Invest Like the Best with Patrick O'Shaughnessy - Elizabeth Zalman & Jerry Neumann - Founder vs Investor - [Invest Like the Best, EP.351]

Starting point is 00:00:02 Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest like the best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum, and the CEO, of O'Shaughnessy asset management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of positive sum or O'Shaunacy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of positive sum or O'Shaunacy asset management may maintain positions in the

Starting point is 00:00:54 securities discussed in this podcast. My guests this week are Liz Zollman and Jerry Newman. Jerry has been on the show two-time. before. He's an early stage venture capitalist and adjunct professor of entrepreneurship and an amazing writer. Liz is a two-time founder, most recently co-founding Strong DM, which Jerry was a seed investor in. Together, they've written a book called Founder v. Investor that Lees bear the relationship at the core of most new businesses. They take specific moments in a startup's life up to its IPO and share their experiences on the friction that inevitably appears between founders and investors. In our conversation,

Starting point is 00:01:33 we discussed the strong reaction to the book, the incentive problem at the root of the relationship, and explore best practices for other founders and VCs to follow. Now, please enjoy my conversation with Jerry Newman and Liz Zalman. So I just hit record because we were having a conversation around the book itself. Maybe someone can read the quote on the back. It says super problematic over the top venture capitalist name withheld. Name withheld. So what's the story behind him saying that? To me, this seems just like a great interesting book that's an actual perspective from an actual founder and an actual investor about how the interaction between these two classes people work. And that's interesting. And it's valuable for

Starting point is 00:02:13 people to know how it works. And it seems to have ignited a response that's different than that. So I'm a venture capitalist and I have been for a long time. I read Liz's sections and some of them make me uncomfortable. Just as a venture capitalist, I don't see myself in what she writes. I don't see myself the same way that she sees me, or at least sees venture capitalists as a class. But this was part of what we wanted to do with the book, right? I actually insisted that if we were going to write a book together, that we not agree, that we don't come to some consensus. Every book's like that, right? Like, oh, here's one side, here's the other side. Let's find a place where we can all agree. And you read these venture capital books, and it's not true. Because that's not what happens in the company.

Starting point is 00:02:51 People aren't always agreeing. So the point was we write the book, and we each tell our sides as convincingly is possible so that people can see what each side says. And then when they read it, they can say, okay, I'm talking about my venture capitalist, and this is what they're thinking. They're thinking what I'm thinking, and what I write in the book. And if you were venture capitalist, you can say, well, I'm talking these entrepreneurs, and they say one thing, but what are they really thinking? And they can read Liz's section and say, oh, this is what they're thinking. And I think it's true. But when I showed the book when we were writing it, and we had a bunch of people, including you, take a read of it beforehand just to give us feedback and tell us how it was jelling. The people who were venture capitalists

Starting point is 00:03:27 were very negative on it. They didn't agree with what Liz said. They didn't think it was true. And they thought that saying it was harmful to the ecosystem. So we were looking for somebody to write the forward. And I said, yeah, we should have Sandy Lerner write it. Right. They found her an amazing company. She found at Cisco with her husband and was then fired by her board a year before they went public, which always surprised me because if they were that close to going public, she couldn't have been doing that bad a job, right? And Sandy is a great writer. She sent in this forward. It's really well written, really powerful, and was like somebody kicking me in the head because it's so anti-VC. So I said, look, you know, I think in the spirit of the book, we should have a

Starting point is 00:04:05 second forward written by somebody who believes in venture capital as an institution as a way to go forward and build progress. So Liz's like, okay, fine. So I went and asked a bunch of investors that I know, some who I knew pretty well or know pretty well, people I've worked with who I like. And to a person, they said no. They wouldn't do it. They didn't want to be associated with the book. And one of them emailed me back and said, look, I didn't like the initial post that you wrote that this was based on. And I think that, you know, you've moderated your opinion in your half, but I think Liz's side is completely wrong. It's off base. It's over the top. I think that you should not publish the book. I think you should disassociate yourself from what she's written because it's just wrong and bad.

Starting point is 00:04:46 I was a little surprised because he's actually a great investor. He's a friend. I've sat on boards with him and he's really helpful to founders and super reasonable. So I asked a couple of my founder friends. I'm like, look, name with hell, but this is what was said. And one of them said, yeah, spoken like a guy who can't be fired. What's your feeling about this piece of this, this reaction from the investor community that you went over the top? I think it's the same old. I think it tends to be zero acknowledgement of the founder experience in times of good and in times of strife. nobody really seems to acknowledge it, which is why the post that Jerry wrote about boards of directors firing founders was so impactful because here was a VC actually saying that, yo, these things happen. And the beautiful part about the post was that it actually wasn't pro founder and it wasn't pro investor. It was just these things happen. And so that reaction, it was unsurprising to me. I don't know if I told you this, Jerry, but I was actually worried that you were going to pull out of doing the book when that came back. And you told me that story. I was nervous. the first part of our advance, so when I'd spent it. I think it's important to note what are the entrepreneurs actually thinking that they're not saying to you. And here's actually an honest account of that of what Liz was thinking. I mean, right or wrong, and I disagree with a lot of what she says. But it's still what she felt, right? So I need to know that as an investor. Just to go the other direction, was there anything that he wrote that made you uncomfortable? There was maybe one thing, which is this idea about firing founders. I think Jerry is pro-founder

Starting point is 00:06:15 staying involved in companies until the end. I think he's seen many companies destroyed because founders got fired by their board. But it was pretty zero bullshit. He's like under these circumstances, because he lays out a whole bunch of scenarios about this founder's not hiring people or this founder is not managing their company properly. This founder doesn't actually want to push product out. And it was pretty cut and dry in terms of people staying on or not staying on. But that is also the job as somebody financing companies, right? This thing is growing or this thing is not growing. It's very much zero or one. I think if we were to do a second edition, if somebody said to me after one of our events,

Starting point is 00:06:50 it said there's a lot of complaining about venture capitalists, and this was a venture capitalist saying this, but nobody ever complains about the founders. And founders have just as much bad behavior as venture capitalists do it. And I think this is true. And I think maybe I've been in the business too long because I could have been a little more sharp-tonged about things that founders do that are wrong, such as, okay, we're just going to screw the investors. We're going to take the money and walk away. We're not going to pay out the preferred. I've been in deals where the founder has negotiated with an acquirer to get half the money, even though they weren't paying back the preference.

Starting point is 00:07:22 Both sides can do things that are wrong, right? I mean, I have known founders to lie during due diligence. I mean, just flat out lie about revenue, about how many people they hired or have on staff, things that are hard to verify without a ton of work, especially at the early stage. There's plenty of bad behavior to go around. Venture capitalists usually don't talk about it because it feels partly like punching down, but partly because if they don't catch it, it's probably their fault. They take ownership of the problems they miss, but it still happens.

Starting point is 00:07:48 I list some of those stories. There was the situation that I was in in my last company where there were three co-founders, and this acquire came in with a nice offer. It was, I don't know, $40, $50 million or something, and it was going to go pay out the pervert and the rest was going to go to the founders. And two of us didn't want it and one of us wanted it. And it was like a fight to the death about whether or not we take that deal or not. And it was us essentially debating, do we want to screw our investors now,

Starting point is 00:08:11 have life-changing money, and then maybe never raise again. Screw in what sense? Well, these people have put in money, I think it was four years into the company. They were pre-seed and seat investors. So we're going to cash them out. Great, they get their money back. And the founders make $40 million, and the investors make $10, didn't seem like a morally good thing to do.

Starting point is 00:08:29 And yet there we were talking about it. And one of us wanted to take the deal because they didn't care about getting a job again. They just cared about fuck you money so that they didn't need to work again. Beyond obviously bad things, lying, fraud, lying, just being a bad person, where is the zone that you think there's the most conflict? Is it around this control of the business? Is it a bill of goods that feels from the founder's side like you were sold a bill of goods and the reality is something different? As we leave the absolute black and white stuff and get more into gray, what comes to mind? For me, it's something I didn't know at the beginning of my career and I fully

Starting point is 00:09:05 understand it now, which is that a company starts by me having an idea with a few other people and burthing the idea and then growing it into a thing. And at some point, I need to transition from being a founder into being an operator and a manager. And there are two fundamentally different things. And nobody ever told me that that is the thing that you're going to need to do. You're going to need to enjoy people management. You're going to need to learn how to play politics at the highest level, you're going to need to learn to have nuanced conversations of control with rich egomaniacs. And I didn't know that that's what I was signing up for at the beginning of my career. And VCs come outstretched, we can help you do this, we can help you do that.

