Invest Like the Best with Patrick O'Shaughnessy - Garry Tan - Unwrapping the Gift - [Invest Like the Best, EP. 267]

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Starting point is 00:01:09 startups. We have faced challenges hiring engineering talent for various projects, and Lemon.com offer developers for one-off projects, developers for full start-to-finish product development, or developers that could be add-ons to an existing team. Check out Lemon.io slash Patrick to learn more. 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 of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the

Starting point is 00:02:04 opinion of O'Shaunsi asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. My guest today is Gary Tan, founder and managing partner of early stage venture firm initialized capital. Before starting initialized, Gary was a partner at Ycombinator, employee number 10 at Palantir and co-founder of YC-backed blog platform, Posterous. Our discussion covers what's missing in the investment world, how to best systematize venture investments, and what he learned from Paul Graham. Please enjoy my conversation with Gary Tan.

Starting point is 00:02:44 Gary, could you begin by telling us what you mean by software and the global brain and why this concept is interesting to you right now, given what's going on in the world? Yeah, it's actually something that I think is driving every organization that's trying to use software in the world. And actually, interestingly, it was brought to my attention by Yuri Milner of Digital sky. He came to speak at Y Combinator, and I remember him distinctly saying, one of the reasons why he invested in Facebook very early, or relatively early at the $10 billion mark, was that he came to a realization that something like 10% of the world's energy goes to data centers, which is also about

Starting point is 00:03:26 the ratio that the brain consumes in a human body. And I don't know if that's true or not, but I thought that was very interesting. And all the world's people, people and all of the world's resources are coming together being organized around a nervous system that is basically the internet and software. And that was, he came to speak at Y Combinator probably 10 years ago or more. But I think ever since I heard that, I've been seeing that absolutely everywhere. And I think now, if you look at every business that we like to fund, or every business that's growing very quickly and reforming the way resources are delivered, or all transactions are being sold, you can extend it all the way to crypto.

Starting point is 00:04:10 What's happening is that it's that story, not just at the global brain level. Like we think about Facebook and social media, and we're not really sure. Ten years ago, we were very optimistic about those changes, and today I think we're quite a bit less optimistic about those changes, probably rightly so. We don't know what it's doing to our children. We don't know what it's doing to our society and to political thought and to geopolitics. But what's interesting now, I think, rather than think too much at the global level, now what we can do and what you and I can do is think about it at the local level. So maybe don't worry about Facebook. Someone else can't solve that, hopefully.

Starting point is 00:04:49 What we do have very deep control over is our own organizations and our own communities and how does that play out in our own world? And even lots of listeners here might be in startups. Some of them might be in financial institutions. no matter what organization and how old that organization is, every one of those organizations is reorganizing into a local brain. And I think that that's very interesting to me because that's something that's never happened before. It's often a one-time shift. On the one hand, it's easy to be cynical and say, well, we've had computers and smartphones and spreadsheets for a long time, but I would go further. Spreadsheets are just the first manifestation of it, just because you might have semi-structured data in spreadsheets, it's like scarcely better than being on a

Starting point is 00:05:37 clipboard or in a file cabinet. And I think we're seeing really big companies come and make things significantly better, faster, cheaper in very large industries like Flexport, for instance, and logistics. There are these companies that aren't taking it above the spreadsheet level, above the pick-up the phone level, and turning it into structured data that lets you do things better, faster, cheaper. And ideally, that lets you also create new types of organizations that are ideally more fair, more transparent. That's the story that I'm most interested in of the last 10 years, this idea that, hey, man, we can't control the global that much, but we can't control the local. And then the global is constructed from that. How do you think about that in terms of how it

Starting point is 00:06:23 manifests in your investing in company activities. What is different about maybe what you might consider in a founding team or a company itself or a product as a result of this interesting shift from global to local? Act locally means try to take care of your own backyard before you go into your neighbors, I guess. So I run a venture firm called initialized capital and we started about 10 years ago. And one of the things that I learned from being a partner at Y Combinator for five years was that software can remake how investment is done. What Paul Graham did was he realized, hey, let's get a website online where anyone could apply, and then let's write software to let a group of smart former founders figure out who the next set of founders could be. And that's actually a process

Starting point is 00:07:10 that still happens every single day. I think people forget that there are tens of thousands of applications for these hundreds of spots that are in Y Combinator batch that happened twice a year. So it's really like the 2% acceptance rate or less that has held constant. And that was such a powerful moment for me because coming at it, I came up as an engineer. I came up as someone who I never thought I would work in finance. I never thought I would fund companies or help startups at scale the way that we were trying to do now. I grew up as the child of Chinese immigrants and we didn't have a lot, honestly. Sometimes dinner was like some bread dipped in milk.

Starting point is 00:07:51 That was the background that I had, and then tech really gave me the chance to get a six-figure salary and then take care of my family, take care of my parents. I'm just really surprised at how much money there is in the world. And I think a lot of people, you have to take a moment to zoom out and realize there's been so much monetary expansion, and what that means is capital is seeking yield. If I put it all together, what a gift it is to realize most people think, there's too much money chasing too few good ideas and too few good people. But my experience in that thousands of applications reading founders and problems that they're trying to solve and then trying to pick that one or two percent. And then since then at initialized funding hundreds of companies and 25 unicorns, what I learned was that's totally bunk. That's totally not

Starting point is 00:08:44 true. It's definitely true that there's too much money, but there is just unbelievable number of very, very smart people who are locked in all kinds of professions and lives, geographies that do not get the most out of them. And I think, if anything, the scarier thing that is true is the majority of things that people are working on. It's not maximizing their potential output for their fellow man. There's just an outrageous amount of emotional intelligence and real intelligence that is being squandered in organizations that are not local brains yet. They are somewhat pits of despair sometimes, or they're locked in the game that people have to play in large corporations.

