment the world today in our letters to LPs as AI capital incinerators and AI capital savers. There's two crops of companies and some of it is founder-driven and some of it is business model or end market driven. And one of our companies in the portfolio, they spent two years using all of the latest AI tools to build a product suite that they felt like they can go out and sell against the incumbents with. They needed to get to feature parity, but they just put their head down for two years and built. And so when we first got the model, I'll never forget this model review. It was a series A model. And there were five different contributors to revenue.

And they were actually running truly at almost 80% gross profit. So one of my best friends and partners, Chase Packard, he was running the model review and the investment in the company. And I just said, Chase, like, what are we doing here? There's zero chance. This is an 80% gross profit business. something is hidden, it's our job, the number of PNLs that I get that's say 80%, they're really 30 or 40,000 of companies. And then we actually went through it and he explained to me, hey, these are very mature founders.

They did everything they could to make sure they were capital efficient. We ended up doing that series A year and a half ago. They've burned like 5% of that capital and just raise another round on top of that because with the efficiency. Now, there are other business models and maybe founders who are using this moment in time, because capital is abundant to say inference costs are going to go down everything is going to go down reminds me a lot of crypto by the way back in zirp and so this is going to be capital consumpt up early and then we have this big inflection point in five years from now that story is one that will be very

hard to trick us on and that just comes from a lot of experience and investing and frankly scars and the only way that really works is if there's true economies of scale like giant economy Correct. And really, network effects. And by the way, they do exist. Some of my best investments started at negative gross profit at the A or the B, right? And now you have to know that market cold. I'll take Fintech again for an example because I think there are a lot of parallels with fintech and AI right now. I knew that there's a company called Cloud Walk. It's a Shopify Brazil. When I first invested there at negative 5 million gross profit run rate. But I knew that at scale, the networks were

going to give them breaks on their fees. So network costs were going to come down. I knew that they were early in building their fraud risk and compliance machine. So that was going to come down. And so I can go through every single last cogs. And because I've been on the market for so long, I knew that we're going to get a lot of inflection there over time. And today, it's, you know, doing 300 million of net income. And thankfully, this has come true. And so this is still true in AI. So it's not to say, I don't want to invest in a negative 10% software business that's leveraging AI. It's, I really need to understand it and understand which campus. And I'm not to say, this founder is in and this is where the additional layer of diligence comes in.

Most investors don't lose because they lack information. They lose because they can't separate signal from noise. Every day, thousands of earnings calls, SAC filings, expert interviews, and market updates, compete for your attention. The challenge isn't finding more research. It's finding the few insights that actually change your investment decisions. That's exactly what I unpack in my conversation with Ryan Fenerty. Instead of talking about AI in theory, we discuss how leading investors are using it to surface

differentiate research, move faster than competitors, and make more informed investment decisions. If you're an investor looking to gain an edge through AI-enabled insights, I think you'll find this conversation valuable. You can access this limited release episode by going to alpha-sense.com slash how I invest. That's alpha-sense.com slash how I invest. What are you looking for that's different and founders today in a post-AI world? Company building is very different, right? There's the pace of innovation and the pace internally, it necessitates, I think, a different level of poise in a founder because every day we're waking up and there's some massive round. There's a new product launch that are rendering some businesses obsolete overnight. And so we really are spiking on

potentially second-time founders, but mostly mature founders feet on the ground that are going to run their own race and not be distracted by tech Twitter. which is a really dark place, really focus on the team. Because ultimately, the famous trope, build a good team, build a good business. And I believe that to be true today. But it really does require a certain level of poise and operating rigor. Speaking of this constant disruption, what's your view on vertical AI versus horizontal AI? In other words, which vertical AI companies will be disrupted by the Anthropics and Open AIs of the world?

The million dollar question right now. I don't view horizontal versus vertical much differently than I did before, right? What we love about vertical is you are building custom, but for hopefully a very large vertical set of solutions that it would take either one of the labs or one of the large incumbents a long time to really focus on and build a team around and offer into the market. And so the labs are going to come out and disrupt many of these horizontal solutions just like historically in our business,

people will say, well, what about Oracle? What about Salesforce? So on and so forth. And so you really need to build something special and have that maniacal focus on the customer experience and product to build something that is going to require an immense amount of attention to detail where one of the labs look at it and they say, you know what, we're either going to buy this or let's just keep it horizontal

and we'll pick off, you know, the long tail of revenue coming out of this market. What are some of those moats? Some of those modes are features. Let's talk about toast feminism. Famously, there's been a lot of chatter between Block and Toast with Block really building the horizontal software suite for SMBs and maybe lower rental market. And Toast said, hey, restaurants are complex enough

where we feel like we can build a really big business, really just focused on that, right? And so you go into a restaurant and you say, well, what's going on here? We have servers, which require a certain type of scheduling and time cards. We're buying stuff for the restaurant, food, beverages, so on and so forth. Let's build a network of procurement on the back end.

Let's fully integrate payments into the experience and not just the server handing the check at the end of the meal. Let's give the person that's dining the ability to pay it directly on their phone. And so there's just a lot of nuance to a market that's very big if we walked outside here in New York. There's, you know, restaurants everywhere, very, very large end market. very, very specialized set of needs. And so if we sat here today and said, hey, which one of these is Anthopic most likely to disrupt? I think you'd probably say block before toast, right?

Again, just because of the horizontal nature of it. So it requires a lot of work and customer calls. You cannot replicate knowing the customer without making 10, 20, 50 calls over the course of looking at a trend and decided to make an investment there. So another way, it's inherently not. scalable to invest in these kind of companies because the things that make them special in a specific vertical are one of one, are idiosyncratic versus if everything you could have this checklist of these three, four items, you could have an AI analyst go in and figure out exactly which companies

invest in. That's exactly right. And again, we are using AI all throughout our business, but we are really leaning into the human component of it. We do two to three deals a year. And this is really where we started the firm because we want to spend a lot of time prosecuting on an idea and making sure we are prepared. And that's how we win. Speaking of these two to three opportunities that you guys invest in in a given year, how do you go about mapping the opportunity set and identifying?