Starting point is 00:09:42 The fact of the matter is, in my opinion, I don't think that they can. My experience has been that they can't and that they've never seen particularly invested in me succeeding. They're invested in the company succeeding, but not necessarily me. I can be cast aside, similar to the Sandy Learner story. So my goal in writing the book was actually to sort of eliminate whatever naivety was possible so that a founder maybe understood that in 10 years, they as a human being and as a business person are going to have to look fundamentally different than they do now. And do they want to sign up for that journey? Do you think now with the benefit of your experience that the simple trope about the role of the board of directors in its most basic element is to hire and fire the CEO and pay the CEO? That is the principal governance job of a board and everything else we can talk about too.

Starting point is 00:10:33 But I hear a lot of people say that's the reason that this thing exists, those two key functions. I think that's true, but because that's the only thing they can do. So I've been on boards where the board has to approve the budget for the following year, right? Every board has to do that. I've been on boards where you approve the budget and then the CEO doesn't stick to the budget. And then what do you do? Do you sue him? I mean, you know.

Starting point is 00:10:55 There's no recourse. Yeah, the only recourse is to fire him or to lower his pay or pay. And that's it. So even though that's not the only thing you do on a board, in the end, that's the only remedy you have. Do you think that that's right? Is that solid foundation from which we can then proceed? Yes, is that that's the only thing that I believe they can legitimately do and actually do do? Yes. Is the problem then something to the effect of many investors hold themselves out as doing more than that in a productive way for the business, the classic, how can I be helpful? There's the investor and then there's the board director, right?

Starting point is 00:11:28 And those, I think, are two different roles that often frequently get commingled and conflated, especially in early stage startups, right? There's the investor coming arm outstretch saying, it's early I'm going to help you. I've got these people and this people and these introductions I can make. And then they sit on this board of directors and these meetings are ostensibly to governance of the company, right? But is it ever really that in a meeting? Not in my experience. Flipside is now I said that the job of the board is to fire.

Starting point is 00:11:55 CEO. But in truth, so when I sit on boards, it's usually really early stage, right? So from founding until they raise their series A or B, I can't fire the founder. I mean, you never have board control, but I couldn't fire the founder even if I wanted to because nobody's going to take that job. I can't hire somebody to run this company that needs to. My job isn't to do that. My job is to train them to run real board meetings to try to push them in the right direction to remind them of what they need to do that they know they need to do to get the company off the ground. I mean, I have to be there to support them. That's all I can do. Whether I do a great job at that is certainly open to question, but it is what I try to do. You need to do this if you want the company to succeed, right? And they're like,

Starting point is 00:12:33 oh, yeah, right. I need to do that and stop doing the stuff I'm doing today and go and find some customers. I don't consider myself an expert at that. But I think as an outside voice, somebody who's saying, don't forget that you need to go make some money. People need that reminder. As an investor, Jerry has always been more useful to me as that outside voice. And he said things. I remember I was raising my last series A. And he sat me and my co-founder down and didn't exercise in the whiteboard about what revenue targets we need to hit and work backwards. And we were 18 months behind in hiring salespeople.

Starting point is 00:13:01 Something insane like that. And not a single human that sat on my board that was a majority stakeholder had ever walked me through that exercise, which goes back to the question of what am I now? I'm not a founder. I'm running a business. If you had PSA ability to just every time a founder was talking to an investor automatically that's just got put in front of their face, what would be on the PSA? Oh my God, it would be talked to me like a fucking human being.

Starting point is 00:13:26 Stop it with the whitewashing of words and just actually say what's on your mind. Don't gently suggest something. Because I now, I'll sit in a board meeting as an observer and I'll watch a young founder being spoken to by a pretty seasoned investor and the founder will come by the meeting and they'll call me, and I'll call me, I'm like, that went great. And I'm like, dude, you've got six months and you're going to be fired. And you don't see it because the language is so nuanced and it's so delightfully vague, as opposed to the VC actually saying, here's what I think.

Starting point is 00:13:53 I think if you ask a VC how good other VCs are, they'll say, well, 90% of VCs are idiots. They'll all say this. It's like everyone being an above average driver or something. Everybody's a below average VC, except for them. And it's interesting, right, because VC, there's usually no training. The people who are successful often just pop into it and become successful at never having done it before. There might be no right way to do it.

Starting point is 00:14:15 It's an interesting thing. Why are the most successful VC firms, often the ones that came out of nowhere? Union Square Ventures, the two founders had had previous jobs at VC firms, but they weren't that successful. And they started a fund and they became one of the most successful funds on earth. IA ventures, same thing. They weren't venture capitalists and all of a sudden they were one of the most successful funds ever. So maybe experience is not what you need. It's unfortunate that the people who are successful are often the ones who don't know how to manage companies. I'm not saying either of those firms is how to manage companies because I like them both, but people come in

Starting point is 00:14:44 and are successful financially without knowing how to manage the companies they're investing in. And there's no motivation to be people who are good managers. I don't think that's what LPs look for in investors. If you think about the thing when you read it that made you the most uncomfortable about what she wrote, what comes to mind. So I've invested in two of Liz's companies, both of them from the very beginning or very close to the beginning in the first one, and then at the very beginning in the second one. And I think we've had a good relationship. We're friends. It's been, I don't know, 12 years now or whatever. I found some of the comments, if applied to myself hurtful, she's only had, I don't know, 10, 15 VCs in. her life in the company, so I'm one of them. So it's like, okay, well, am I doing these things? Is this a fair comment about how I've advised her? Here's one. I think we actually had an argument about

Starting point is 00:15:30 while we were writing the book. She said, oh, VCs never give you this advice. And I called her up and said, I gave you this exact fucking advice. She's like, you did not. I'm like, I did. And I reminded her of the exact situation we were in and what I had said. And she's like, oh, was that you? What was the advice? That was the whiteboarding exercise. She's like, nobody ever told me I'd have to hire more salespeople this fast. I'm like, swear to God, I have pictures of a fucking whiteboard. Like so much in life, incentives are so powerful. And I would love to hear from you both on where you think the system of incentives in the system of this style of investing are most broken. For me, in the most romantic version from a founder person, I start a company because

Starting point is 00:16:10 I have a desire to bird this idea into the world and turn it into a big thing. Maybe it's ego, maybe it's pride, or maybe it's just this thing should exist and it's goodwill to the human race, I genuinely want to do this thing. And then the investor comes in. An investor's job is to return capital and more to their investors. And those two things. One is hyper pragmatic and one is truly romantic at its heart. They come in and they conflict. And I wish there were, when Jerry will say, I want a founder who wants to build a billion dollar business because I only want these outsized returns, which is his right as an investor in the type of investment that he does. Every founder will say to Jerry, oh, I want to build a billion dollar business. It's come out of my

Starting point is 00:16:48 mouth. It's a flat-out lie, I think a lot of the time. I want to say whatever I can say in order to get money to finish that transaction. And I wish there were more of a frank conversation about the things that both side wanted. So it was maybe slightly more unromantic on the founder's side. It's a weird business, right? I think every financial intermediary is judged on how much money they make, right? You look at the Midas list. It's not a list of the people who've built the most successful companies. It's a list of who's made the most money. Some of them have made money. to the detriment of the public markets or whatever. But that doesn't count, right? I mean, for me, I think I'm most proud of the fact that I've had nine companies I've invested and have gone public,

Starting point is 00:17:27 right? These are real companies that these people built something and I was part of that. They created thousands of great jobs. And I mean, if all you care about is making money, it's a weird business to go into venture capital because it's not the easiest way to make money. I mean, you look at the Forbes 400. A lot of real estate guys on there. Yeah, a lot of hedge fund guys. I mean, how many venture capitalists are on the Forbes 400? I mean, I think maybe the past five years there's been a few. But before that, there was maybe one, maybe two. And those couple were either John Doer or they made their money by being a founder first and then becoming a venture capitalist. So the fact that so many people go into it to make money and that's what they want to do,

Starting point is 00:18:01 it's odd to me. And all they care about is making money. And I think there are a lot of venture capitalists like that. But if you don't care about building businesses, it just seems like the wrong job to take. So if 90% of them are idiots and you both met presumably some of the 10%, what do those 10% do? Why are they not idiots or why are they good? There's a conversation in the book in which I sit with a founder who passed on my series A and then invested in a competitor for Series B. I'm actually going to name him because he said I could. So I did Ethan Kurzweil at Bessemer.