Starting point is 00:09:30 I've worked in some of these, and on the face of it, when I worked in Microsoft, there were like 12 levels between me and the CEO. And can you imagine the fiefdoms that emerged? I'd experienced the worst of it because I was the lowest of the low in that totem pole. and the things that you have to do to get higher up in those organizations, all of that is not what's fundamental and fair. All that being said, I think the cool thing is there's an alternative, which is a startup, which is, to me, there's so much wrapping paper in business, period.

Starting point is 00:10:06 There's ego, there's power distance, to maintain 12 levels between the bottom-most person trying to just do their work and the CEO. All of that is wrapping paper and the gift is creating a product or service that other people really need. What is the most powerful manifestation of that? It is the startup. It could be one or two people in a room sitting in front of a computer writing code that eventually turns into Coinbase. Talking with Brian Armstrong from Coinbase and I met him when he had quit his job at Airbnb. He sent me 0.1 Bitcoin using his Heroku hosted Bitcoin wallet. called Bitbank.is. It was just one person in the idea maze trying to work backwards from what would we need to create the cryptocurrency and the Bitcoin world that we want to build. And this was

Starting point is 00:10:58 2011. And I think that that is like one of the most pure manifestations. And if we pop back up, there are people like Brian Armstrong absolutely everywhere. In fact, a lot of them are probably listening right now. And to them, I want to say, the water is fine. To say that there aren't enough problems to solve in the world is just lacking imagination. That's what our jobs as investors really are. How do we take this extreme overflow of capital? Like people don't have enough ideas left in the world. That's what people think. But it's not true. We just need to take our capital and apply it to people going after problems that are lying in plain sight. And the difficulty is it requires belief. It requires conviction. And we need more of that. There's something I know you're interested in already,

Starting point is 00:11:42 but also just from doing research, which is the systemization of this style of investing, trying to treat as many things like a product versus just some genius investor, kingmaking or picking people that there should be more throughput, I guess, in the funnel overall. I'm interested in the notion of immigration, of locked value that you've talked about with people working somewhere else. There's so many interesting concepts here. But maybe we could start by you saying a bit about this notion of systematizing this style of investing as much as possible. I remember listening to Paul Graham and 2009 interview out camera row and YC was founded, but early days of YC, basically saying, look, what we're trying to build here is like a factory, like an assembly line that has as much throughput as possible. There's a reason these pitches are six minutes and they're back to back, to back to back, to back. What have you learned about trying to do that? I know you built internal software at YCombinator. I think the idea of YC's continuity came from you or partially from you. Just say everything you can about what's missing in the investing world that if it existed would increase this throughput for the benefit of everybody.

Starting point is 00:12:41 It's really about attention. I want to go back to this idea of the wrapping paper versus the gift. And having been at YC and then now running a multibillion dollar fund, the craziest thing to me is seeing that we don't need to necessarily do many hour pitches per se. YC was able to make something very valuable just in the 10 minute interview. Obviously, a lot of people realize that whether a pitch will work or not is basically not the same. some total of the 60 minutes, it tends to be the first five or 10 minutes. So this was always true anyway. And being on the other side, helping founders try to tell their story, the number one thing that I get back is like, if only I had more time, actually, no, no, you don't need more time. You took too much time to begin with. If you're saying, I have an idea that's so complex, you need to take time to understand it, that I think misunderstands human beings. human beings are not complex enough to glom onto and put their lives towards an idea that

Starting point is 00:13:45 can't be understood in 10 minutes or less, actually. Sad to say, until an AI comes along that can load way more than five plus or minus two things in their brain, it's actually that. And I think the funniest thing that I had to learn from Paul Graham directly was I used to walk into these pitches and have this other attitude, which is there are things that are so complicated that I cannot possibly understand them in 10 minutes. And I think that that's very dangerous thinking if you're an investor because that's how Theranos happens. You're not trying to see the gift. You're trying to sift through the wrapping paper to look for certain pieces of foil.

Starting point is 00:14:21 Every box that is wrapped in gold foil, a Stanford degree in CS, and they want to work at Google, and they want to work at Facebook, it's wrapped in gold foil, guys. It's got to have a gift in it. And I'm sorry to say, and I'm one of those, I have a Stanford CS degree. Let me tell you, some of the people who applied to YC or some of the people who came from some of the most awesome pedigrees, they're the worst founders, actually. The thing that people don't talk about is that the people who should be pulling the trigger on more of these investments should be the people who have most recently been builders. Because then you can look inside the box and you can interrogate. inside the box is a gadget. Maybe you need metallurgy.

Starting point is 00:15:06 Maybe you need user experience design. How do I press the button to make it work? There are all these different aspects to the craft itself of the mechanism that people are trying to build. And I think that's one of the things that I learned from Paul Graham the most, which is the hard part about playing chess is being smart. It's not learning how the pieces move. So you need to look at companies at a much more fundamental level.

Starting point is 00:15:29 That is not the gift wrapping. You need to look at the gift itself. going back to how a lot of investors operate. It's very ego-driven. It's very driven by one personality or a bunch of lone wolves who happen to run in a pack. And I don't think that that's how capital deployment should work. I genuinely believe we need a hive mind. And that's what we've done at initialized. We have six total partners, including myself. When we meet companies, I tell every single person on our team, you have to be 100% totally true to yourself. And also, the backgrounds of people are completely different. We have someone who's been general counsel and lawyer for many years.

Starting point is 00:16:11 We have someone who is literally building apps for the New York Times. We have someone who built software with me at YC. And we have designers. We have journalists. We have people with totally different 10,000 hours with very different networks and totally different expertise. and that's because diverse points of view matter. The gift itself, the startup itself that's going to work, it requires not just one person to say, I believe and I'm going to devote my life to it. It requires all of those different expertise.