That part of our business is unchanged other than the fact that AI has been phenomenally helpful in finding those companies and founders, right? AI for us internally, phenomenal top of funnel, phenomenal keeping us on process and organized. It's taking everything we're doing and saying, hey, we're missing these things or not. But look, ultimately, it's our job to go out and meet every single company and all of the trends that we care about, spend real time with the founders, and then you make a risk-adjusted decision of, hey, do we feel like this founder and team are differentiated enough in this landscape of 20 or 25 companies again because there's so many more now. If we can't make that decision, let's wait for the series A.

If we can't make that decision there, let's wait for the series B. The biggest mistake you can make in our business is backing the number two, three, or four business in any given market that ends up working. Because, man, if you're right on the trend and you're right on the market and the rest is there, but you just happen to pick the number two or number three, not only do you lose money, but it's the opportunity cost of putting a lot more money into a business that's going to make money for ourselves and for our investors. Your previous firm, KOTU, just put out this graph showing that it's easier to give from

$100 billion to $100 billion than it is to go from $10 billion to $100 billion, and it's easier to go from $10 billion to $100 billion than it is from $1 billion to $10 billion. In other words, ventures becoming extremely consensus. How do you integrate that into your business? It is at the growth stage where they're playing, right? At the getting to $100 billion, there's a lot between zero and $100. To get there is the hard part. Now, what we are seeing are these very large firms dumping historic levels of money

into the perceived winner in the category. And these are just good old network effects. Once you have these datasets, they are compounding very differently than they used to. And so that strategy is very clear. However, it is consensus and it may return consensus style returns. Our job and our hope is we want to get to a well-be-400 billion, right? And then we'll have them raise that capital then. And so that is the challenging and fun part of our business today.

And if you subscribe to the idea that venture is becoming consensus, how in the world do you go about competing against the multi-stage firms? Look, we started Marathon as a firm that does two to three deals per year with four investors that are working their tail off all day every day. And AI has created an environment where having agents running around, booking meetings for you and doing diligence is no longer an edge. What is an edge is years and years of experience, years and years of experience working together, complete and total dedication to an investment process that we have laid out and talked about relentlessly. And then lastly, the human component of this, right? Platforms are owning

mind share and owning the world today. They also have five, six hundred companies in the portfolio. We want to focus on a low-end number of portfolio companies and founders and lean into the human component of this business. I got my start in this business with a firm called Canaan Partners. My mentor, Dan Siporin, hired me there. And that's kind of exactly what it was. It was one to two deals a year per partner really focused on the human every board meeting in person this is a 10 well now it's a 20 year journey from seed to public and we are not indexing the market we want to go deep into very few relationships and that's what differentiates us right and by the way I'm not the type of person in an ecosystem to say our capital is different a marathon it is a very very fiercely competitive

market with small firms and large firms alike. It's our job to win the deal before we get there, and there's just a lot of focus that is required to win a deal here. How would you describe your right to win? All four of us show up every single meeting and most board meetings. The founders have direct access to the GP as opposed to a platform team. Ultimately, people don't want to work with the platform team. They want their GP and the GP's relationships to get there. We have this concept of pre-portfolio. You can't have many of these, by the way. And in any given time, we have three or four of these companies. And so I talked about this earlier. Okay, trend, Tam business model works out. Now, we picked the one, maybe two companies in a trend that we really like. Let's work for them

as if we're on the board. And so that way, when the round comes, and we have the option to lead the round or not. And this is, you can only do this if you're saying no to all the other stuff. We're not reactive to trends or sub-sectors where we don't feel like we have a right to win to begin with. And so by being focused and by saying no, we can pour time into these founders when they're like, man, the platforms are, yes, they have the mind share, they have the brand, they have media companies now. But the GP's not texting me every day. The GP's not asking me for the latest pipeline so we can go out there and help them win.

The announcement that we just have today is a company called Stryker, it's AI Agent Security, we came in and just hit our network so hard and brought tens of customers to them out of the gate. And the founder called us one day, and he's just like, I've never seen or heard of anything like this. And that's where we want to make our brand. We're not very loud out there. We're going to keep the firm small from both an AUM,

or not a fun size and team standpoint. And the only way to continue this strategy is by doing that. We will never be an index firm. I previously had Ron Rofi from Rainfall Ventures, and he talked about how he got into the Robin Hood round, and he just delivered. He flew out to L.A. He met with the CEO. He flew out to L.A. He met with Vlad, and he just kept on giving value out. And then when the round came in, the CEO gave him access to the opportunity to invest. And we had a discussion about whether that was rational for the CEO to do. that. And the thought experiment there is, let's say the CEO does not care at all about relationships or reciprocity, essentially is close to a psychopath. Should he or she actually give allocation

of somebody that's provided a lot of value ad? And the answer is yes. And the reason for that is what's highly predictive of how somebody will behave in the future is how they have behaved in the past. And the best predictor of value ad and providing value to a company is actually providing value at already. And when you're a hot company and you're going out for a round, every single venture capitalist, and unfortunately this is an incentive, they're incentivized to sell your dream. We're going to be there. We're going to be introducing you to 100 customers. And then you have a Michael that has already introduced him with his team to dozens and dozens of people. Who's more likely to continue providing this value out? So even if the founder doesn't

even care about relationships, still highly rational for them to give the allocation. I love this. And this is what is changing right now. And I think the best founders are starting to see that because they have been sold this overpromise from the platforms for six, seven years now. The way we talk about it internally is if we do what we know we can do in our pre-portfolio and a round comes up and we don't get allocation, it hasn't happened yet. Let's hope it never happens. We wanted to feel like a breakup. Right. And you're kind of like, oh, I'm hurt. I'm, shocked, right? We've done all this great work together, right? I love you. I just think if you really put your whole heart into it, you love the trend, you love the market, you've shown up. A non-psychopath is going to say yes, 10 out of 10 times, right? Who wouldn't? And even a psychopath, I would argue, probably 9 out of 10 times. By the way, if that one out of 10 psychopath that says no, they're not just treating us like that, they're treating their service providers like that, they're treating their employees like that, they're treating the other investors like