Starting point is 00:18:28 And I saw the press release of him investing in the Series C of my competitor. And I emailed him and I think it was something like, what the fuck? And he wrote back, by the way, you asked earlier today, who do I get along with? He's one of them. And he said, I'm really sorry. I wasn't sure if I should tell you. You're no longer at the company. And we went to the bar and we had it out.

Starting point is 00:18:45 over a drink and then we parted as friends. That to me is what I look for in the 10%, which is actually a frank conversation of straight shooting. I don't feel good. You did this thing. Can we talk about it? Which happens in most relationships I would think in my life, but just not in the business ones. See, it's funny because Liz and I disagree about this. She thinks that being frank and honest is the highest virtue and I don't. I don't think that always being honest, the people you're in some sort of relationship with business or otherwise is the best strategy, that sometimes you need to sugarcoat it a bit, that you need to help them get to where you are, and just being completely frank, doesn't do that for everybody. I think the best venture capitalists

Starting point is 00:19:23 that I've worked with are the ones who care about the company, care about building the company, and can give the right advice to get the company to do the things they need to do to build the company. Not just about making the most money, but about actually building a business. But even there, they're not there to make the founder successful, right? They're not saying, like, here's the advice that will make you the founder successful. It's here's the advice that'll make you a company successful. And I think that's probably the point of divergence for most people is that the founder is like, well, this person gave me money and they want me to be successful. And then they find out that, no, that's not what happened. VC. gave the company money and they want the company to be successful.

Starting point is 00:19:58 And if you're along for the ride as founder, great. But if you're not, I mean, that's fine too. I have this theory of founder friendliness where there's sort of two ways to value a company. And there's the way of thinking about it as an option. And there's a way of thinking like discounted cash flows. It's a thing. I can sort of have a sense of what it's going to be in the future, I can build some valuation model for it. And that founder friendliness all happens in the option value phase of a company. And that once it either graduates in the right direction, now it's Uber, then you're no longer founder friendly because you need Uber to work because it's going to return your fund. Or on the other direction, if you graduate, it's like, okay, this one's not

Starting point is 00:20:32 going to work, then you are no longer founder friendly either because you just want your time back. That seems to be the experience. Do you agree with that? Do you think that that is, this notion of founder friendliness is really just constrained to a period? when the thing might work, but it hasn't yet? I think every person I've backed would say I'm the most founder-friendly VC they've worked with, and yet I refuse to say that about myself because I think it's intellectually dishonest. I need the founder to succeed if the company is going to succeed. But in the end, I also have a personal investment in the founders I back because I back people,

Starting point is 00:21:02 not ideas. So you get this attachment, but I know that that's an irrational thing for me to do, to be attached to the person, not the company, because that's not the job. I think it's intellectually dishonest to say you're founder-friendly, and tout that as some sort of plus for the founder. I don't think that's the job. I couldn't agree with you more. To Jerry's point earlier, right,

Starting point is 00:21:20 he can't fire the founder at the earliest stage because then there's no company. So you sort of ride the founder until there's something there where you can see how it could be monetized and grow with some crazy growth curve, and then you can just put in the operational team to go and get that done.

Starting point is 00:21:34 That point, you don't need the founder anymore. Although from a branding perspective, I would say founder adds intangibles and all that stuff. Yeah, I mean, founders are often the best salesperson. and they're usually the person has the vision. They're going to push the company more than any other. One thing I wish I had said more strongly in the book was that to me, it's crazy that founders think they're the show, that the people are giving money to the company,

Starting point is 00:21:53 and yet somehow they're not the pop star, right? Like the act goes on without. But that goes back to the point that I made earlier, which is that nobody tells the founder at a certain point you need to change, you need to mutate into something else. And it is essentially getting over yourself and getting over your ego and realizing that this thing exists outside of you at this point. Yeah, I agree with that. I actually changed from a doer to a manager when I worked for a big company, and nobody told me

Starting point is 00:22:16 that there either. The difference being that they gave me the time and space to actually make that transition myself, but somebody actually told me you need to stop working and start managing because people who work for you need somebody to manage them. I had no idea what that meant. And I think it is true that there's not enough education to people who are growing companies to let them grow also. Do you think, though, that it's a feature of a market system that nobody's really owed anything? When you become the manager at whatever company that was, you weren't owed that. Stuff gets sorted out because those that figure out that this is the case are probably more apt to be a good manager. They figured it out and they evolved and adapted.

Starting point is 00:22:52 I guess I'm more of a humanist than a market system would imply. I mean, owed or not, I think it's, I would prefer to help somebody continue running their company through IPO just because I think it's good for that. Part of the reason I do the job, and I think part of the reason most VCs do the job is because they want to see these things succeed. It's not just to see ideas succeed, but to see people succeed. And nothing makes me happier than to see people I've backed succeed personally. It's just a great perk of the job. I mean, it has nothing to do with me making money. I mean, correlated, but it's not causation, right? They succeed. I make money. They make money. But that person succeeding that I backed is just awesome. I'd love to talk about fundraising. It's where the two sides were so often really

Starting point is 00:23:32 come together in this kabuki dance process. And the way I love to structure the conversation is advice from the investor to the class of founders and from the founders to a class of investors. If you had a captive, curious audience of every VC in the world or something in some stadium somewhere, and you could say, listen, I'm going to tell you something that's good for you to hear from the founder perspective vis-a-vis the fundraising process. What would you tell them? I would ask them to spend as much time as possible trying to perceive what it is that I'm actually building. Don't start asking me questions about market size or who I'm going to to hire or what this feature does, but actually get to the core of the thing that I'm doing

Starting point is 00:24:12 with elementary ABC questions. Because I think without that, founders get so frustrated in fundraising because they get this crazy whirlwind of questions and go down these diligence rabbit holes. But I think most of those are just masking the fact that investors don't actually understand what the founders building because, especially at the precede and seed stages, most founders have zero idea how to communicate what they're building. And so that's where things blow up. So just more zooming in on present reality. Present reality, just ask a series of questions. Even if you spend the first half hour of that call, just trying to get to the kernel of what is this thing?

Starting point is 00:24:48 Right? So that I could go and call my father a teacher and explain it to him, that would be beautiful. I can't agree with that. I think I can't disagree more strenuously. It doesn't matter what you're building today. In terms of investment, your product today is just not what you're going to look like five years from now when I might actually get liquidity or 10 years from now. all I care about is what you are trying to build 10 years from now, right? So that's why I ask questions about market size or hiring or who works there, right? Because whatever product you have today is

Starting point is 00:25:16 going to change. I mean, it's nice to know that you can build it, but I just don't think knowing what your product is today makes any difference to me investing. Now, if it makes you feel better for me to pretend that I care, that's fine. And I'll do that. But why? Why would I care about the details of your product? You should be able to articulate in a sentence what it is the thing that I am building. Why? Because how else are you going to decide if you want to invest in it? I want to decide on what I'm going to exit. I'm not deciding on what I'm investing in today. I'm deciding on what I'm investing in 10 years from now. Sure, but you should be able to say what that thing is, and you should ask me about market size, and you should ask me about hiring plans and all that

Starting point is 00:25:53 stuff. The question I always ask is, what do you want this company to look like in five years? Because that's what I care about. But you should also want to know what you're investing in. I'm investing in you. Right? I'm not investing. investing in your product. Fair enough. I'm going to press rewind and replay on this conversation when I raise my next company. Sorry, Jerry, you don't get to know what it is. You just get to know about the market size. You said you invest in people, not ideas. So what does that process look like? Venture capitalists, you know, people product markets, right? Those are the three things that venture capitalists invest in. I've asked a bunch of people which one you invest in. And the best answer

Starting point is 00:26:28 I got was Andy Weissman from USV who said, why would I have to choose? That's sort of been my North Star, I do invest in ideas, but I don't invest in the product today. Because the product today, I mean, when you showed me the product for this company, the first time, you're like, okay, just open a Docker container, bring up the command line, and then dump your biggest dataset. And I'm like, I don't have a big data set. Obviously, it was my biggest data set. And it's not the product you sold, right? In the end, that's not what you brought to your customers. It was a seat of an idea, and I understood what you were trying to do, the driving motivation behind it. But I didn't need to actually use the product at the very earliest stages. So