Starting point is 00:16:47 You're going to need great design. You're going to need marketers. You're going to need salespeople. You're going to need engineers. You need PMs. Think about the sum total of all the different expertise that you need to create something that really touches a billion people. The more that I can get more people with those different disparate backgrounds on my team in that decision-making room, the better we can

Starting point is 00:17:08 make a decision together to make it awesome. So sort of a two-part question. First is what I'll let you answer first, and then I want to plant another one. The one I'll plant is if there's no time or money or energy limitations, what software you would snap into existence if the North Star was to fund as many viable, interesting potential startups as possible? What is the, if we work backward from a perfect end state to make this whole process more frictionless, faster, more throughput, whatever, what would exist that doesn't? And I'm sure you're on a path towards that because you said you built custom software at YC to do this. You're doing it at initialized now. So I'll begin by asking, what have you built so far? So if you recognize a new opportunity, some deal comes onto your

Starting point is 00:17:49 radar for some reason, some founder comes on your radar. What does the machine look like that you're dropping that piece of information into today at initialized? The systems level thing is that we actually have to be very fast about getting back to people. So being able to schedule an all partner in 48 hours or less is actually really important. And being able to make an investment decision with a group process without short-circuiting due diligence within 48 to 72 hours, just speed is important because speed kills deals. hyper-competitive, as you know. It's actually very interesting because as initialized has grown in prominence, it's very easy to rest on your laurels and say, well, they should totally

Starting point is 00:18:28 take our money because we're so-and-so. And it actually requires constant gardening there. Like, no, no, this is still an economic decision. And the second we think that someone's going to wait for us, that's us depriving ourselves of making the best possible product. That's a fast path to being not relevant at all in a matter of years, really. There is a constant gardening that's necessary as well. So first is speed. Second is two-step process of actually disagree but commit. So the first part is we actually have two rounds of blind voting that's all in the software.

Starting point is 00:19:01 So we don't sit around in a room after the founder leaves and shoot the stuff about things and lean back. We have to lean forward, make a decision on the spot that is true only to us. And then that's why it's two rounds of blind voting. I don't want people to think, oh, because me or someone else on the team wants to do it, that they should vote a certain way. I want people to be totally true to themselves. And then between the first vote and the final vote, we should have that actual space to talk through. Well, did you think about this?

Starting point is 00:19:31 In my expertise on the PR side, I'm worried about what they did six months ago. Did you see this blog post? And that way we can have the synthesis. And that's really what I think of when I think of a local brain. The funniest example of that, I think, is, have you ever looked at a cheeseburger and you're like, oh, I really want to eat that cheeseburger? And then there's a synthesis moment where other parts of your brain with other priorities, with other governors are saying, hey, you're in a diet or, hey, your cholesterol's up. Hey, don't you want to live to 100? There's all this interplay that happens at the moment of a decision.

Starting point is 00:20:06 And a very smart decision is a very integrated decision. So I think of every partner and every decision that we make as a firm as actually a moment for the firm itself to reaffirm its integration with one another. And then we have a final vote because it's not about getting to consensus. It's actually about people still being true to themselves. And then it seems like from our experience either the best things are generally meet the bar for consensus and obvious, or they're so controversial that someone has to use a silver bullet. I think that's just a function of the fact that all the best opportunities they're lying in plain sight. You don't have thousands of teams going after it. The things that seem to be really, really big are not there yet. There's a reason why, from a telean sense, we often ask ourselves,

Starting point is 00:20:56 what do we believe that nobody else believes? We ask the founders that too. If there isn't one of those things embedded in an antimimetic aspect to the business, often we don't want to fund it. That's why you have to make space for the super contrarian. And even that internal to the person who's going to fire the silver bullet is a decision. My partners don't see it, but I see it and I have such high conviction, we're going to do it. We need to make space for that stuff. And then once we actually commit, they're part of the family. The war is over.

Starting point is 00:21:30 It's like we have to help them no matter what because we own 10 to 20% of that company. we are like one with that founder at that point. And that's how we think about making decisions. And then the bigger question is like, how do you actually scale that? And I'm still trying to figure that out. Actually, I think that the basic mechanism is there. And the harder part is how do you make the pie big enough? How do you attract people?

Starting point is 00:21:57 That's something that we're still figuring out. I think that a lot of it is about making an environment that is much more long-lasting, something that initialized itself needs to be a startup the way the startups we want to fund are, which is we're trying to build this thing that's never existed before, and it's going to take being a part of a system. The alternative is actually extremely compelling. The alternative that's happening out there that I think is awesome. They're amazing people out there who are doing it par excellence. You know, Elad Gill, for instance, as a solo capitalist, is the best angel that I've ever met and he's doing it at a scale that has never been done before. So that's the alternative.

Starting point is 00:22:40 For me, what I really believe is if you want to go fast, go alone. And then if you want to go far, you got to go together. The hardest part is finding more and more people who are doing it for frankly the right reasons. Everyone who gets to work in this job, period, everyone's going to make an outrageous amount of money. In the back rooms and the water cooler of other VCs, if you you really listen to what people are saying, there's just so much tension around control, around who gets more carry. It starts to resemble the wrapping paper of big companies that really don't serve people. At some point, it becomes a clash of egos. And all of those things give me nightmares because that's not how I want to do the business. And that's not how

Starting point is 00:23:28 I think the best VCs do the business. I remember a conversation with Dave, the founder of Upstart If you ask him to articulate his vision, there's this version of the future where debt capital is available for given reason to an individual programmatically, meaning there's enough objective information about the person to know whether or not they're eligible and you press a button and they're instantly approved or not for a certain line of credit or whatever. What is in the way of that happening for early stage equity capital? So why is there not, and do you think there ever will be, literally just like an objective application, that? that sets a price at which equity capital is just tapable and available. And obviously there's, I don't want to get into like fringe cases of fraud or whatever outliers or gaming the system. But just generally speaking, it seems that if there are more great people out there,

Starting point is 00:24:18 like you said at the beginning, automated funding mechanisms, like you could argue I see is like approach to this general idea, although it's still lots of human judgment. How much human judgment can we take out of this? And just someone's willing to give up a third of their company for 100 grand or something, Is there a natural extension of this that's just automatic, programmatic equity capital as a service? In a world where there's infinite capital, the real scarcity is actually trust. I think it's Munger who talks about the ideal world that you live in is one where there's very, very deep, mutual, shared, and earned trust.