like that, man, what a Dodge Bullitt that is. I don't want to spend 10, 15 years in my life with somebody like that, right? And so I think that's very, very important. Very few people do it. We call it the anti-Ozempic way of life. It's just good old fashioned, hard work and discipline, getting you in the room and keeping you in the room and winning that business. I'm curious, does this approach work much more when there's already a multi-stage flirm on the platform or whether they raised in previous startup. We love founders that have multi-stage platforms on the cap table either currently or before

because they see the difference. They really, really do. They also already have the brand halo from that. The area of the brand halo, which, by the way, I would argue, is slowly going away. I think that brand halo exists more with first-time founders and with LPs who have known them for a very long time. Mature founders who have been around,

they know that, hey, we're going to be sold something that we don't get. I'm probably going to end up with two or three different board members over the life cycle of my company at this platform. Unfortunately, a lot of GPs are leaving their firms right now to go and start smaller shops. And they say, hey, they may pay the highest price and they may say the best things and they may send me the nicest things in a wind motion at the start of a deal or finish line of a deal. But they're not actually going to do the things that they say they're going to do. I also just want to say this is a human capital business. We're speaking in generalizations. There are phenomenal individual investors inside of all these firms.

And many of them are the reason why these firms earn the right to become a platform. And so some of them do show up, but in aggregate, this is absolutely the truth on the ground today. There's also this highly underappreciated aspect of a founding GP making a promise versus a GP at a firm on two levels. One is, as you mentioned, there's a big trend where GPs go out and spin out and start their own firm. So they may not even be there. But also, they may not even have the agency to fulfill the promises that they made. By the way, that's true on deal terms. You can have somebody who works for somebody else going out saying, yeah, we can do this.

That changes the way the founders running the process, and those are kind of the worst outcomes there. I would like to think I always had great empathy for founders before I was a founder myself. Boy, has it changed. once you are in the seat and every single thing going out the door is a reflection on marathon, which is a brand that I have a four-year-old daughter. I genuinely hope that she is working at and running the firm at some point in the future. Every single thing we're doing from the legal docs through how we're hiring and structuring these contracts and investments, we're building this firm for the long term.

And this is not going to be an AUM grab. This is going to be hopefully a Moik and IRA grab. I had this very conversation with Ryan Sourhant, who's been on the podcast several times, about why he called his firm Sourhant. He had a long discussion with his investors. Investors wanted him to call it Sourhand. He wanted to call it another name. It's alluding me right now. And the downstream consequences, and this is an extra layer, so you have Marathon, which is your identity, but it's not your name.

But the extra layer of just having your name on the firm. And the way he described is every single closing document, every inspection says Sourhant. There is no way that he's able to put any kind of air between himself and the brand. I love that. It's another great forcing function. And it also, what I want also say, being a founder, your identity is already there, right? And so at Marathon, I see that out there. And I don't need my last name to be there in order to feel that.

And you also, it very quickly distills what matters and what does not matter, right? When we started the firm along with Chase and Alex, Gokul and I, my first title was financial analysts and Gokles was associate. And it created so much confusion in the market. Our LPs ended up emailing us like, hey, we should change this. So people don't know what's going on there.

Why is Cochle and associate? But it just, it didn't matter in what we wanted to send the message to our team and to our founders and to our investors that there's no work that's below us. And we love the work behind the scene. because that's what makes you great. If I'm not in the model, if I'm not in the deck, if I'm not on the calls,

I can't make the best investment decision. And again, how does that scale? It scales by saying no to other things. If a founder calls me and says, hey, we have 48 hours, I need a term sheet. I'm like, awesome godspeed. Internally, I'm going to come back and say, guys, how did we miss this?

What can we do to be better from a coverage standpoint? But we're not making an investment decision 48 hours, period, ever. We're going to win the deal before it gets there, and we're going to spend a lot of time and feel good about the investment decision. And so that enables us to actually functionally be an analyst and an associate at a firm that we founded. I think oftentimes about Dumber's number, the 150 relationships you could have in your life. And it applies to every single human being. They've done multiple studies.

They've regrated studies many times. It's roughly 150 people. And people are subjected to this 150 relationships, whether they accept it or not. There's no opt out and I'm going to manage 450. Trust me, I've tried with this podcast having 400 guests. I'm still being pressured in this 150 relationships. And it's an highly underestimated aspect of being a good investor. I would love for Dunbar to rerun that exercise for parents of toddlers

because that number is probably a little bit south of 150 for me today. It's a great thing to think about in life. And what I would tell you is for us, anytime I'm, I'm talking to folks about running the firm and starting the firm. The privilege of this moment for me and for us is we get to hand select every single person that we talk to and work with every day, not just our founders, our investors, all the way down, right? And what a privilege in life that is. And there's a certain amount of people who are going to make that 150, and we're going to work really hard for them. Speaking investors, you raised $400 million in one of the most

difficult fundraising climates, really since 2001, since the dot-com bust. How are you able to accomplish it? We've been very, very fortunate to have the capital to go out and back this next crop of founders out there and do what we all love to do. How did we do that? It wasn't easy. I've been telling everybody who will listen, everything is harder and has taken longer than I thought it would, but it's a million times more rewarding every single day.

coming into work, if we can even call it that, working with these founders. Almost out of the gate, we had two, our first two big yeses are on our LPAC, real big checks to us, and that certainly helped quite a bit. You ask why, and I think what our investors have seen is, of the 12 deals that I did at my prior firm, Gokal and I co-invested on eight of those 12. And we kind of fell into this motion where, and accidentally, where I'm a finance person, I was a banker and I've been an investor in my whole life. I would go in and underwrite the specific P&L, the market structure,

hey, here's what we think this opportunity can look like. Hey, Gokul, there's nobody in the world with an operating background like your own. Can you go spend time with a team to look at team structure plans around that product velocity, product potential? And if those two things come back as a yes of those eight companies, the results were pretty dang good. they see the fact that many of us have worked together directly for a long time. This is the second time I hired Chase Packard, who has become one of my best friends in the world

and obviously close business partner. And then Alex Gorgoni, who was most recently at TCV. When I sent an email out, we needed somebody who was the best in the world at what they do focused on the enterprise, true enterprise software, sales motion. and overall, obviously, business model. His name came back to me from like seven different people. And when I sent that email, I said, hey, I need somebody with what I just said,

best in the world at what they do, and two, an exceptional human being who will work well with me. And I only sent this to people that I know really well. We spent seven months with Alex, and I would say the first month with AG, it was the model, case study, da-da-da-da-classic stuff. The next six months,

just personal conversation. We were going on hikes. We're going out in the wild, going to dinner. I really wanted to know the human behind the investor, and that's really, really important to us. And then our most recent addition to our staff is Grace Everett, Chief of Staff. She was actually sent over to me by somebody

that I love and trust that I had worked with before, and she is a sibling of that person, which is the highest compliment. I think anybody can ever give somebody. She also talked about David Goggins at the first interview. and I was like, I don't need to spend seven months with you if you like Goggins. Me and David Gagins went to the same high school. Both cut from the same clock.