Starting point is 00:27:01 when Liz was starting her second company, we had a series of breakfast. Every few weeks, we'd go to breakfast, and she would run about 30 ideas by me, and I'd tell her they were all stupid. Actually, I didn't say that. I said it nicely. They were ideas that perhaps you didn't know enough about the market, or that I'd heard before I have sources of information you don't have, right? So I could help you, and I think you would probably win the list before you came to me. But then she came with the idea, and I loved the idea, right? And of course, in the end, I had those breakfasts every few weeks because I knew that she would eventually come up with a good idea. But it wasn't like she told me an idea which I didn't like or didn't think would work. And I said, that's it. And I'm never talking to you

Starting point is 00:27:34 again. So, of course, you invest in people. But you have to wait until they have the right idea. So I don't think it's one or the other. I mean, I knew Liz would come up with a great idea. And I know she'll come up with one in the future. Why? Why did you know that? I don't believe in raw talent. Or I do believe in it, but I don't think it's that useful in this regard. I think it's raw drive. I knew that she needed to come up with a good idea just because of who she is, right? She needed to start a company and have it be successful. So I knew that she would not rest until she found that idea. Do you think that the drive to win is the most important thing in terms of what you're looking for in a person? It's one of the most important things. Drive to win is super important. The problem is if drive to win is too strong or if there's no countervailing force to make you do reasonable things, then it can be destructive. So there's a tightrope you have to walk.

Starting point is 00:28:16 What do you think about from your own perspective in yourself? Do you think drive to win is the thing? If you're building some attribution of why something worked, is it drive to win? I think you have to hustle until you fall over. It's not taking no for an answer. Somebody tells you something's impossible. The answer is, that's great and you move on to the next person. It's just knowing that when I wake up in the morning, that I can do whatever it is that I need to do that day. So maybe it's unbridled confidence, even if I'm not a self-confident person, which is not the case, just knowing that I can enact anything that I want to. I think with Liz is the drive to win, but there's also, there's a couple stories in the book. One, where we were doing a follow-on round. And the contract came in and I read the contract.

Starting point is 00:28:56 I said, look, there's some terms in here that we didn't agree on, that we in fact agreed we would do something different. And I called Liz to say so and she wasn't available. So I called the lawyer and he's like, well, that's just the way it is. I got super angry. I got super angry because I was like, wow, I did not expect Liz to screw me. That was totally, must have completely misread her. I can't believe this is happening. You know, a part of what I was looking for with somebody who was a team player, here's his contract. The denouement was that I yelled the lawyer for five minutes, which is what you pay lawyers for. I'm sure I got billed for that. I'm sure you got billed double for that. And then Liz called me like five minutes later. And she's like, hey, look, I know we agreed to do something

Starting point is 00:29:32 differently. So the lawyer was just freelancing. It's fine. We're going to do what I said. We're going to do. And I said, all right, well, why are you whispering? And she's like, I'm going to shiva. But then I think the flip side is the story Liz tells where she said, well, we had this opportunity to sell a company. We would all make money and the investors would just get their money back. Right. So they wouldn't make money. Which was a good deal for the founders. And Liz said no. Because she's like, that's not what we signed up for. She has the drive to win, but she doesn't have the drive to screw everybody else to win. Don't you think in that case, though, that is what the investor signed up for? Isn't that the nature of preferred equity? That's an outcome, which you are literally signing up for. Obviously,

Starting point is 00:30:09 you want more, but there's nothing objectionable had they taken that deal. Well, Liz told me when I invested that she was going to make me money. So that's what I signed up for. But the contract said, you will get your money back first and then... I mean, contracts are great fences. They keep you from going past the bounds of where you're supposed to go, that you agree on the bounds of things, but that's not the whole agreement. The agreement includes what Liz and I talked about before I invested, right? What does she want to do with this company? Where does she think this company is going to go? What she's trying to do for me as an investor. And it goes both ways. I mean, what I told her I was going to do, I think, is also not in the contract, but at least morally binding.

Starting point is 00:30:45 Maybe that's part of the impasse here, which is the founder is doing one thing. The investor is typically doing some number of things, some number of companies. It's much harder, I think, for the to really deliver on. I'm going to help you in all these ways. You're one in a hundred, right, in a fund, and the partner is sitting on how many boards? Ten, and until you actually become, I think, to use your language, Patrick, no longer a call auction and something that can actually make money, I think you're sort of not ignored, but you're simply not the priority. And then once you become the priority, gloves come off. So there's an interesting symmetry here where both sides overpromised to get the deal done. But investors expect the founded overpromise, and I think founders don't

Starting point is 00:31:23 expect that the investor's over-promising, right? So the investor's like, oh, I'm going to do all these things. I'm going to be your best friend. I'm going to walk your dog for you. And the founder's like, wow, that's amazing. They're going to do my laundry. The flip side is the founder saying, we're going to be a billion-dollar company. And the investor says, yeah, maybe. All right, back to fundraising. I don't want to lose the threat. So now you get PSA to every founder raising money. How many pitches do you think you've seen in person? Thousands? Yeah. You've got an end of thousands. What advice would you give to founders who are raising money from professional investors? My advice is tell me what you want to happen. Don't come in there and be like, here's what we have

Starting point is 00:31:59 and what we're going to do and let's see what happens. It's tell me what you want to happen. Tell me what you want the world to look like in 10 years that makes a difference. That's actually meaningful because I want to buy into the vision. I want to buy into something big, not some small product, not some chat GPT overlay. I want you to tell me how this is going to change things. And if you can get me excited about the vision, nothing else matters. What, as examples, did Jeff from Trade Desk or Founders of Data Dog say anything to you that correlated with what they ended up doing? Oh, totally. Jeff was like, look, this is how every piece of advertising is going to be bought in the future. This way, what we're doing. And he overperformed,

Starting point is 00:32:38 actually, because I don't think in my wildest dreams, I would have thought they would be as successful as they are. But I believed that, or at least I believed that was possible. I invested in a lot that companies and each of them were different and each of them had a different vision of how things would be done in the future. And in each of those different visions, there was some billion dollar company at the end. And I couldn't believe in all of them simultaneously because they were digging different things. But that's part of the job of the investor, right? It's its portfolio. He was the one who was like, well, this is how it's going to be done in the future. And I was like, yeah, probably not. But you know what? I believe in you. And I think that if anybody could do it,

Starting point is 00:33:10 you could do it. So yeah, I'm totally in. What else would either of you change about the fundraising process. I just want to respond to Jerry for a second. So you want every founder to just come in and make shit up? Is it making shit up? I think so. Telling your vision what you want to happen? I mean, most founders are not building you a flying car and getting all the cars off the road and reclaiming roads for trees and saving the planet. Most founders are building some chat GPT overlay. Oh, absolutely. Oh, totally. Totally. The founders who come in and tell me, well, we've got this chat GPT overlay that can write advertising copy. I'm like, that's so boring. I don't care. And I've had like 10 of those. Already, that's not changing the world. I think if you said, we're going to completely change the way creative work is done. And then when I ask, like, well, how are you going to do that? Like, well, we're using chat GPT. It's different, right? I'm not saying that's a good idea. But what is the focus. Is your focus the technology or is it what you're trying to build? Most founders are not good at storytelling. The reason why I am so successful at fundraising, as you know, is because I can tell a wild story. And I am outrageously good at reading somebody and being able to adjust the conversation. It's the question I want to answer. It's why I'm good at sales.