Starting point is 00:24:55 And I think earned is a big part of it, actually. The hardest part is we don't have enough hours in the day. we don't have enough networks that have gelled together to determine these are the people who have done great, who have the skills, who are capable, and that's actually the limiting reagent. There's no objective measure of a good pitch, for sure. Anyone can say anything, and the worst thing is, in an objective world, you might be tempted to borrow crypto, Ethereum, or an Oracle. And people in the business world do this. You and I wouldn't outsource our understanding of a market. We'd want to hire a team and really understand what the data sources are and then draw our own conclusions based on that.

Starting point is 00:25:37 Even if you hire GLG, you'd have to go and figure out who those sources are and make a understanding of how much can I trust this. It's not capital that's in short supply. It is actually trust. There is one mechanism that I think is very powerful, which is a society that is hard to join. and then one that enforces certain expectations is actually necessary. One example of this is at YC people are much more open about their secrets. They'll walk you through and show you how they approach Facebook ads, for instance, if you ask. Imagine doing that same thing when you went to nothing against TechCrunch Disrupt,

Starting point is 00:26:19 and it's a great conference, but if you go there and someone sitting next to you is like, hey, could you show me your Facebook ads? Show me how to do it. Would you do it? You probably hold back some of the stuff. That's the thing that's hard. We need more communities in which you can share and be true to yourself with way less wrapping paper. That's the tricky thing about building these networks of mutual trust is that they're very rare and they're very, very hard to build. I love the notion of inspecting the gadget versus the gold leafing or something. Reminds me of a comment that I heard Matt Cole or say one time, we were talking about inventors or how do I identify great inventors if some of these, especially tech forward companies are almost started by inventors like Edison's.

Starting point is 00:27:02 And his simple comment was like, who cares about the inventor? Like, look at the invention. If it's a good invention, it's probably a good inventor. Exactly. Exactly. With that in mind, when you're looking at the invention, what are you looking for? What is shared in common across? You've got a very high reference class.

Starting point is 00:27:20 You've looked at a gazillion of these things. You've funded a lot. Lots of them have been really successful. What in that initial grappling with the invention or the gadget is common from company to company? Like, what are you looking for? What's the reaction in yourself that you're looking for? Just talk about that initial engagement.

Starting point is 00:27:37 I remember meeting Aporva Meta from Instacart. He emailed me and all the other YC partners at the time. And he said, I'm working on the startup no matter what. I want to be in YC. YC, of course, is 10-week program. I think three or four weeks had already passed. so half of it was over. I said, hey man, you should apply to the next batch. It'd be almost impossible to get you in. And Apurva said, so you're saying there's a chance. And then he sent me a six pack of beer. I was sitting in my office in Mountain View doing office hours. Someone knocks on my door and drops off a six pack of 21st Amendment stout in the can form. It was like amazing. That beer is always special to me for the rest of my life now because I said, what is this? And then I downloaded the app. And I was one of the first couple, maybe 100 people to try the app off of the test flight. And I will tell you, there's this quote from Steve Jobs where he says, a cabinet

Starting point is 00:28:26 maker can tell another cabinet maker, not by looking at the front. Everyone can look at the front. They turn around and look at the back. For me, that moment was seeing that it was smooth scrolling. I mean, people were still making these poorly threaded demo apps. And here it was, I scrolled thousands of grocery items, and it worked really well. Like, the images came in and were threaded properly, and that's when I knew. Not only is this a demo app, but it's a demo app that was done the right way. And of course, he had a driver app. He'd already hired two people off of Craigslist to do it. We also had seen probably dozens of other people try to do exactly that app. Uber was out. There was this idea that you can make a mass workforce driven by

Starting point is 00:29:11 smartphones. I think Android and smartphone penetration had reached like 60 or 70%, which is a real why now. So I just will never forget that moment. Like you said, you examine the invention and then it tells you so much about the inventor. What that also tells me is if I were instead of an investor at that moment at Y Combinator, if I was trying to decide if I was going to go work there, that was going to be the way I could tell I wanted to work there. It's like, hey, this person made a thing that's awesome. And if they can make this, they're going to attract other people who can recognize that this is awesome. And through the like attracts like principle, this is going to be a magnet for all the other smartest people who know how to build. And I think that that's underrated, actually.

Starting point is 00:29:57 People don't realize this, but people who are really, really good at building really like working with other people who know how to build. So, and that, that's like the real currency of being able to build software in Silicon Valley is actually where the builders go, where they want to work, that tends to be the thing that is the future. We still use that as one of the primary things that we look for when we sit across the founder is like, if I weren't doing what I'm doing now, which I love doing this. And if I was going to go look for a job, would this be one of the top 10 places that I would want to go work at? Can you convince me? And then we look at all of each other with all of these different backgrounds. And it's like, would all of us go work there? The cool thing is,

Starting point is 00:30:43 if you have a fund that is a bunch of people who, if you did go work there, you'd be a pretty good startup. That's actually a really good situation because that's actually what needs to happen out there. What we realize is that every startup that could be a billion dollar startup is actually a shelling point for talent. And then initialize now, what I realize is when you build a brand in VC, you get to be a shelling point of shelling points. We want to attract founders who then want to attract the engineers and designers and product people to go and make the self-fulfilling prophecy of a startup actually work. And we're starting to see that now, which is just really, really interesting, just people coming and saying, if I get money from you, I'm going to

Starting point is 00:31:27 hire another echelon of executive or engineer, and they don't care even about the money as much anymore. These startups are getting thrown absolutely insane deals, absolutely all of the time and nobody seems to care about just having money anymore. The absolute top end realizes I need to pick my investor the way I pick actually an executive. What are they going to do for me, actually? Are you able to evaluate somebody and do you often if you can't poke around in the invention, meaning it's not built yet? Someone that's just starting out with just an idea or an initial team or something very, very basic, but no actual thing to show you yet? Yeah, absolutely. At that point, we often need to rely on our prior relationship.