Gagins is responsible for me running my first marathon. I did it last year when the news dropped that we started marathon. I, of course, got like 50 different texts. Are you going to run a marathon? And I'm like, oh, God, we've made a huge mistake in taming the first marathon. I don't want to run a marathon. And 3 a.m. one night I was watching his videos, and I just signed up. I was like, we're going to go and do this.

So you can thank Gagins for my knees still hurting. Support for today's episode comes from Square. It's all in one way for business owners to take payments, book appointments, manned staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running boutique, or managing a service business, Square helps you run your business without running yourself into the ground. It's actually thinking about this other day when I stopped by a local cafe here. They use Square and everything just works.

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you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing so your best customers keep coming back. And right now, you could get up to $200 off Square hardware when you sign up that square.com slash go slash how I invest. That's SQU-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Support for today's episode comes from Square. It's all in one way for business owners to take payments, book appointments, manned staff, and keep everything running in one place. Whether you're selling lattes, cutting hair,

running boutique, or managing a service business, Square helps you run your business without running yourself into the ground. It's actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Check out as fast, receipts are instant and sometimes I get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are in store, online, on your phone, or even at pop-ups and everything stay synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go.

And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing so your best customers keep coming back. And right now, you can get up to $200 off Square hardware when you sign up at Square.com slash go slash how I invest. That's SQUA-R-E.com slash go slash how I invest. With Square, you get all the tools thrown your business with none of the contracts. or complexity. Run your business smarter with Square. Get started today. Support for today's

episode comes from Square. It's all in one way for business owners to take payments, book appointments, manned staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. It's actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Check out as fast, receipts are instant, and sometimes I get loyalty rewards automatically. They're something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell

wherever your customers are, in store, online, on your phone, or even at pop-ups, and everything stay synced in real-time. You could track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through square checking. They also have built-in tools like loyalty and marketing to your best customers keep coming back. And right now, you can get up to $200 off Square hardware when you sign up at Square.com slash go slash how I invest. That's SQUA-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity.

Run your business smarter with Square. Get started. Staying today. So going back to the recruiting of Alex, you spent six months getting to know him as a human being. Obviously, that's important. but why focus so much on that? It even goes back further at one point in time, an investment banking analyst. And the world does not view investment banking analysts. It's zero to ten. I'll put us somewhere like a two. We carry stuff to meetings.

We're forced to work long hours. People very rarely even acknowledge your existence in a big meeting. Tim McAdam, one of the most senior partners at TCV. We're working on this transaction. It was a company called Toa Technologies. This was field service management back when you had three to five-year multi-million dollar contracts. At the start of almost every call, he would acknowledge me and talk to me like I was a real

human being and almost a peer. And I was just a young analyst at the time. He never tried to keep him touch. I was like, he's just a great human being. But it stuck with me really forever. And anytime TCV came up, I would talk about him in that way. And then when Alex was first introduced, I was like, TCV. I was like, he works for the greatest human being I've ever come across.

He treated me as a lowly investment banking analyst like a peer. So it already started in that way. So why is it so important? Look, again, going back to in a world of AI, where everybody's looking at the same stuff and they're trying to automate everything in their lives, you forget that we're all still human. We want connection. We want to be made to feel special.

We want to feel heard. We want to feel understood. and people who are good people they treat we went out to lunch at and I made a point we went to like a burger spot please and thank you every single time somebody came to pour the water did he leave the trash on the table when we walked out or did he go and bust the table himself all of these things the way I like to describe the people that we have at the firm are soft-spoken somebody would want to have at a family dinner and welcome there, but when it comes to your craft and they get excited about something,

you're going to feel like they're going to jump across the table and choke you out if they don't get what they want in that situation, right? And it's obviously, I'm speaking figuratively, but we want that passion behind the craft while still being an excellent human. And that is something that if we maintain that and we maintain a focus on process, which, by the way, good, honest, discipline people will continue to focus on process. Regardless of where our Morgan IRA end up over time, if those two things are true, I'll consider success. You started the firm with Gokul.

I've known Gokul since 2009, now 17 years, which is kind of wild. How would you describe how he looks at deals and how does that differentiate? So the first thing I will say about Gokul, there's a ratio that I have come up with, which is, his ego to success ratio. And he's had a lot of success. And the man has no ego. He is a lifelong learner. Which is why he took the associate title.

Correct. Correct. He just wants to spend time with founders and he just wants to learn. We had an offside two weeks ago in our LA office. And he did a full teach-in on Claude and Building Skills. And we had four of us in the room. And it was one of the best product minds in the world teaching us how to build product internally at the firm.

And what a beautiful and fun moment that was. Goquel is the eternal optimist. And I'm the career investor finance guy that is the eternal pessimist. And that creates a phenomenal combination when the relationship is built on trust and seeking your partners to get in the way and save you from yourself as opposed to the opposite. it. Gokal is extremely founder focused. He's extremely focused on what can this be. He's extremely focused on and this is the thing that I just, nobody can ever replicate. Team quality, team structure, he'll get in and ask questions that in a million years I could have never asked,

let alone make something of what the answer ends up being. And that's just a weapon. And he loves it. He is the hardest working person at our firm by far. You look at his calendar. It's not Monday through Friday. It's Monday through Sunday. We have meetings. He's texting us about meetings that he's doing all day Saturday, all day Sunday, and just love this stuff. And he says success comes at the intersection of passion and ability.

