Invest Like the Best with Patrick O'Shaughnessy - Hunter Walk – Building Picks and Shovels - [Invest Like the Best, EP.112]

Episode Date: November 27, 2018

My guest this week is Hunter Walk, the co-founder of Homebrew, a unique venture capital firm. Hunter is a tool builder, having spent his career before venture at companies like Google and YouTube. The topic of our conversation is the intersection of creative expression, technology, human behavior, and problem solving.  We discuss his time at the company behind the video game Second Life, building tools for creators at YouTube, and why a very hands-on style of early stage venture investing represents an interesting use of his skillset at this stage of his career.  Please enjoy my conversation with Hunter Walk. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Show Notes 1:24 - (First Question) – Background on Second Life and what role Hunter had there 6:10 – The virtual currency system at use in Second Life 9:51 – Measuring how people behaved in this virtual world 12:21 – How closely is the Second Life world mimicking real life 15:13 – The market for platforms that lets people take on creative ventures 17:58 – Investments that interest Homebrew 20:21 – Lessons learned while working at YouTube 28:34 – The idea behind Homebrew 33:44 – How to best describe good problems to solve for 36:10 – The Shadow economy and investing in companies operating there 42:17 – Monetization of attention 47:22 – His interest in fintech companies 54:03 – Major trends of change he’s observed over his first three funds 1:04:13 – What is there take on the state of returns for VC’s 1:09:52 – What is the most common way that founders need help and what advice is more helpful 1:14:35 – Kindest thing anyone has done for Hunter   Learn More For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

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, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfield guide.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 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 this week is Hunter Walk, the co-founder of Homebrew, a unique venture capital firm. Hunter is a tool builder, having spent his career before venture at companies like Google and YouTube. The topic of our conversation is the intersection of creative expression, technology, human behavior, and problem solving. We discussed his time, at the company behind the video game's second life, building tools for creators at YouTube, and why a very hands-on style of early stage venture investing represents an interesting use of his skill set at this stage of his career. Please enjoy my conversation with Hunter Walk. Sounds like from reading about your background that you were the co-founder or very early at the

company behind the game's second life. Talk about that company and that game. We're going to talk about YouTube too, but this whole idea of people's digital presence is really interesting to me right now, The rise of e-sports and all these things is one component of that that I've been thinking about. Talk about what Second Life is for those that might not know what it is and what role you played there. Second Life is a virtual world where you're sort of represented by an avatar, a 3D creation of yourself, that you can customize to look like you or not look like you. In fact, it was very interesting to see people would, there were very predictable paths of when men or women would sign up for the service to either make themselves photorealistic.

They'd want to look like their digital selves would want to look like their real selves, or they'd want to look idealized, muscles and abs if you were a dude, long hair, boobs, if you're a woman, whatever type stuff, or extreme. Just move the slider bars and let me see how crazy I can go. And the idea was that we were trying to build sort of a fully virtual but also constructable world where the inhabitants could shape it. So if you could sort of think about what maybe kids use Minecraft where the idea you have a bunch of little parts and kind of Lego virtual Lego, but we also had a coding language

where you could actually program these things to do things. or if you were going to want to make a dress for your avatar, sure, you could go buy that from somebody else in the world, but you could also design it in Photoshop, upload it, and apply it to yourself. So it was highly creative, highly malleable. We had a virtual currency that predated Bitcoin and at various times was a floating point currency. So I think it was it traded more favorable to the U.S. dollar than like the Thai bot at times and stuff. And it was Burning Man in some ways. Like when you think of a virtual world, I think you can kind of think to extremes. You can either think of Disney World, someplace that people have created for you to walk

through, or you can think of Burning Man, being dropped in a desert, scorching heat, no supplies, and having to figure out how to survive using the people around you and your skills. For better or for worse, we chose Burning Man. And that probably actually turned into sort of a ceiling on the number of people who wanted to survive in the desert. But I was the sort of first non-engineer on the team, the founder of this guy, Philip Rosdale, who's actually now building another version of this in VR. I had been thinking about this for a really long time, built one of the first high quality video streaming products that was bought by Real networks and became CTO of Real. And so he felt like now was finally the time to build this.

And I came on and it was my first job out of grad school where I sort of came to a conclusion about how I was going to make professional decisions before, you know, I was sort of throttling between this and my left brain or right brain. And then I finally realized maybe I'm a little bit of both. So I said, I only want to work on projects that I'd put on my tombstone. So they represent me. They're not just a job. I only want to work on projects where I think I can have a unique impact.