Starting point is 00:32:07 or seeing what they built before. And then I think that that actually can work really well too. Sometimes there are people with just a deck, but they happen to have the ideal people involved to attack that problem. I think of Roe, who came to us, Zachary Retano, I worked with at YC previously, and then he came to us with Rob Schutz,

Starting point is 00:32:29 who was the head of digital marketing at Barkbox. So he brought Barkbox from zero to 100 million a year in revenue less than 12 months, 18 months maybe, really, really fast. Just one of the world's experts at buying ads on Facebook and Google, actually, which back then, but it continues to be true now, you can think of being able to buy digital advertising at scale like that, similar to being a high-frequency trader. There are like dozens of people in the world who really know how to do it well, and almost every single one of those people, you could probably stand up a D to C company that could be dominant.

Starting point is 00:33:06 That knowledge is so rare and so valuable. So you have to rely on what are the unique skill sets to that market. Of course, they were going into selling Viagra online. That's kind of perfect. And the coolest thing is when you have people who are that smart and that ambitious, they were able to take something that was an incredible thin edge of the wedge, and now they're turning it into one of the defining digital health brands. Back in 2012, you wrote this funny thing about the worst,

Starting point is 00:33:34 but very common bad startup idea was travel planning software. What about that was a bad idea? And then I'm curious, if you fast forward to today, what the most common bad idea is that you see today? Travel planning is this amazingly attractive problem. One of the reasons I think is I remember being in my 20s and wishing that I could travel. How cool would that be to be able to spend all my time thinking about travel. And then the tricky thing was, and it remains true now, I had met someone from Yahoo was a recruiter. And I was asking them about, I don't know how it came up, Yahoo, travel, there used to be a travel planner service at Yahoo. And he said, oh, yeah, that's the thing that we use to get college kids to apply to us, because they all want to go work on that thing.

Starting point is 00:34:23 And then I get their resume, and then we put them in the system, and then we can hire them with this idea that they'll work on this. And I was like, that's interesting. And it's like, is it actually a good business? It's like, no, it's not a good business. It doesn't make money. And it goes back to what we were saying earlier. All of these consumer brands end up being about two things, customer acquisition cost and lifetime value. And travel planning happened to be one of those places where it's either equal or the LTV as much lower than the cost of acquisition, actually. It's a really tough market. And if you can't rely on buying eyeballs, then you have to look at organic.

Starting point is 00:35:02 And at that point, organic, especially for things that resemble social networks, they only work if you have daily or weekly use. And most people, we should be so lucky to live in a society where everyone gets to travel all the time. Maybe bad for CO2, but it would be an amazing world that would be much more connected. But it just doesn't happen that often. You don't have inorganic means to get customers in a profitable way. Turns out that's not a good business.

Starting point is 00:35:31 What do you think that idea is today? What is the most common or modal bad idea that you see today? I saw a tweet yesterday in the crypto world that said, we don't need more Dow tools. We need more DAWs. So everyone in their mother is trying to make new tools to help people make decentralized autonomous organizations, but we actually really need more of the organizations first.

Starting point is 00:35:54 We don't need more picks and shovels. That's not the hard part. People don't even know how to do it yet. yet. That's always the funniest thing. People overindex on what is hot is the tricky thing. Everyone talks a lot about the amazing outcomes, the parallel distribution of returns and venture. A lot of stuff fails. And I'm sure you've been a part of a lot of businesses that had that great early gadget, but just ultimately didn't work. What are the most common reasons for failure in this type of business that you've observed again and again? The first is probably not having a

Starting point is 00:36:24 team that has the skills. You so often run into people who can't code. but want to do a startup and then don't have a co-founder who can code, that's probably the number one. And to them, I say, hey, one of you or both of you should learn to code. It doesn't mean you have to code forever. Life is short, but it's not that short. And learning to code means that you'll know exactly what to say to someone who could be your technical co-founder. And in fact, technical co-founders would rather work with non-technical co-founders who know how to code

Starting point is 00:36:57 because then you can actually speak the language instead. have talked past each other. And that's the number one. Number two, I think, would be picking markets that don't exist. And that's really hard because I think it was Chris Dixon who coined this idea of the idea maze. I use this all the time because when you're trying to create something new, you are entering into a maze. And you know how in Starcraft there's this fog around you? The map is fogged. And then you only figure out what's in front of your face. That's what's happening when you're running a startup, especially in a market that doesn't exist or a brand new market. And we are exploring the idea maze all the time. Actually, there's a nuance point in there, which is most first-time

Starting point is 00:37:39 founders end up trying to look in the part of the maze that's already explored, because it's easy. That's like trying to find your keys under the lamp post. It's not under the lamp post. It's out there in the darkness. It's hard out there. First, you have to find the frontier of the idea maze of that fog, and then you have to bump your face into a bunch of walls, turn around, and then find the way out. That's the process of finding product market fit. That's also a subtle point. Either you're in the maze and you're looking where lots of other people have looked, and most investors or most other founders who have explored that space thoroughly will say,

Starting point is 00:38:15 hey, man, there's a wall there. And then there's a special case there too, because sometimes a founder, if you have a new innovation, some sort of new technology or maybe the market changes, maybe there's a new platform, there's new hardware, there's new capabilities. Sometimes in the part of the maze, there's been a wall there for 20 years. Suddenly that wall goes away. I would look at Instacart being able to rush in and do grocery delivery with a mobile workforce deployed over the smartphone. There was a wall there, which is people didn't have smartphones. And then at that moment, the wall went away. And then Apurva and Instacart were right there at that maze.