And he has both of those. And he's found what he's done just like the rest of us have. I think this archetype of what I would call a high EQ and a high IQ people partnering together or this pessimistic worldview with this optimistic worldview is so valuable, especially in venture because you need to have both. Because if you just have an optimistic worldview, you're not going to have the right portfolio. You're going to be over levered. If you just have the pessimistic, you're going to be off by an order of magnitude going back to Uber. I think the thing that people miss there, and you said it, but you said it was very subtle, which is you need to have both, but you need to have deep respect between the two partners. And that's extremely difficult to find people with two very different worldviews that have mutual respect.

I love that you said EQ IQ. We actually have, so we have a Marathon University culture deck. And it's culture and process in the way we run our firm. We actually say EQ, IQ, and RQ, which is rational, right? And it's exactly what you're saying where we know the other person has the certain set of skills. Now, when they are proven wrong and in our business, because you're making so many decisions, you're proven right or wrong every day. And then over the long term of investment, you're certainly getting that.

And so we have a rule. If you're wrong, something big, something small, you say it out loud or you write it down in the moment that it's happening. And so there's deals we've passed on. There's things, just decisions around pro rata or decisions around terms and our LPA. And we both come to each other and said, and it's not just I was wrong, it's I was wrong and you were right. And it takes a mature person who wants to build and maintain credibility with their partner to be able to say that. And that's a beautiful thing, right? It really has enabled us to keep and maintain that trust.

It's just the most important thing in any relationship. my wife Jessica commented on how me and Curtis argue. And she said, why do you guys argue like that? And I said, what do you mean? He's like, you guys keep on adding to each other's argument. And you're not really arguing like regular people. And I explained, well, it's because we don't have our ego in it. I think the mark of an egoless relationship is when you don't remember who actually came up with the idea.

And if you could build that culture, we just hired our seventh person. It starts to actually permeate. And some of that is self-selection in terms of the people you attract. But when people see the founders don't bring an egotistical aspect to it, they start to actually buy into this culture. It's quite fascinating. Keeping score is the fastest way to a death of a relationship. There's no doubt about it.

And on debating, by the way, you prompted me a little bit. People often ask, I was at Canaan and Kutu, like, you know, which firm are culture are you trying to? to build. And the answer, of course, is always like, neither. We're building it our own way and in a really special way. I'm curious how you guys debate, but we go out of each other hard, all four of us. You will see the most spirited debates insofar as Grace recently when she came in. We were having a really intense debate on Slack. And I called Grace and I was like, hey, just so you know, like this is how we talk to each other. We're just trying to get to the run out of comment. She's like, I love it. I don't

care at all, which was also another good sign that we made an amazing addition to the team. But that debate is just in the spirit of getting to the right answer because we only care about returns, right. I don't care about being right. In fact, I'm thrilled to be proven wrong if it makes this money. I'll be wrong every day if that's the money-making way. And that, I think, is the really core pillar behind a good firm and a good culture. It's interesting. I've also realized this with podcasting is it's a bit of a paradox, but the more cutting of the questions I have, the more the people feel heard and respected because you wouldn't ask a really tough question to somebody unless you believed in their ability to answer.

Correct. It's exactly right. And the uncomfortable truths get you to the right outcome, best outcome, you know, a lot faster. And so none of us hide behind any of these things. We say it out loud and it's a really special thing. It's warming my heart sitting here thinking about it. And I know you're building your own firm, but what best practices do you bring from Canaan and Co2? Yeah. So at Canaan, I learned how to be an early stage venture investor and private company board member, right? That firm was a loss. It's a loss. It's a loss start. Indeed. I started my career at a firm where every other month we're looking at pacing, we're looking at reserves. So it's its portfolio.

construction, we have exposure to what segments. Hey, Michael, you've deployed a little, you're deploying a little bit too fast. Maybe we should sew down a little bit because the best investors in the world at the early stage have one to two huge ideas that they won't be able to sleep without. And then I really, being a private company board member is just something that not everybody has the ability to do. It requires an immense amount of patience and psychology. And that has created me as a board member, you know, a lot of time before I invest founders, like, well, what kind of board member are you? And I always say, I'm a chameleon.

It's my job to learn you and to make sure I am doing the things that you need me to do to get you going and keep you going to get the success that you need. I have one found. I really know my founders are extraordinarily well in what's driving them. I have one founder. He's building a business because he grew up in a really tough neighborhood internationally. he got a scholarship to Stanford, not a scholarship, but he got like a week or two week long tech camp at Stanford. And he decided there and then, hey, I'm going to build a tech company. I'm going to take it public on a U.S. exchange, either NYC or NASDAQ, and I'm going to come back

and give my wealth to the community because he grew up in a really tough spot. I have another founder. He just wants to own a Gulfstream. And that's perfectly fine. As long as you're aware of it. And so founder A, I'm like, hey, how can we get you public? And he's actually close to going public now. And so we're talking about that. And like, what a beautiful moment that is. And with the latter, it's like, hey, man, this is going to be the best way to grow the business. And here's how much you own and this is how much money you have. Like, you're getting pretty close to a G6 here. And that it truly is okay, but it's really, really important to understand that. And then what did it take away from Kutu? Man, there's so many.

different things that Filippe had taught me over my time there. One, the way he showed up, it could be a multi-hundred million dollar position in a public company, or it could be a $2 million seat check at three in the morning. He's going to show up and he's going to show up the same way with the same intensity. He hates losing. I have a younger sister. She's four years younger than me. And she would tell you that I'm the most competitive person. She's ever meant her life. like I wouldn't let her win anything growing up. And I look at somebody like Philippe, and he's just, he is fiercely competitive. He's fiercely innovative.

And while I learned how to be a venture investor at Canaan, I learned how to be a money manager at Kotu. There's a polish and a seriousness that managing money necessitates. And he expected the best out of everyone, every step of the way. It could be an email. It can be slides going into our AGM. The number of reps and focus on the little things there process and anything going outside of the firm was just something that I've never, ever seen before. Did that permeate through COTO? It truly is top-down. Slack posts, right?