Starting point is 00:34:14 right? But most founders are not. And so I actually wonder how many founders fail so many in the fundraising process because they can't articulate. You just very deftly took one narrative and turned it into something highly compelling. Most founders can't do that. You're right. I'm going to change the advice I give founders, which is become good at storytelling. No, seriously, I think you're right. You're totally right. And I think if you can tell a good story, not story in the terms of meaning something that's not true, but a story about what could happen. Something evocative, absolutely. Maybe it's as simple as the people that are going to be able to build these big businesses are going to have to marshal resources and the best way to martial resources, hiring people

Starting point is 00:34:51 with everything, hiring people, money, customers is storytelling. All right, now I want to move to the next stage. So you've secured funds. Now you enter this relationship stage where there's an ongoing relationship, there's communication, there's board meetings, etc. I like this approach. Okay, now great. Give advice to the investor that you've now taken money from or give advice to the

Starting point is 00:35:12 founders that you've now given money to about how to do that relationship well now that you are partnered in a long-term way. Tell me exactly what is on your mind all the time in plain English. I will learn how to take it if I can't take it. Just to be nuanced about it, why might you not do that with good motivations as an investor? I think that would be fine if it were me. If a founder was doing that with me telling me all the broad detail about all the problems they had, it makes you nervous as somebody listening, obviously, because here's all these problems. Wow, big problems. I think I could deal with it, have dealt with it, but again, you know, I can't find the founder. I think later stage VCs might become nervous. And board meetings are three or four VCs from different

Starting point is 00:35:54 firms all trying to prove to each other how smart they are because they need the other people to think they're smart so they can get future co-investments with them. If you start bringing up problems, they're all going to start trying to solve your problems. And the last thing you want as a founder is for them, the investors to solve your problems or attempt to solve your problems for a few reasons. One, they're not able to solve your problems, right? They're there one day a month for a couple of hours at most, and they don't know, have enough detail. Two, any solution they come up with, your problems, you've already thought of, if you're any good, because you're living this 24-7. And three, if they think you can't solve your own problems, they're going to find somebody you can.

Starting point is 00:36:29 So my advice to founders has always been, you walk in with solutions. The board has hired you, in a sense, they are invested in you to be the people who solve problems, not the people who come up with problems. If you have a problem, you walk in with a solution and tell them, look, we have this problem. Here's our suggested solution. Here's three other solutions we thought of but rejected. We can talk about it. And if you walk in with a solution, founders are like, great, this person can solve problems. If you want to be in charge of your company, you need to be in charge. So if I were walking into a board meeting and I were running it in the shitty way where I'm coming with all of my problems, which I wouldn't do, but I were doing that. I would

Starting point is 00:37:03 not want those three investors to leave. I would want one of them to say, Liz, I got to tell you, you're running these board meetings like shit. I have lost all confidence in you because of blah, blah, blah, blah, blah. Here's what's going to reinstill confidence in us. I would love that. If I'm a founder and I can't take that message, I'm not going to last long anyways. I'm just not.

Starting point is 00:37:24 I'm not good enough to run the company if I can't hear a hard truth like that. I don't think that anybody's not good enough to run a company. I think that it can learn to be good enough, right? So the blog post I wrote about your board of directors is going to fire you was not a blog post I just wrote, right? This was taken from an email that I had sent to many founders over the years saying, hey, you're having trouble on your board. Here's some advice.

Starting point is 00:37:45 And to a person, none of them took that advice because they're like, no, no, no, no, no. These investors just gave me a bunch of money. They love me. They love me. And they're not going to do anything bad to me. They love me. And this, of course, is not true, right? They didn't give you money.

Starting point is 00:37:59 They gave your company money. And they'd be more than happy to replace you with one of their buddies and have them run the company with all that money if you give them an excuse. I can be as frank as I want. It doesn't mean people are going to listen to me. Another story in the book, right, which is Liz and I were at this event and we were talking to a VC who was complaining about a founder that he had invested in who was doing things wrong at his company. And it was obvious to everybody that he was doing the wrong things. And the VC would say, look, look, no, you need to stop doing that and do this. You need to hire these people to do this and blah, blah, blah.

Starting point is 00:38:27 And the founder would be like, yeah, yeah, yeah, whatever. And the VC said, I called him every week. Every Friday we had a call and I would tell him the same thing. And then after like four or five times, he just stopped answering the phone. Yeah, whose fault is that? Yes, the founder is doing the wrong thing. But the VCs now lost his opportunity to change the founder's mind about what he's doing. And that means that he's completely powerless. He wasn't on the board. He couldn't do anything else. You need to be able to tell people things in a way that they can digest and believe and act on. In a way, VCs have to be storytellers as well. Here's a story about how your company becomes successful. Like a biased sample of highly disagreeable, highly independent. people, which is a feature. That's what everyone wants. That's the kind of person that can build a big company. And so it just makes this relationship of passing ideas and advice back and forth very strange. I'm saying what's worked for me, but it hasn't always worked. One of the weird things about venture in general is I've invested in 100 companies in my life and some of them have been

Starting point is 00:39:23 really successful and some have completely failed. But it's not a big enough data set for me to definitively say this is what works and this is what doesn't. And that's true of every VC. There's no fee so you can say, this is what definitively works because nobody has a big enough data set. So I can tell you what works for me, but are the places where it wouldn't work? Yeah, of course. Maybe each say more about what would be an ideal board meeting. I mean, tactically, structurally, we've got to do this. This is governance function. We're going to meet quarterly or monthly or whatever it is. And there's going to be minutes and there's going to be a lawyer there maybe sometimes. We need to run a professional board meeting. What have you learned about this? It would be option

Starting point is 00:40:02 approvals and comp adjustments and that's it. It'd be 10 minutes once a year if I could get away with it in the bylaws. But you can't, right? Because the investors need to know how their investment's doing. They need to know whether they should continue having you as CEO, like this is their job. So they need for the board meeting to be more than that. You have to run a board meeting that's more than that. It won't be allowed to not do that. I don't know that there is a way to structure a board meeting such that it's about an update on the company and it doesn't descend into ego or advice or things that are not necessarily requested. I've been on boards like that, but I think it does depend on who is on your board, I mean, to a large extent. And unfortunately, some of the name investors,

Starting point is 00:40:41 the people who are like, oh, that investor, they've been so successful, aren't always the best people or board members. What about a board that's really great? I've been in boardrooms that are, I mean, they're hard, there's tough truths, there's all this kind of stuff, but that you would walk out and be like, wow, that felt like a really good, I think if you pulled everyone independently, like swearing your child's life, was that good or not? Everyone would be like, yeah, that was great. What made it great? What's the quality of conversation that's happening?

Starting point is 00:41:08 Just extremely detailed revelation of what's going on and very honest discussion about really hard, ambiguous on certain decisions that are important for the company, which direction to take the business. We were talking about one at lunch as an example, where the founder brings, in this case, founders bring tons of incredible perspective. They're incredible operators. And investors bring this reference class of experience. Yes, I understand, but I have seen a hundred of these. There's a base rate perspective on this, very just Spock-like perspective. And you bring the Captain Kirk perspective, and everyone emerges a little bit smarter about what's going on. We end up seeing reality,

Starting point is 00:41:50 each of us more clearly than when we started the meeting. And seeing reality clearly as productive when you're building a business. And it requires respect and it requires research, it requires listening and it requires being non-judgmental of somebody's opinion, right, a very even sort of playing field. A very clear agreement that people are prepared and knowledgeable to the extent they can be and that this is in service of making this business great. I agree with that. I mean, I've been on boards like that. Not all boards I've been on are like that. We'll know that everybody understands what their job is on the board, board members wise. I don't think founders do either, yeah, if I'm being honest. I always feel like going into a board meeting, my job is to keep my job.

Starting point is 00:42:28 which it literally is and to fight against the investors. And I know my co-founders across two companies have also felt the same exact way, which is, am I still going to be here at the end of this meeting? And I wish, similar to explaining to a founder at the beginning of their career that they're going to have to turn into a manager, into an operator, into a businessman, similarly, it's you're walking into a meeting. And the idea, the kernel of the idea of this meeting is in support of the company and turning it into something great.

Starting point is 00:42:57 and you are a piece of that, you are not the thing. I think a lot of venture investors, especially early stage ones, could do a better job preparing founders for the next stage in their company's life. One of the best compliments I ever had was a follow-on investor who had been on a few boards of companies that I'd been on the board of because I had been an earlier investor said to me, you know what, I love coming onto the boards where you've already been a board member because things just go much more smoothly. I think, yeah, you know, that's because the board was me and the founder,

Starting point is 00:43:22 and the founder would come in and do this. And I'd be like, no, no, don't do it that way. Do it this way. They'd be like, come on, it's just you and me. What would be an example of that, of that kind of hygiene? What do we want to look at, right? What kind of metrics do we want to look at? Founders will, anybody, will look at the metrics that are going well, right?