Starting point is 00:38:57 So I don't know. I mean, I can torture this analogy to death, but the reality is all of these things happen. We see it every single day. It's so crazy to see. Is every example like this, you've mentioned Coinbase and Instacart for which this is definitely true, but in all the cases you can think of, is there always some big enabling technology change that makes the window open? Like the why now is always clear in hindsight or even in the meeting for these biggest outcomes. The way that we try to approach it is to suspend disbelief.

Starting point is 00:39:28 If someone comes in and says what Brian Armstrong came in and said was we're going to upend the global financial system with something that is open and the blockchain. It's very easy to look at the total ARR of all of this cryptocurrency stuff is sub a billion dollars. This is very fringe. Look at what Wall Street Journal is saying. You would just say no on the spot. But if you come at it with a different angle, which is if what this person is saying is true, what would happen? One thing I like to ask, would we choose to live in that world? And the answer, when it comes to technology, sometimes that answer is no. Sometimes you run across the technology and it's like, oh, it's going to change society in X, Y, and Z ways. And I wouldn't choose to live in

Starting point is 00:40:14 that world. And it might be a great business. Someone can make money doing it, but I don't think I want to be a part of that. I think it cuts both ways. The nose in those are more important than the yeses sometimes. I love that. If this all goes swimmingly, what does the world look like? How does it look different? And do we want that world to exist or not? It's kind of an interesting and hard question. What's the role for you of media in investing? This is a topic that every investor is kind of interested in, all of a sudden it's a common thing to say you want to have some sort of media strategy. You've been doing this a long time. How do media and investing intersect today? How should they intersect? What have you learned about this intersection? Well, I would dig back into what we

Starting point is 00:40:55 started the conversation with, which is there's infinite people in the world, but the limiting reagent for that is actually know-how and access to knowledge and networks, given that media is necessary and important for investors, period, now. In the past, I think, 20, 30, 50 years ago the way it was done, you just had to be in the right club or born in the right place or be the right person's son. That's not how it is anymore, and I think that's awesome. Now we can truly harness the full potential of a workforce that is billions large, and that was never true before. It used to be a very privileged few who got access to capital, a very privileged few who got to create businesses, and then that's a self-fulfilling prophecy itself. Too much money

Starting point is 00:41:41 chasing too few ideas, too few people. It's like, that's a self-fulfilling prophecy. You're choosing to live in that world if you believe that. That's where media is so important because Paul Graham, with his essays, taught me, you don't have to have a job. You weren't meant to have a job. You could be a founder. If you are an engineer, if you were a physicist and you understood how the atom worked,

Starting point is 00:42:04 you would be able to look at the pure art table and predict what the next element on the periodic table is, which is itself a very powerful idea, I think. And that's what I want. We want to teach people about the atom. And for every single one of those, you've got a billion dollar company that could touch a billion people. That's what I want. At the end of the day, every business actually is a meme now. To go back to the global brain idea, I think Naval talks about this all the time. You go back even a couple decades. And mass media was the few speaking to the many. And then we are now in this other age of truly the many to many. Every single person on the planet who has electricity and access to the internet, you might not have a reason to, but increasingly

Starting point is 00:42:50 we do have a reason and to be able to operate locally to then construct this global brain that hopefully will drive us to a world that we all choose to live in. Could you tell me the story of the episode or individual piece of work that you are most proud of? I have to say at this point, I'm most proud of initialized as a firm, because I think that we're entering this other realm of, I don't want it to be about me and my personality. I never really entered it with that idea. It goes all the way down to how I want to approach working with founders, which is this idea of, I'm not different than you. I'm the same. And to me, it's really about how do we get all the way to the gift? How do we just talk about the mechanics

Starting point is 00:43:34 of making a thing that's never existed before. If we can strip it down to just the signal and have no noise around it, that's what I really want. All of this feels fractal to me. Initialized is the defining startup of my life that then is about helping other people create the defining startups of their lives.

Starting point is 00:43:57 We are a shelling point of selling points. If you want to create something that touches a billion people with the high integrity and the, bottom-up nature of how we want to do it, then we want to talk to you. And we want to put you in a community of all the other people who are exactly like that. And together with that mutual shared trust, a network of people who help each other, that's what the world needs the most of right now, right at this moment. It's the biggest mission that I could think of is making this magic happen more.

Starting point is 00:44:27 If you think about the history of the firm so far and even projected to the future a little bit, to what do you attribute you may be winning at that task? What were the major decisions or choices or things that you built that made this the thing that you're most proud of? What contributed to that outcome? I think some of it was a personal journey for me. I grew up with a pretty tough childhood, child of an alcoholic. And I would say that the biggest transformation for me over the past five or six years was a journey inwards to realize what made me very different. For instance, I realized at some point that what I need, which is a situation that is high love and low structure, I thrive on chaos. I actually thrive.