They did a phenomenal job creating visibility inside of the firm because they believe that makes everybody better and across products. Very early on, I remember I got a call from Fleepe. I had posted something about some like series A fintech trend or business and I get on a Zoom and it's like the whole hedge fund team. He's like, Michael, let's talk about this thing that you said about this trend and how will it impact this public company. And he just did a phenomenal job kind of gathering that data. But that meant I was like, oh God, everyone is reading my Slack post. I thought it was just like the venture of growth teams here. And if there was a mistake in that Slack post, that can impact not just the Series A I'm looking at.

that could impact how we're operating on the board of a growth business or making a decision on a big public position. And so there's a lot of scrutiny on it, right? Like if my team, I saw my team post something publicly, I'm like all over that thing. It better be right. It better be formatted. The way you do one thing is the way you do everything. And that's it's absolutely true there. Looked out different financial models, Canaan and Co2, mentioned that you make two to three investments a year. How do you put together your portfolio? With the best companies, hopefully. But look, we want the best risk-adjusted return we can possibly get at any moment in time.

And I know that's like pie in the sky, but that's ever-changing and dynamic on a week-to-week basis. The end markets that we are investing in currently are software in fintech, and because of how long we've been doing this, there's pockets. Each of those that we want to exposure. or two. In any portfolio, you need to manage risk and not be over levered to one trend more than the other. So we think about the sector allocation and the stage allocation all of the time, but I also think it's very important to be flexible and not overly prescriptive. I'm not going to come out of an offsite or a partner meeting and say, we're behind on pre-seed deployment. Let's go do a pre-seed this week, right? It's just like to-

Artificial constraint. Yeah, life doesn't work that way. And But how do you communicate that with LPs? The communication with LPs is we're building a highly concentrated portfolio. In the first fund, it'll be 10 to 15 names. And we want those to be extraordinarily high conviction where we can build that position up over time. We'll get to a max position size in the fund. And we've been blessed with LPs who are very, very excited about and trust us to do co-invest into our very very.

best name so that we can support our companies all the through IPO. But that's really it. It's like, look, we are, we're multi-stage with an eye towards early stage because we are in the business of ownership the same way founders are, and we want to own as much as we possibly can. But we're not going to go with tick earlier if we don't feel great that this is the winner. And so sometimes you have to be patient. The corollary to this question is pacing. We're on the kind of standard three-year initial deploy. But if it takes five years, it'll take five years, right? And by the way, maybe it'll be two years in some funds,

but that's because we feel really good about the risk. But I don't let us focus on the sector and trend and stage and pacing components of the business because I'm looking at it, but I don't want everybody hunting in that way. We need to do the best deals that we have access to and can win in any given time. So another way, I asked you how do LPs react

to not optimizing on different, investments at different stages and you answered that that's what they signed up for. That's the story that you sold them and that's what they're subscribed. Look ultimately in this business returns are going to keep you in business forever. Now, investors just like us, they need exposure to certain things. They have other managers focused on other products and stages. They have to kind of put you in the box. Totally. And so our box, to be really clear, is early stage venture capital.

but our first company was a pre-IPO deal. It's the largest position in the fund. And we did that right out of the gate. And I would say if we went and polled all of our investors, 100% of them would say the only thing we're upset about is we wish you got more exposure to it. And so we're not going to be hunting there every day. But if we see an opportunity like that is, in our view, unique access to something extraordinary, we just have to do those. But every other deal, besides that one, so far has been incubation through Series B. What's the number one lesson you've learned about dealing with LPs?

They're all people, right? It's not, hey, here's my mock portfolio construction, and we're going to go and give you software in FinTech. They want to know the person, too. And in fact, I really love that aspect and component of it. They're your true partners. They're true partners. I can't even tell you how many LPs are. We're on a text basis with sharing updates with.

They've become very close advisors to us. And I can tell you, when you leave a place that could have given you and your family a lot of stability for years and years and years, six months after that decision, you're like, oh, boy. Into one of the most difficult markets. Totally. What did I do here? And so, and it has been the most rewarding thing in the world. But those, especially those first two to five yeses, I'll go to. war for all of our investors, I will go to war for these people. It's just so meaningful to me that

they believed in us and give us the ability to go out and do the thing that we love every single day because without them, we quite literally couldn't do it. And it goes far beyond the money, just like a great GP and founder relationship. You want to be able to call them when you have questions or insecurities on things and you're seeking feedback. You want to be the best manager in their portfolio. Early on, there were so many questions that I had. We have the fund admin. We have finance. We have compliance, all of these things.

And the question from us to them is always, what is the best in-class way to set this up and run this firm? And so we've built a relationship where we're seeking feedback. So we get feedback that's unsolicited as well. That's the only way we can be better. Your vulnerability has led you to better information from your LPs. Man, vulnerability, not just in our business and life. if you start that way, one, it's good for you.

Two, it enables you to see the other person. And they said, how are they absorbing this? How are they responding to it? Are they reciprocating? You get somebody reciprocating in that moment. A true relationship is starting in that moment, right? And from there, then it's trust, right? Hey, we're going to send you, we've been told over and over by our largest investors

is that we are the most transparent firm in their entire portfolio ever, right? We want them to know exactly what's going on with our companies. This isn't two sentences on XYZ company launch this product and hired a new CFO from XYZ, big company. Like, great, no. It's not a hype track. No, it is monthly results at a high level, unity economics, full qualitative overview, good, bad, ugly.

And we're ruthless on valuations and where we have. have the bookmarked. We don't want there to be any surprises ever with our investors because that just leads to really, really bad things. It's like a good employee review, right? You're sitting down for a review. There shouldn't be any surprises in that review. We're talking all day every day. You should know exactly what's going on. It's almost performative at that point when you're doing a review. Previous guests, Mike Maples, famous seed investor, talked about how he went out and raised his fund. He was looking for his true believers. and he wasn't trying to sell anyone that wasn't a true believer.

To what extent do you believe that's true? You have to be at a certain point in life to go out with that mindset. It is absolutely true. There were many instances where you just feel there's skepticism and diligence because that's where you start. But then there's just like deeper skepticism. And you kind of like, I made somebody to these calls. I'm like, hey, like, you know, let's just, we don't have an abundance of time.