Starting point is 00:43:37 The vanity metric kind of thing, vanity metric problem. And you say, look, let's not do that. Let me look at what you're looking at to run the business, right? How are you running this business? How are you making decisions in your business? Tell me those metrics, right? Because I would run the business the same way you would. So why wouldn't I want to see the same things that you're looking at?

Starting point is 00:43:54 I mean, this is a very simple thing to think about, but they wanted to tell me how great the business was going and would find whatever metric there was to show that. I didn't want to see those. I wanted to see the metrics that they were looking at. That actually made a difference. I mean, it's not rocket science. But those metrics are the ones that actually make me fearful about my job. And I think that's part of the problem is if you're making the founder fearful about their job, then of course they're going to come in either defensive or scared or the worst board of urban on. The founder would come in and we'd have all day meetings, a quarter and he would have every member of his management team come in and present for like an hour. And everybody was falling asleep. I just don't need to hear all this. It's not critical for me to know this today. The information he sent out before the board was a full binder full of information. It was so much that nobody really digested it. And yeah, I know it's our job. And you'd flip through it and be like, okay, well, balance sheet looks good. He never focused on what the actual issues were that day. Let's take an example in which I can close customers, no problem. I can expand customers no problem. I can retain them, but my issue is pipeline, right? And so I'm going to come

Starting point is 00:44:58 into a media. I'm going to say, hey, I'm struggling with pipeline. And here are all of the ways in which I'm thinking about generating more pipeline. I've got humans. I've got content. I got marketing and I map out this whole strategy. But I'm still not getting pipeline. There's only so much time you and I can eat up in a board meeting talking about how to create pipeline. Because to your point, every way to create pipeline has already occurred to me and it's already being done by the company and by the team. And so if you spend more than, I don't know, five, seven minutes on that as the existential problem for the company. Where do we go next in the board meeting? You're going to beat me up because I haven't made headway on pipeline? Not if you've talked

Starting point is 00:45:31 to me about it before the board meeting, right? You've talked about this, right? You call up one of the investors before and say, look, you know something about building pipeline. What should I do? And if you ask me outside the board meeting, what should I do, you don't have the group dynamic. I know it's you're just thinking about it. Whereas when you walk into the board meeting, you're supposed to walk in. Here's the things we considered. And I'm reporting to you on what I think we should do. And if you don't know what to do. You really have no idea. All right. Well, that's a problem. Bringing this back to something very tangible. I'd love to talk about terms, investing terms. This is an interesting scenario where surely investors have some upper hand, some degree of

Starting point is 00:46:07 upper hand, because they've just done it a lot and they're familiar with terms and it's not typically a founder's N of times negotiating a contract with a bunch of investing terms is very small and investors is very large. So let's just talk about, I'm curious, how you think about educating the world at large from both perspectives in a productive way about what terms matter shenanigans to look out for things of this nature. I think I might take the standard venture capital line here and say my term sheets very fair. The terms are extremely ordinary terms. There's nothing fancy. I'm not trying to make money on terms. I'm trying to make money on the company succeeding. So you should just take my terms and go for it. I pick terms apart one by one.

Starting point is 00:46:47 I rank them based upon what's important. Typically, option pools are overinflated. I spend an extraordinary amount of time on the language that governs the board of directors and who owns what seat, right? I care less about valuation. At the end of the day, if you do it right, somebody once said to be valuation, everything's a rounding error. I think that person is right.

Starting point is 00:47:08 And then I think about actually the long view, which is if you set the stage properly in your preseed or seed docks, you can just copy, paste those docs all the way through. to the end of the company. So I try to think about what are the ways in which I can make them as founder-friendly, as humanly possible, right up front so that we've set the standard now. When I advise founders on terms, especially somebody who, when I'm not investing in the round, so there's no conflict of interest. Board composition, obviously, is always negotiable and super important. Option pools, are they pre- or post money also important. I mean, I think the more that you can share whatever is happening with the investor, so if the option pool is post-money,

Starting point is 00:47:47 You're both getting diluted. All right, that means that the investor is not going to push for an oversized option pool like they might if it were pre-money. Stuff like that. What is the biggest shenanigan that you've seen, having seen a lot of term sheets? For me, it's actually when the contract doesn't say what the term sheet said. The term sheet is obviously much shorter than the contract. The contract can say lots of things. Actually, that example was from when I was a founder. We got a term sheet. We got a contract, which was not what the term sheet said. And then we had to argue for two months as we were running out of money about like this doesn't agree with what you. said you were going to do. That's just super annoying. Oh, I mean, I've had so much shit pulled with term sheets. I've had, I think to Jerry's point, there's valuations changed in the middle of the deal. Term sheets pulled three days before the close. Lead investor deciding to give away a portion of their equity to some other charitable fund that they work with telling me maybe a day before the

Starting point is 00:48:38 close. So much just bad juju. Maybe we'll talk about something very different, which is when things are going right, which is what I'll call the growth stage. of a business. So you've entered into some zone of success where you've built something people want, to use Paul Graham's term, and now you're faced with a new set of challenges, which is everyone wants growth. But I think one of the things that's hard to understand, unless you've experienced it, is that growth is really, really hard, especially if it's so fast that the new people at the company outnumber the old people three to one or something because you're just hiring so fast. All these things are breaking as you're growing really, really fast. What have you learned about the investor-founder dynamic

Starting point is 00:49:16 during this phase of a company, which of course everyone wants, in this case, it's like very positive. Everyone wants to get to this phase together. It's the whole point. But I think still there are hard parts of managing growth together. So what have you learned each about being in this stage of a company and the relationship between founder and investor? With founders, there's a certain amount of fear once you get to that point that they might lose what they've built, right? They've found a product that people will buy and they want to make sure that at this point, they're not taking the risk with the company, right, an existential risk with the company, whereas the investor will be like, look, you need to keep taking risks. You need to hire people not being sure if they're the perfect

Starting point is 00:49:52 person. You need to spend money, not being sure if it's going to work. Because as soon as you have a product that is successful that people want, your competitors can see that product. So you're going to have competition pretty quickly. And if you don't take the growth, then they're going to take it. You need to keep going to keep going. You need to keep going to keep going to, take that kind of risk going forward. You need to keep taking the risks. What happens in growth? It gets messy. Messy as fuck. And so Jerry says, go spend all this money, go hire all these people, go scale like crazy. Well, most of those hires are going to fail. And guess what? The company's tripling in size and nobody is talking anymore. And so maybe I actually need to hit the pause

Starting point is 00:50:30 button internally so that we can actually figure out how to talk so that we can then go scale even further. And so if I'm doing what Jerry says, which I should be doing, I also now need to clean up the mess internally and there's all this stuff going on that I actually don't want to share with him because then he's going to say, well, you're doing a really shitty job. How is it that you guys don't know how to communicate? You've been communicating all this time. I feel as if there's so much more pressure now, there's more pressure in times of good than in times of bad because there's so much, there's just money sitting on the table and everybody can smell it and they can see it and they want it. That's totally true. I think the one thing I would disagree with is I think a lot of investors

Starting point is 00:51:06 will look at what you think of as a bug that's this messy that people are coming and they can't do the job, I had to fire them, and think of that as a feature. If you go in there and say, I hired 100 salespeople, 80 of them didn't work, I fired them. Investors will be like, great. Yeah, but if that's, for example, my executive team, right? And we know that at least 50% of exec searches fail and 50% of them fail. I'm going to get blamed for those failures, for sure. I think it depends on how you pitch it, right?

Starting point is 00:51:30 I mean, I think investors have a bias towards action, at least the ones I know, right? So if you're like, that person wasn't doing it, I fired them. They'll be like, okay, well, you should have told us first, but good job. So we're back to storytelling. Well, isn't that the truth? It is. There was once at one company where I paused all product development because we had stopped talking to each other and it was features, bugs, the product

Starting point is 00:51:51 wasn't working anymore. And I purposely did not tell the investors because what was I going to say, hey, we're just not going to sell anything for the next month because we're falling apart. I would have gotten blamed for not being able to see that. But how was I going to see that? Sports teams are losing. They say it's a rebuilding year. People buy that somehow.