Starting point is 00:45:13 I just love an ambiguous situation because that's where I can start putting structure in and figure things out. It also gives me great freedom and flexibility. One of the things I had to realize is that's not how most people are wired at all. And it was a big surprise to me, actually. It was my executive coach, Cameron Yarbrough, at the time, who helped me. understand that. What works for me does not work for other people. The ideal situation is actually a high structure, high love situation. And it took a lot of self-work to actually realize, oh, hey, that's actually how we do it, especially because taking a step back used to assume that process and

Starting point is 00:45:54 bureaucracy, I thought it was bureaucratic, and I thought it was part of the wrapping paper. And I think one of the big things that I came around to is realizing, yeah, when you're two or three people in a room, that part is wrapping paper because you don't need three C levels in a room to do anything. The title is a wrapping paper at that point. And then now what I realize, I spent five years of my career as an investor just working with rooms of two or three people. And now the evolution over the past five or six years has been seeing not just that early stage, but also that stage of you're hiring your first 20 people, then you're hiring your 80 people on top of that, your 100-person team now, you're hiring your first C-levels, you're hiring people who you need

Starting point is 00:46:37 to get to a thousand employees to be able to create a compound startup the way Parker Conrad is doing at Rippling. So now I understand the early game and the late game is very, very different. And I had to internalize that and realize that. And then now I realize because in the past I failed at this. My startup back in 2008, Posterous, I failed at this. Right at the moment we were 20 people and I need to switch into a manager role and create structure for others. I was still clinging to this idea of writing all the code and doing all the design. And that was exactly the wrong thing. Posterous went deep in the idea maze and we didn't make it. And of course, we made money for investors and ourselves and our employees made out fine with the acquisition to Twitter. But I didn't

Starting point is 00:47:25 make it to the promised land. I think we topped out at maybe 100 million or 200 million monthly actives period. I didn't make it to a billion people. But now I realize, hey, if I enter this with humility, I'm here to help and I'm not perfect. In fact, I mess this up exactly, but I don't want you to mess it up when we're in the IDMAs with the founder. That's actually the best thing I can do. What I realized is, I used to worry, like, do I have enough of an ego for this business? And now I realize what was different about us all along is that we got rid of the wrapping paper, we started off the game without the ego, and then it's resulting in better outcomes. The biggest thing is finding my own confidence, perhaps, over the past five or six years. If there was a button that

Starting point is 00:48:11 if you pressed it would retroactively make your childhood easy, would you press it? Not right now. I also wouldn't with that on others, and I also wouldn't choose to experience it again. But having done it, it also makes you who you are. And that's the conundrum. Do you ever see founders that don't have some sort of similar extreme adversity really in their lives? Even when people deny that they had adversity, I think if you introspective enough, I think at the core of every person's human existence, there is some form of it. even if you deny it completely. And this is a familiar experience for me because actually I spent most of my 20s denying

Starting point is 00:48:53 that it had an impact on me. I bet most of my time trying to be normal. And then now I realize, no, no, I was never normal to begin with. And that's actually okay. In order to create an organization or a local brain that's integrated, you yourself need to be far more integrated. And it's fractal in that sense. What does the word integration mean in this context?

Starting point is 00:49:14 An example of non-integration is saying, denying your own experience, for instance. To say that I'm normal and that I never had these experiences, it would come up in all these sorts of different ways. In the moment when I was in a meeting and my face got hot and I didn't know myself, it's like, oh, I don't know why I'm feeling a little hot-tempered right now, what's happening. A lack of integration is saying, well, I'm just going to let the people around me have that. And a more integrated version of it would be saying, let me understand where is that from and then how do I direct it and also to accept it. More integration results in just better decisions. We can live in a better harmony if we are

Starting point is 00:49:57 true to ourselves. If you use your portfolio as the glasses or lens through which you view the world, what's going on in the world that is most interesting, bizarre, notable? What are the winds of change that you see through the portfolio itself today in 2022. The sheer fact that there's so much capital in the world, I think, is highly undercapitalized. I mean, I think at the venture level, we just talked through why I think initialized is pretty cool, but we're seeing it more broadly everywhere in society. One example, I think, would be Formic, which is a company we funded at C. Lux just did their series A, and it's working.

Starting point is 00:50:36 The founder actually was an AI venture capital. for Bidew Ventures previously, so he was on the board of a number of robotic startups. And he wanted to start a robotic startup that wasn't focused on the computer vision, ML control systems part. He realized that there were plenty of very smart people doing all of that stuff. What we really needed was the ability to go to market, the factories, the global manufacturers, but also the American manufacturers, of which there are thousands and thousands. they actually just don't adopt it. And the question is why. And then if you keep asking those five whys, the Jeff Bezos five whys, you start finding out all of these crazy things. Saman Fareed,

Starting point is 00:51:20 the founder, realized that a lot of these small manufacturers want to, but they're afraid because they don't know what the good system integrator is. And if you choose the Ron System Integrator, you just flushes a million dollars down the toilet. And that's a million dollars that a small manufacturer cannot afford. And also, really, you're going to put a million dollars in off your balance sheet. Your balance sheet might not even have a million dollars. The GMV of these things might be tens of millions, but you're running such a razor-thin operation. You don't have the gross margin for it. So when you zoom out, you realize, oh, these are the real problems that real American manufacturers face, and there are tens of thousands of them that all have this. You know, it's funny because

Starting point is 00:51:59 you think that the world is asking those questions, but they're not. And so Saman said, we're going to square the circle. We're going to go and we're going to get financing. So these SMBs don't have to put it on their balance sheet. Not only that, we're going to find and take the technology risk completely out. So we're going to find our own system integrators and do it for them. And then they're just going to pay us an hourly wage the way they would pay a worker. And that's what they want. They assume no risk. They get all of the return. turn, and then we get some of the highest yielding IRR that exists in a very pure form of yield. I think this is a startup that can make $100 million a year net.