We're sitting trying to raise our first phone. Like, this is a no. You prompt it and it's an uncomfortable truth that saved us a lot of time. And that's just the best way to live. But it's absolutely true. But when you find that person that does genuinely want to back you and believe in you, like, man, I'm going to invest in you and do whatever it takes to make sure you're successful and help you so many ways beyond hopefully just giving you returns.

Like our investors are constantly hitting us up to, hey, can you help us review this name? We're looking at a co-invest with another manager. and I know you know the name well because you cover the sector or you're an angel investor or you used to be on the board of it or it's the competitor of a company you used to be on the board of. We love doing those things, right? I think these relationships are compounding over time and I know that for many of them, hopefully all of them,

we're just getting started. You have one of the most unique co-invest structures that I've heard from talking to hundreds of GPs. Tell me about that. Leaving my old firm, what I knew I needed to be able to quote unquote sell to founders or provide to founders is we have the ability to support you from seed to public. You talk about competing with the platform.

That's a big one, right? Founders want that access to capital and they don't want to spend time fundraising. And so we said, hey, how can we make it so that our fund size isn't so big that it's going to hurt returns? We want to make sure that we can provide investors great returns on the core fund while still giving them exposure to our best names at the growth stage where there's, return profile may be a little bit different. We can be looking at a pre-IPO round that's close to IPO.

That's 1.3x and a low 20s high teens IRA. There's pockets of money that that's a great investment for. That is not a great investment for a court fund. And so we lean on co-invest. And we saw a lot of co-invest across firms throughout ZERP. And in many cases it worked out. But I think in a vast majority, it did not. And so let's go into a co-invest process and what's breaking.

I come in, I say, hey, I'm going to co-invest $200 million into X, Y, Z name. Now, I'm going to go look at a list of LPs. They're all paying me zero and 10. I'm going to create a deck. I'm going to zoom them, and I'm going to say, here's what the company does. It's zero and 10. Here's my model. Let us know if you're in, right?

And so they are looking at a company for the very first time, and then they are paying you, whether it's 1.1x or 10x, the same amount of money. And so starting a firm, you have the ability to step back and say, how can we change things that everyone just kind of does? And so we said, well, the first issue is the best co-invest happen really fast. And so we're not going to have three weeks or four weeks for you to go out and do work. You need to know the name already. And so I talked about the transparency on the LP reports that we send out. A great co-invest program starts with the very first time you get metrics from the company after you invest.

And so our biggest LPs, they're getting these monthly updates. They see what's going on in these companies. We had something in December. I'll never forget. It was a fun moment. We had one of our LPEC members reached out and said, hey, when can we get direct access to this name? There was no round. Nothing was happening.

And I forwarded to the team. I said, this is how you run a great co-invest program because we don't even have to educate them on what's going on because we've done such a good job. Doing these things monthly is a pain. It's burdensome. We're checking and tying numbers. Everybody's looking at them. But that is going to save us time down the road, which is the best way to invest. You're basically building conviction for your LPs ahead of the operations.

Or not, right? And it's like, hey, this company has pivoted into this thing and maybe this isn't working. And so it helps them as well where they would have gone to spend three weeks on it. That's annoying. It's like, well, you may have spent time on this and we don't like it. We're going to pass. And so it cuts both ways. and then I said, okay, we shouldn't get paid the same amount

regardless of how the company does. It's just basic incentives. And so we said, we are going to charge 0.7.5 or 0.12. If we beat our underwrite in our model by X percent, it's the same for all of it, we get kicked up to the 12.5 percent. So what does that do? Suddenly I'm in the Zoom with an LP who knows the company cold, and they're looking at a model and saying,

Michael really believes this model, because I would have given them zero and 10 all day long, So he's leaving 2.5% on the table on a really big co-invest. And so now I don't have to go back to my committee and just discount everything by 20, 30%. I'm going to use Michael's model and say, hey, if he doesn't hit this, we're going to blend our fees down a little bit and go down to 7.5%. And so I think the best things in life are simple. And this is just a really simple yet elegant way of hopefully they already trust you on the numbers. But now you're putting your money where your mouth is and you're only getting paid the 12 and a half.

your job. So you've set the over under and now you've bet your carry into it. Correct. How did you come up with this? I just sat down with Gokal at the start of this and just said, what are all the things that are broken inside of our business? One other thing that we did out of the gate. So it's essentially a misalignment with LPs because it's a free option for the GP. Completely. And the LP, it could be a very large check for them. Exactly right. Because look, especially as the firm grows, not our firm, but as a firm grows, headcount, people just want to fill the con-invest. What should the model say if we need to go raise $200 million so I can give back to my job? That's just the reality of the program, and so the best LPs in the world are doing that extra

layer of work. I told you my LPs are calling on Co-Invests all the time that they're looking at. It's a good company or evaluation, all of the above, and so it's just another way of creating trust, but creating trust economically and doing things the right way. What other practice do you do in Marathon that almost no other VCs do? Because of the platform that I was on before and the financial rigor that it demanded, it's impossible to not bring that into the day-to-day work at Marathon. If you look at our Seed-in Series A models, for example, they look and feel like a public company model.

Like if I were to call my buddies at Well Rock or Lone Pine and, say, hey, let's look at this name and you pull up your model. It will look and feel like that. Now, it's a series A model. The only thing I can tell you about the model is it's definitely wrong. I don't know if it's going too fast or slow, but it's wrong. There's no doubt about it. Now, what is absolutely accurate is whatever we're assuming the exit multiple is, we're going to have operating leverage within sniffing distance of what it should be for that product set at that point in time. for this business. I know what every single business model across Vintech and Gokl knows what every single business model across software looks like at scale. And if we don't, we'll go figure

that out pretty quickly because we did it for a long time. And so we say, okay, here's what we think the net income conversion off of gross profit can be. And so what does that mean from a multiple standpoint? And so if we are right, this company will trade like this. And now we still have to get there, which there's a lot of work to do from Series A to public. And that, been very fortunate. I have done nine seed deals over the course of my career. I have a 100% graduation rate from seed to series A. Now, from Series A onwards, like there's still, again, there's a lot of work to do. We can call it one of two things. It's either complete dumb luck. My mom will probably tell you that's the case. Or two, it's that we underwrite everything like a growth business, even without the numbers.