It doesn't mean that I'm the best person for it. Other people might be able to succeed in the role as well, but I'm going to bring a point of view and experience that might be unique. And I don't want to compromise on the quality of people I work with. And so that was kind of our merry band of an early team that built this product, that then I was there for three years. Very interestingly, after it was sort of bootstrapped, angel funded. I left after it commercially launched for reasons.

we can get into. And in another classic case of good timing, right after I left was sort of when it took off. So it became this hype thing of the 3D internet. You know, is everybody going to live their lives in second life? You had really bad implementations of corporations trying to, Mike Dell made a virtual replica of Michael Dell's college room you could walk through, you know, insurance agencies were trying to open in Second Life. Benchmark, the amazing venture fund funded it and Bill Gurley sent on the board for a while. The sort of cut to the chase thing is online communities like this are very hard to create, but also very hard to kill. So now Second Life, the company, Lyndon Lab is in its 18th year. It's profitable based in San Francisco. It's kind of always

hovering around 500,000 paying members who some of them from the earliest days literally are living their lives virtually. They spend more time in the world than out of it. Now it's interesting as people sort of debate the role of social media and it's healthy or not. I mean, we had some of these questions earlier on when we start to see some of our earliest users online line for 12, 18 hours a day, wondering if that was a sign of success or something we should be worried about. I was essentially a non-engineer, non-designer. So I worked on the product the whole time, and then I solved whatever the highest nail issue was. Oh, we've got to figure out distribution strategy, go talk to Nvidia, Intel, so and so forth. Oh, we need community terms of service.

This is a fully open world. Should you be able to do anything? How do we enforce community standards? How do you police it? All this type of stuff. There, we actually, pioneered a lot of very interesting design choices that people later copied to greater degrees of success. Mark Pankas at Zinga talks a lot about how our virtual currency system was a inspiration for the virtual currency. How did it work? How did the currency system work? So basically, you know what's going to be fun when one of your advisors is a real estate economist from Berkeley. So we basically didn't want to, we didn't want to sell the virtual currency. So we wanted to make sure that as best we could, although there was going to be an economy, and the economy was really to manage resources. Each server we

ran could simulate 16 acres of virtual land and could have up to 5,000 objects on it at once. And we had a real physics system. So you can think about if somebody builds a giant tower, a janga tower, and pushes it over, and those all fall down and bounce like you'd expect them to bounce, that's taking up a high percentage of the computing power at any given time. So how do you manage that? How do you make sure that you don't have 100 people building 100 towers trying to push them over all at once. Well, the way that we chose to do that was essentially with an economy. You'd have to buy land and it costs money to maintain your land and it's only on your land. You can do things like that. Essentially, it was a subscription service. You could play for free,

but you wouldn't get any currency. So most people subscribed. By subscribing, you'd sort of get a stipend, I guess, a version of the safety net. You know, citizenship gives you some some linden dollars. And then really the way that those would transfer within the world would be people would build goods and services. So if you made a compelling outfit for somebody to wear, you know, there was a lot of cosplay stuff like that. Like let's say, you know, modern terms. You wanted to dress up like the Avengers. So you found somebody who was really good at 3D modeling and Photoshop and they made a bunch of Avenger costumes and they'd sell them to you for 500 Linden dollars, maybe a thousand if one could actually make you fly. You'd transfer the money to that person. All of a sudden, that person could

pay their rent, buy more land, that type of stuff. You were free to buy and sell dollars between one another, but we ran the Lindex, which was sort of a floating point currency exchange system, where in exchange for, I forget exactly, well, let's say a 2% transaction fee, we essentially made the transaction secure. So if you, Patrick, you said, you looked at the buy sell board and you said, okay, I have a hundred US dollars. What's the best? I can, how many Linden dollars can for that? You might find that somebody is willing to sell a thousand Linden dollars for those hundred dollars. If you used our exchange, because we had access to the accounts, since we were the world owner and your credit card, we could make that transaction securely,

take 2% into our pocket and make sure that you got your linden dollars and the seller got their real dollars. So we essentially rented virtual land that we could create at scale, right? So if there was demand, we would just bring another server online. We facilitated transactions of this virtual currency. So you can sort of think about it as at scale the best business model ever, or you know, or every good business model from the physical world brought into the digital one and thus no longer constrained by physical resources and frictions. It was a great experience. It really, I think, prepared me for life in Silicon Valley in the sense of smart, small team of smart people working on something that was crazy. And that helped me understand that no matter whether it was going to be the next