Starting point is 00:52:40 It's only a couple thousand machines in operation, and we've got 20 up now. There are these crazy macro discoveries that are lying in plain sight that we run across every single day, and I just really, really love those. I think basically I would call these things outcomes as a service. how do we take this thing that we all complain about, which is yield is so low, and then how do we turn it into an asset, which is that everything that could be happening that's high IRA should be. This is so much fun. I've learned a lot. I think your perspective is very unique and different. I ask everybody the same traditional closing question in these conversations. What is the kindest

Starting point is 00:53:19 thing that anyone's ever done for you? I think of honestly Paul Graham and Jessica Livingston meeting us for our totally harried 10-minute pitch for Posterous, the blog platform back in 2008, and they said yes. And I'm finding out how deep this rabbit hole goes now. Thank you for funding us and then introducing me to a world where I wasn't meant to have a job. In fact, we're here to help everyone else create a million jobs and to touch a billion people. And it's not really even about the billion-dollar startup. It's really about building the world that we want to live in. Jerry, this has been so much fun. Thank you for your time. Thanks for having me, man.

Starting point is 00:53:59 Next, you'll hear my conversation with Steve White from SW Investments. We cover how Steve incorporates Teegis and Bamsec from sourcing to monitoring his portfolio. To hear my full conversation with Steve, make sure to check out our episode with Eric Mandelblatt. Maybe you could talk us through the specifics of how you use Teegis and Bamsec, which are now under one umbrella, one company, but very different tools. What are the ways that you use those things actively in the process. I use these tools every day. So I first came across BAMSEC through, I think somebody mentioned it on Value Investors Club on a message board. And I went and checked it out, got a free trial. And I think within the first five or 10 minutes of using it, it was like the

Starting point is 00:54:39 biggest no-brainer to me. I think it was something like $30 a month. And I was like, you got to be kidding me. This is the easiest 30 bucks I'll ever spend. And I absolutely love that. You know, everybody in our business has Edgar bookmarked. And, that browser window open. Basically, it's like the first browser window you go to in the morning. And Edgar's fine and all. We've all been there. We all used it for many years. But I just love anything that takes sort of a clunky or cumbersome or not perfect process and just makes it easy. And that's what I immediately discovered with BAMSEC, where they just had this great interface and this great organization around this publicly available information that we all see every single

Starting point is 00:55:19 day. And then they were able to add some higher value services on top of it, like quarterly call transcripts and some other things like insider buying and these other things. So what I found is that it had replaced Edgar for me. It was open. It was one of the first browser windows I opened in the morning. It was when the last browser windows I closed when I shut down my computer at night. And I just sort of love that it could make it easy. Anything that made my life easy, I'm happy to plunk down money, especially because as you know, like with the one man band, I'm a little bit. time constraint. I'm conscious of how I spend my time and where I spend it. And I don't want to be spending my time copying and pasting a million things from an SEC filing into some sort

Starting point is 00:56:03 of separate note-taking tool like Word or Excel or OneNote or whatever it happens to be. So I've been a huge fan of BAMSEC for a long time. In fact, I was always happy to give them feedback on product improvements. And I was involved with them when they were rolling out some beta features, and I've loved it all. All they've done is made that site much more robust as they've added more features, including things like global search functions, which I find myself using all the time. So I was really impressed with the product and the thought that they put behind it and how they were rolling out new features. It's been a part of my daily process since I've used it. How about Tegas itself? I mean, obviously, I like the Edgar first tab open, last tab, close

Starting point is 00:56:44 concept. It's sort of the primary material. And now this is a BAMSexa tool on top that let you parse through it much faster and easier. Teagueis itself is something much different, but adjacent, obviously really important. How does that get used in the process relative to Bamsec, let's say? Yeah, it's funny. A friend of mine had told me about Teegas a few years ago, and he strongly recommended it. And I didn't quite understand the concept of what he was talking about until I went to the site and spoke to somebody who got a free trial. And I instantly understood what it was that they were doing, and I thought it was brilliant. And one of the reasons why I think I kind of quickly picked up on the value ad

Starting point is 00:57:20 was because the things that Tegis does, I used to do all myself. So I used to do in the hunt for fundamental research in Scuttlebutt, I would be on LinkedIn searching for former employees of companies or searching for employees and competitors that might have something interesting to say. I'd be going to their company websites and I would look at things like white papers that they would publish and you'd find the author or people that were quoted in it because you'd assume, oh, gee, well, they probably might be a little bit more willing to share some insights as to this company. And so it was actually funny. I was living in Chicago, Teague is a Chicago company.

Starting point is 00:57:59 I had been reaching out to them just casually. And they invited me to come over to the office. And I was sitting down with some of the team and the founders. And I was sort of laughing about them. I was like, you know, I know exactly what you guys are doing. Only you guys are having a thousand times more success with it than I ever had because I found myself increasingly running into non-responses. Reaching out to somebody with a cold, direct message on LinkedIn has gotten, had gotten worse and worse over the years. And so Teegas had really kind of cracked the code as acting as a credible middleman between the by side and some of these experts. And so they took, almost like Bamsec, they took a process that was,

Starting point is 00:58:42 very clunky and they made it almost seamless. In Tigis's case, they were taking a process that had become almost impossible for me and they had made it very easy. So once I realized what they were doing, it just became a no-brainer for me and it became ingrained in part of my daily process. I get their morning emails where they say what all the new transcripts are. I like doing that. I've actually started using Tigis as sometimes a screening tool, actually a starting point for the research process because I get very interested, for example, in companies where if I see it's a new transcript and it might be the only transcript that's ever been done on a particular company, rather than the 50th transcript that you see come in and you go, well, I don't know

Starting point is 00:59:27 if this is going to be that helpful. When I see a new one, I start thinking, oh, this is interesting. Maybe there's some hidden gem company that somebody else is doing some work on, and I get to piggyback on that a little bit. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

Invest Like the Best with Patrick O'Shaughnessy - Garry Tan - Unwrapping the Gift - [Invest Like the Best, EP. 267]

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