And so what does that mean? We're not investing in these science projects with terrible business models and small end markets that somebody else just gets excited about. And it's like, I love the founder and we hit it off and he's smart. So we're going to go into it. We know that it's going to pass the business model, Tam and trend and potential operating leverage tests that all these growth investors are doing. And so we need more capital.

We want them to be able to back into the company at early growth and beyond. And so I think we just help ourselves by. lowering that funnel of stuff that we just know it's unlikely to get more funding. A lot of people will look at that and say, doing a financial model for a seed or even a Series A company is kind of absurd. But they failed to grasp that the most important thing

about modeling something is, are you smarter after or before the model? A lot of people put this standard where the model has to be within a 20% sensitivity or something like that. That's an absurd standard. The question everybody should be asking is, did this model

help me make a better decision, did refine my thinking? Did it help me know where my unknowns are? Like what variables could not even plug into the model? What variables did I not even think about until making the model? Modeling could be such a valuable razor to apply to just better decision making.

I completely agree. And if you really study these things over time, what the metrics can tell you a lot about the product or other things around the team. And again, our Series A models are wrong, period. Now, they're wrong on delivery. They're wrong on delivery, but exactly it's such a good exercise to go a later,

deeper and understand what's going on. So a great example. I'll walk through it. If you ask anybody who's ever worked with me, what is the one metric Michael likes the most? You'll hear NDR within a split second of asking the question. Why? Okay. So NDR tells us, especially at the early scene, net dollar retention.

Net dollar retention. All it means is, okay, we're sitting here in June. if I'm a business that's selling into the SMB, say we send 100 customers in June. Now, there are 100 bucks of revenue. They're paying a dollar a month each. In December, if they're suddenly paying $200 across that same cohort of 100 users, maybe 20 of them churned and they went somewhere else, but those 80 spent more, now we have a 200% NDR.

So what does that tell you? That tells you that the business without any new customers is growing at 100% pretty awesome. It also tells you that these 80 customers, they must love the product, right? They doubled their money that they're spending on the product overnight. And so it's not me saying, hey, at the series, hey, it needs to be 250% NDR and do, right? No, it's what is the NDR relative to the sales motion relative to the customer base? And is that telling us that there's immense product love? And is it telling us that sometimes it's either existing product love of it's seat-based,

or is it telling us that we have backed such a good team? six months, they've launched three other products with new modules and they're upselling them into these modules, right? And so understanding, okay, the NDR is 250%? Why is it 250%? And then it's, okay, the business is growing 150% organically. And then if I see Holco's growing at 200%, I'm like, hmm, new customers are only growing the business 50%. Right? And so then I'm like, okay, I should go spend some time on go to market. Is this accelerating? Because that's not going to be enough if we have this base here. Maybe it could be 300% and if 290 of that is NDR driven, maybe there's a new competitor in the market that we're not even seeing and all the new

customers are going to them. And so 300% could be quite bad in that circumstance, right? And so this is why, yes, like we're not making an investment decision based on the model, but it leads you down the path of so many other questions through diligence to understand. And it's a really core part of our process. Something I've noticed interviewing some of the world's greatest investors. I've now interviewed more than 10 trillion in AUM and guests. And the greatest and these financial investors, they look at these numbers. They're almost personified these numbers. They almost become like these people that they understand. Most people will look at these numbers almost at these super official gauges. They heard on a podcast that 250 NDR is good

or bad or this kind of growth rate, but the best investors will actually understand the knob that's being turned on this number. This job is not spreadsheets. It's, you know, how many times we've said it now, this is a human-driven job, you know, and if you're going out and investing based on spreadsheets and you have some table that says, if these four things fall in this strike zone, then, you know, go and invest. It's just, it's never, ever going to work because you need to understand, you know, what's driving them. How do we get this founder at G6 as fast as humanly possible if that's what they want? Or how do we get them public so that they can go and give back to their community, right?

It's really, really important in the context of all of those things. If you could go back to 2009 when you just started as investment banker, what is one piece of timeless advice you give a younger self? Two of my favorite quotes right now. What punishments of God are not gifts?

And then I'm most grateful for all of the things that I wish had not happened to me. And so when you look at those two things, I think early on in your career, you're taking risks and you have this perceived failure in life. but as you get older and you take care of a sick toddler for three days and get on a red eye right away and you're very tired

at that age you're saying man i'm so thankful for all of those failures and the things that i did wrong because i'm sitting here today as a human who wants to take more risks because i've learned that hey these risks can learn to lead to really good things like marathon And I think so often when, at least for me, as a young person, every job I didn't get. Like I, you know, I went through so many super days at byside firms and I didn't get it. And I just remember being so down. But every single super day they didn't get was leading me to the next thing. And I end up with Dan Soporan, who's one of the greatest mentors and friends that I have going to go to.

There were two companies that we were invested in together and on the board of together. both of those companies fail. But I went to a platform where I learned so much that changed me as an investor, my investor lens forever. And so these failures, if you allow them to and you don't allow them to consume you, can be very positive. And I think you hear those two quotes and when you really sit on them, you'll get to a point where you believe them.

And then suddenly you're no longer a victim, right? You're a victim or a hero in whatever situation it is. and if you're a victim, you can't grow. If you're a hero, all you want to do is grow. And so I think that is a long-witted way of saying, I wish I enjoyed the failures a lot more along the way. Anthony Pompeiano, who I just had on the podcast last week, said you could turn a loser into a winner,

but you can't turn a winner into a loser. Amen. And that is because once you understand winning, you can never go back to being a loser. It is perhaps the most addicting thing in the world. and winning, I would also say, is not how it's defined outside there. It's internal. And it's knowing that you've done the things you said you were going to do for yourself.

There's Kobe Bryant would create his off-season plan before the season ended every year. And every year it got harder and harder. And he would not negotiate with himself throughout that. And naturally, like, you're a month in, it's off-season. I don't, you know, I can skip today. But that is the winning mindset. He got addicted to winning, and that drove him to do the things that he needed to do over time. And so I completely agree.

Michael, absolute masterclass. Thanks so much for jumping on.