Starting point is 00:52:07 See how long I keep my job there. Jerry's written maybe the most popular post ever about moats, sources of sustainable, competitive advantage in business. And at some stage of a company, this becomes very relevant. And in order for a company to be a $40 billion company like a trade desk or something that is the outcome everyone is after, usually a moat has to start to emerge. And early on, I've heard a lot of founders say, geez, shut up about these moats. Like, I'm just trying to make a product that people want and sell it and not have everything

Starting point is 00:52:39 break. At what point, this is the next step as a part of growth, but even past some successful growth, do you think it's appropriate for the founder and investor to start thinking about this concept together of, okay, are we architecting this thing in such a way that our behavior will naturally start to dig this moat? So I actually think it's something you can think about from the very beginning. The funny thing about that post was it's not actually about moats. It's about moats as a side effect of proving that as a startup, you probably won't have a moat when you start. So I categorize all these moats and said, look, each of these moats is you build over time. When you first start, if you have a real moat that's value adding, as opposed to

Starting point is 00:53:16 if you show up with a patent, that value is something you brought to the table, not something you're creating in the company. If you show up without one of those things, then you won't have a moat to start and you have to build a moat before you become successful, because once you're successful, like I said, people can see that you're successful and they'll just copy you. Different kinds of companies have different ways of building moats, right? So if you're a company with a new technology, that's what you hope will be your new moat. That's a hard thing to build a moat on, right?

Starting point is 00:53:38 people, it's easy to copy new technologies. If you're a company that's building a new market from scratch, well, that's a much easier place to build a moat because in building the market from scratch, you end up knowing something about the market that other people don't. And they can see your product, but they can't see what you know. It's something you can talk about from the beginning. How are you building this company? What is your company going to look like when you're successful? And at that point, what do you know that other people don't know or have that other people don't have? I talked to so many early stage founders now and they haven't done any research on their predecessors, especially in the open source community.

Starting point is 00:54:09 They're like, well, I'm open source. So that's how I'm going to get widespread. And they forget the fact that they're going to need to monetize one of these days. And they don't know who Hachukorp is or they haven't gone and studied how anybody has done any sort of prior art. And so they aren't able to model all of the different ways in which they might build a company to be successful. Just thinking back to my last two companies, I don't think that anybody ever posed that question to me, which is what are all of the ways that we might go to market here and let's go and attack them? I think we were simply in search of anybody that would pay us a dollar.

Starting point is 00:54:40 People focus too much on the early product and not on what the company could become. How can you have this conversation? We are going to build this company in such a way that we could build a bunch of ways, but we're going to pick the way that creates a sustainable, differentiated position for us. You've done this so many times. How do you do that well with the company early on, even pre-product or something? I do accept Liz's criticism that I am not as direct as I could be, is one of my failings in life. But generally what I do is I'll ask the question. I just keep

Starting point is 00:55:11 asking the question and make the founder think of it. This is usually before I invest. Because once you've invested, you're like, okay, they're like, great, I can't talk to you for three months because I've got to build my product. So this is before you invest, all right, what is this going to look like in five years? How are you going to keep people from copying you? If you're successful, aren't you in the end going to undermine your own success because other people will pile into the market? Like, how do you prevent this? So these are just questions you ask in the pitch process. It's probably iterative. and you force the founder to think about these things so that they have thought about them. I mean, when they start building a product, it's part of their thought process.

Starting point is 00:55:42 Hopefully, you can impress the importance of it enough that they will keep it in mind once they've got your money, because once they've got your money, they don't have to listen to you for a long time. You see so many people build companies that have a great product, but no way of keeping people from copying them. There's an investor that I think you're familiar with. They asked us when we were pitching them for my first company to write out a series of hypotheses that must be true in order for us to be a big company, and that we're pricing hypothesis. and market hypotheses. It was a mental exercise that nobody had forced us to go through. This firm said no, ultimately, but it actually changed the way that we were thinking about going to market.

Starting point is 00:56:15 It was hugely, hugely valuable. And I never used the word value when it comes to investors. And this was in this case. And I wish that more people asked me for that. Yeah, that's a good idea. I'm going to steal that. Can you write a blog post about that, Jerry? Well, Liz has to write it. She did it. I can send it to you. Yeah, do. I want to see it, too. I just feel like some open sourcing to be done of these docs in the same way that NBCA has a standard for term. I'm sure it would be cool for there to be like, here's the things you should probably think about before you're starting down this path, especially venture backed where the big outcomes are the only acceptable ones. There's so much theory when it comes to venture back startups that founders don't have exposure to all this theory about company building.

Starting point is 00:56:52 And that's actually the value that I do think investors bring, which is the pattern matching that you're describing, right? Here's the data set of 100 companies that look just like you. And here's what they tried and where they succeeded and failed. and let's integrate that into your thinking. That's what I always crave that I never got from my board. What feels the most different to you both about these two archetypical roles? Like you've been a founder. I think you think you're a better investor. Maybe objectively, that's just the facts. And you said, I think at lunch you would not ever want to be an investor. Just like the feeling of it to you, what defines the difference between these two roles most distinctly? Somebody once asked me what I do for a living. I told him I was a professional gambler. And then my partner told me I didn't have to come back to school night anymore.

Starting point is 00:57:34 I think you need to sort of embrace the fact that you can't control what happens. The nature of the bed is that you don't know what's going to happen. And there's nothing you can really do about it. You put your money down and you can kind of steer things a bit, but it's sort of like steering a roller coaster. So when I was a founder, it didn't feel like that. An investor feels like somebody who is coming in doing some actuarial analysis with a little bit of emotion sprinkled on top and just trying to read somebody and then saying, okay, I'll place this bet and then moving on and creating a portfolio of bets. And a founder feels like a single-minded

Starting point is 00:58:06 mission. I don't know. The quality of it feels totally different. One feels the most plug-in-play and one feels hyper-dedicated. We've come to the end of the canonical journey, which is selling a business or going public or selling strategic or something, something good, hopefully. We could talk about something bad too, which is winding down an unsuccessful business. We'll talk about both. What are the things for people out there that haven't been through this experience? What is the prior art here? What have we learned from all the exits done well or poorly? For me, when I think about exits, and I don't think about exits much when I invest, partly because it's so far away, but I always ask myself if this company can go public someday, because to me, that's the only good

Starting point is 00:58:46 exit. It's not really true, right? I mean, there's plenty of great exits that are acquisitions, but if you're building to go public and be independent, be your own standalone company, then somebody might acquire you, whereas if you're not building for that, then at least in the tech side of the business, like the chance that somebody acquires you is much lower, I think. So you should always be looking towards a, how do we build this company to be a standalone, successful company that can last 100 years? I think about exits all the time as a founder. Every time, a term sheet, fundraise is actually an opportunity to exit. Is this valuation right? Do I want to double down again? Is the right time to exit? Is this offer real? Can I be pragmatic about how tired I am? Or whether

Starting point is 00:59:26 or not this company can be a standalone company or should it be talked away, I think about it constantly. It's interesting because the only time that when a founder tells me that they have potential acquisition offer where I feel excited about it is when I feel like that founder's done. They just can't keep going. They need to stop. And then I'm like, great, better in acquisition than having you just give up. What do you think about secondary sales? I'm old school. I think it's a red flag. I get it. I understand that if you've been working for five years at a below market salary and you need a little bit of money to take out and buy yourself a house or whatever. I get that.

Starting point is 00:59:58 I understand that. I'm good with that. But I think the general, we're raising a series B. One of my mentors at a previous job, we would buy companies, and there would be an upfront payment and then earn out. And I asked him once, well, how big should the upfront payment be? And he said, well, big enough that they don't worry, but not so big that they don't worry. Okay, that makes sense.

Starting point is 01:00:16 And I think for secondaries, I feel the same way. Okay, a little taking some money off the table is great. Taking so much off the table that you no longer have to worry is probably not. great for me. As an investor, I don't usually get the chance to sell in a secondary like that. I think for me, it's been particularly difficult because I'm often in the same position or I was in the same position as the founders were. I didn't have a lot of money. I mean, I put 80% of my net worth into my business, my investing business, and I was living in a rented apartment. And they're taking money out to buy a house in some fancy suburb. I'm like, great, I'm still living in my apartment.