Google, the next eBay, or just a really interesting project, that you get a lot of credit in Silicon Valley for working on hard problems with smart people. I mentioned, you know, that it eventually became VC funded. Prior to that, our angel investors included Mitch Keport, so Lotus 1,23, one of the first great software entrepreneurs, Andy Hertzfeld, who was one of the original Mac designers, Piero Mediare of eBay fame, Jeff Bezos. So even in 2018, those would be amazing names when everybody's an angel investor, but in 2003, when these people, Ray Ozzie, who was also on Lotus, and then did groove networks and some others up at Microsoft, it just sort of became this thing that people came attracted to. Before we move on, this is such an interesting captive ecosystem,

right, that you can observe things in, right? If people are effectively behaving the way that they would in the real world, you mentioned this Burning Man idea. I'm also curious whether or not tendencies from the real world made their way into the game. That's a great question. So let me answer that in two parts. First, the measurability of it. So it was a little bit different than a game in the sense of in a game, the designers of the game can create an object called a chair. And then you can put that chair into the world and see how people use the chair. Things that people built, since it was user created, had no real representation. You can sort of think of it as if they named it chair, we would know it was a chair.

But if they just took a bunch of primitive solid geometry and built, the system doesn't know what it is. It just knows that it's an object that has mass and so and so forth. So you had to be, it was really interesting to sort of figure out, well, how do we know what people are doing? And how do we understand what's going on around us? It ended up being a lot of art and a lot of science. The art part was we literally hired a blogger, a game blogger, to be our in-world journalist. We said, you can write, we will pay you to hang out in the world and find interesting stuff going on and write public stories about it. It was called New World Notes. It later became a book.

We ask one thing, if there's anything that's really bad going on, just give us a chance to comment. You don't have to not write about it, but give us a chance to, like, input into it. But this world is even with a few hundred people, it's already too big for us to understand everything going on. And so we need a journalist, we need an ethnographist to go figure it out. But on the other side, some things were incredibly measurable. So your avatar, the avatar you design, your face, so and so forth, if you think about it, it's really just a bunch of slider bars with points between zero and 100. So I have larger than average ears in real life.

If I was on a zero to 100 ear slider bar, my ears might be 72. Your ears might be 51. So we could actually look and see, well, what does the average person look like? or do the early adopters make themselves look different than the people are coming in now? Do people who claim to be women? What positions do they use? Do men playing women use actually different positions, all this type of stuff? So if you could imagine, if this had become something at the millions and millions and millions of users,

the data that these types of things throw off is incredible. I forget which movie it was, but there was one that was just recently. Ready Player 1 probably. Oh, no, no. This was, it's the whole theme of Westworld, right? Oh, sure. We are scanning people's brains because here in this world, they act according to like their it or whatever, right? Their base instincts.

And now we're using this for marketing. Second life could have been Westworld. So, yeah, so it was definitely, definitely interesting. The second part was about the contained environment. Yeah. So just whether or not, like I'll give an example, something like wealth inequality. So you've got a currency is what's happening in the world like this is something like wealth inequality just like an inevitability that shows up even in a virtual environment or something. Yeah.

You know, we tried, we had this principle. We wanted to make sure that the size of your wallet in the real world wouldn't necessarily impact the size of your wallet in Second Life. At the time, a lot of the early, what they called massively multiplayer online role-playing games, some more pigs, Ultima EverQuest, and so forth, went so far as to initially kind of ban the sale of gold or goods or stuff because they didn't want people. For real currency. Yeah, for real currency. A, because I think they were trying to figure out, hey, some of this value should, you know, fall into our pockets. But B, also was sort of, it was like hacking the game. It was like somebody who just happened to have a trust fund could come in. And that didn't seem fun to the players. Of course,

to think about that now, given the way that these games, you know, make their money is crazy. But back then it was sort of, if you came from the gaming world, it was a very bad thing. We didn't want to go that far because we actually wanted people in the world to build things that had real value and transact them. But I sort of sometimes joke with Philip, the founder, that he was a computer science nerd. So it's like, hey, this is like, high, this is like high school. school, except the nerds are the most popular kids because they're the ones that drive the economy. They're the ones that can code the really cool objects. By the way, the real world's going this way.

The drama kid is the one that because they made the cool outfit and the cool set design, that's the thing that has value. So we thought about it as, of course, there's going to, the world is going to take on its sort of own complexion, own biases. But how can we make sure that you can be successful in second life without being quote unquote successful in real life. The other thing, there's this guy at the time he was at Stanford, Nikki Ye, I think was his name.

And he did a lot of research in these online worlds about what behaviors do people just sort of naturally take into these spaces? And so, for example, avatars and virtual worlds tend to stand in proximity to one another to talk in the same distance that people do. So they don't get too close because that would be weird. And they don't stand too far away because you wouldn't be able to hear each other. Now, both of those things make no sense in a virtual world.