Starting point is 01:00:45 Why are we different? So I don't know. I'm not really for it. I'm happy to make exceptions, but I think they should be exceptions. I think founders get tired. And I think fatigue is shitty for making decisions. And I think you want the founder. I don't know if it's worry so much. To me, it's skin in the game. I want to take enough money off the table where I can put my kids through college and I can buy a house and I can feel comfortable,

Starting point is 01:01:06 but also that I still have a vested interest in the outcome of the company. I believe that founders should put co-sale rights all the way into the very first set of documents they possibly can and fight for the highest number possible. Most VCs don't tell founders that I didn't even know that this possibility exists. until one of my co-founders spoke to a buddy of his on our series A. So this is 2019. And he was just like, oh, yeah, dude, look at what I pulled off. It's not a well-known thing. There's always an information asymmetry, right? So if the founder is like, oh, I really want to sell a bunch of stock in this raise, my question is always, well, gosh, what do they know that I don't know? I had one founder.

Starting point is 01:01:44 The company was going public, and we all had an opportunity to sell some of our stock in the offering. And I said to the founder, I'm like, you're selling any stock? He's like, nope. So I held my stock. And he was right. What should we know about the ways that VCs work together behind the scenes? We talked entirely about this access relationship between founder and investor. We really haven't talked about VC to VC relationship. Anything of note that you would highlight there? It depends on the time, right?

Starting point is 01:02:11 So when I first started investing again about 15 years ago, everything was done in a syndicate. So I'd find a company, I'd bring other people in, and I have to do that because I'm a small investor. But bigger funds would find an investment. and they would bring me in. They'd bring in a whole bunch of people to help bring in different expertise. And also it was a way of risk sharing, right? So if you're doing half the round and you can then invest in twice as many companies, right, so you're sharing, you're pooling risk. I think there's also a certain amount of, I believe in this company, sort of, but let me pull in somebody who actually knows this market and see if they believe in it. And let me pull in the people who are most likely

Starting point is 01:02:44 to bid against me and have them bid with me so that we can not have to compete to get this company done. That was true then. I think when money became a bit easier in the venture market, funds decided they needed to own the whole round. And I saw a lot fewer syndication opportunities because people were like, well, why would I bring in anybody else to take part of this round when I could put as much money as I want into it? I'll take the whole thing. So it definitely depends on the time. It's actually more fun when I got to invest with other people and I'm a solo investor. So it was nice to have other people around the table. I think about it a little bit differently. I think VCs talk all the time to each other constantly. I think a founder is always at a disadvantage in a board meeting or with investors on their cap table because they're always talking behind your back. And they will never, ever, ever, ever vote against each other. It's always against the common. It's true. I mean, I think probably at least a third of my conversations are with other VCs and not about anything specific, but just generally. Because there's a lot of deal sharing. If I invest in a company, I need other VCs to invest after I do. I need people to come into the companies I invest in. There's a lot of, do you know me, do you trust my opinion on companies so that you can put money?

Starting point is 01:03:49 into them. And I think that carries over into the board, right? I'll work with you again, Liz, and I'll work with any of my founders that is done well again if they want to, but I'm certainly going to work with these other VCs again. That certainly affects my decision-making. I don't want to piss them all off. Well, no, I have with this book, maybe, but... Super problematic over the top. I think it's true. The reason that they all vote as a block is because they've talked about it beforehand. This is a great scene in the book about Twitter. I can't remember what it's called hatching Twitter or where the VCs go and have breakfast and discuss what they're going to do, and then the CEO shows up and they fire them, right? Because they've decided

Starting point is 01:04:22 beforehand amongst themselves. Shouldn't be surprising that that happens. What have we not talked about that you wish more people knew? One of the things that I like to tell my students, I teach a class on entrepreneurship, is that failing at a company, if your company fails, you haven't failed. Starting a company seems risky, but it's not that risky, right? I mean, I started a company, I was a co-founder of a company, we raised venture capital, my board fired me. And I was escorted it out of the building because I was intransigent. What did your intransigence look like? They were kind of like, well, maybe you should work from home. I'm like, no, thanks. I'll keep working from here. They're like, well, maybe you should work from home. I'm like,

Starting point is 01:04:56 nah, it's all right. I'll just work from here. But the thing that I thought at that time when I left that company was, that's it. I'm done. Nobody's going to hire me again. Nobody's going to give me again. Nobody's going to do anything with me again. I'm just disgraced. And that turned out not to be true at all. I mean, literally two weeks later, one of the investors in the company, not somebody was on the board, but one of the other investors called me and said, hey, I need you to come in and consult with me on this company. They need some help. And when I went did that and then they had lunch when they were like, okay, so what are you going to do next? Like they wanted to invest in my next company. I'm like, I just got fired from this company. It's just not like that in this world, right?

Starting point is 01:05:29 Having the experience of going through it is so valuable. I mean, so many people in work get wrapped up in work and it is their entire identity. And founders especially, I think, speaking, personally forget that they have a personality outside of this and a life outside of it and it's easy to forget that. And I think people calling Jerry up after he got fired and saying, hey, you still have value. Come help me is an example of that. Yeah, I wish more founders went to therapy. So that they understood that they were somebody independent of the thing that they were building, that they didn't have to work seven days a week in order to prove their value to the universe, that it's okay to shut down. We don't want that. Of course not.

Starting point is 01:06:08 What else is most interesting to you both now as you think forward? Books behind you. You've written the book, said a lot of interesting stuff, some of which we've talked about today. What now? It's interesting to me how people have misunderstood some of the things we've said, or people have taken from the book what they wanted to hear. So Liz forwarded me an email of how a founder center and said, oh, thank you so much. I never knew that I could negotiate away preference. I do think there's a lot of education to be done. I am a believer in this project of people going out and starting companies and working for themselves and building things. And I think it's really a driver for, every VC says as a driver for innovation, but more than that, I think it's the best way for any

Starting point is 01:06:46 individual to self-actualize, right? So I really want more people to be able to do this. And so I'm interested in trying to figure out how to make it a better career path for people being founders, for everybody. If I had to do my life over again, I wouldn't have gone to college. My co-founder, my last company, dropped out my CTO at, I think 19, and drove out to Silicon Valley and grew a beard so that people didn't know how young he was and got a job and is amazing. My father, certainly didn't tell me when college started that this was a place for me to explore and try on ideas and go gangbusters. And I didn't discover that until I became a founder. And I was like, wow, I am sitting here with the smartest people on the planet just batting around ideas for a job.

Starting point is 01:07:26 And people pay me for this. And so I think, Jerry, to what you just said, there's so much possibility for it as a career path. And I wish more people knew that it existed. You don't even need to be a coder, right? You can be a marketer. You can be a storyteller. You can be a designer. It's just super cool. I was in the Dublin airport yesterday. And my boyfriend and I started talking to this guy who turned out to be a network administrator for a giant pharmaceutical company. And they had acquired a company in the south of Ireland. And he was there to go integrate their systems. And he was talking about how bored he was. And he was talking about all these different jobs that he had tried on in Tampa and at a university. And I was like, man, you should come and get a job as like a senior support engineer or a solutions architect at a startup. And you would never be bored again. And I wish that he would come and He had known that that opportunity existed for him and in a way where he wasn't necessarily risking a 401k or stability for his wife and his dog. Interesting that the overlap is that there was more awareness that there is a more creative, less boring path for almost everyone.

Starting point is 01:08:25 Oh, yeah. I mean, I've spent my first half of my career, maybe a third of my career now that I'm old, but it was working for big companies. They never let you forget that you're just a cog in the machine. And the last thing in my life I wanted to be was a cog, right? So when I went off and worked for myself, hasn't always been easy, hasn't always been a ton of money coming in, but I never once considered going back to work for a big company again. Liz, I've had the chance to ask you this traditional closing question before.

Starting point is 01:08:48 Now I get to ask you, what is the kindest thing that anyone's ever done for you? I was stepping down as CEO, and it was the most difficult call I ever had to do with the company and there were 100 people working for me at the time. And the day before I had told my head of recruiting, who was also one of my best friends, and he came over that morning at 7.30 a.m. with his rescue dog, who is the love of my life. And I was on the Zoom call giving my going away speech, hysterically crying. And he was sitting on the floor next to me with the dog holding my hand so that I didn't have to be alone. I'm like, I'm going to cry.

Starting point is 01:09:24 So I didn't have to be alone when I was doing that. Amazing. Guys, this has been really fun. Love this format. I appreciate the spirited discussion. Thanks for your time. Yeah, this was awesome. Thank you.

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Invest Like the Best with Patrick O'Shaughnessy - Elizabeth Zalman & Jerry Neumann - Founder vs Investor - [Invest Like the Best, EP.351]

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