We are typing so long as you're within some range of text, like you're going to see my, see what I'm saying. And avatars don't have bad breath. So the fact that I'm smashing my face against yours should have no impact. But because there's people behind these keyboards, it makes them very uncomfortable to violate the norms that we're used to in our person-to-person interaction. It's sort of, I guess it's the quintessential answer to when people build virtual homes, why do they have toilets? Fascinating. Right? It's like, you're used to it.

You're building a virtual home. You're conditioned. Like, I need a toilet. Like, your avatar doesn't need to do that. I mean, unless in the Sims and your program, that's a predified need. But in a world like Second Life, your avatar never needs to relieve itself, but the majority of virtual world have toilets. So before we leave this, and I'm asking this question a little bit out of order, because it probably is more related to your venture experience, but it's perfectly juxtaposed with Second Life. So it seems to me like the best business model of the last 30 years has been creating a frictionless platform for creative expression of some kind.

And you could argue that every social network kind of falls in that definition. A lot of the marketplace models do, something like Pinterest or whatever. Do you think that that's true that that remains prospectively, not just that that's what worked great for the last 20 years, but prospectively, do you think that there's still white space to create these platforms for creative expression? I think it's a hugely durable lane. And, you know, when I realized that I was maybe part of my father and part of my mother, so I had left brain and right brain, the three products I worked on before starting homebrew,

the venture fund were all within a virtuous cycle of technology is a bar that pushes down the barriers to creation. So it allows more people to be creative. It allows it to be done within communities for both audience and collaboration. And then I believe the strongest platforms also have monetization native to it. So native to it in the sense of YouTube, if you were a creator, we would help you monetize your content and take a percentage of it. Monetization for the creator, not for the company. For the creator. The company, when it's also the way the company can make its money, then your incentives are aligned. But I just believe so, and it doesn't, it can't be a world just about making money, right? So it's not like YouTube, you have to monetize your video. But I think

you end up with this native creative prosumer class that if you're not helping them make money, if you're not helping them pay their rent and quit their Starbucks job in order to spend time in your system, you are a, a disservice and B, are leaving a competitive flank open for you, right? So it's very interesting to see that like Snapchat, for example, was very resistant to paying its creators or creating an economy. Now they're moving that way. Instagram has also been hesitant there. Popular Instagrammers can make a lot of money, but Instagram is not involved in that. It's not the platform that makes happen. I think they eventually will. So I did second life. So all three of that virtual cycle within a virtual world. Then I went and worked on the first three

years of AdSense at Google. So the web and web publishing were the first two parts of that. But the medium and long tail of web publishers, again, this was sort of 2003, four or five. So we're talking bloggers, people building the first community sites, had no way of making money that wasn't pop-ups, pop unders, flashing banner ads, punch the monkey. And we gave them a contextual advertising unit that they could just put on their page and make money by creating content. And then for me, the perfect job was running product at YouTube, which again was sort of all three of those things. Making video without having to go to a Hollywood studio, distributing that video to a worldwide audience without first having to sell your soul to somebody in a suit, and then being able to make TV

dollars if you had TV-sized audiences. With those three criteria that you just laid out for these kind of maker platforms, we'll call them. Is that something that you actively pursue as a thesis at Homebrew? I'd say when I see it, I invest in it. Your ice perk up. But I'm not necessarily dependent upon it. So, for example, in our second fund, we were fortunate enough to invest in a company called Anchor based out of here in New York.

Anchor is a podcasting platform that makes it very easy using your phone and your iPad to create audio content. Now, traditional podcasts, you can make law and inform programming, but you can also make five, 10, 15 minute. It does things like if I wanted to, you know, we have to be sitting next to each other, but let's say I wanted to do a 15 minute interview program. I could use the Anchor app to call you and just record it through the app. Then I could do editing. I could do transitions, all this type of stuff.

Fast forward. Anchor now powers one in three podcasts on the iTunes store. Wow. So, and that's a lot of torso and long tail. And what they're starting to see, of course, you build these platforms. And what you're starting to see is at the beginning, it's a bunch of people just experimenting. you know, it's not quote unquote high quality content, so and so forth. But then you build the better tools. And what happens is the people who are just experimenting, some of them start to

rise up. And folks who just want to get involved, but don't want to go buy all the gear, don't want to go find a production studio, start doing it. So they've had people who've just started using the platform, no money being paid from Anchor. It's a free platform are, I think Ashley Graham, the plus size model that's friend with the Kardashians, Cameron Claskey, who was one of the Parkland students, co-founder of the March for Our Lives is starting a pot. I mean, so they just sort of start noticing all these people who actually have followings now using the platform. What comes next? Obviously helping these folks monetize too if they desire, right? So that's what completes the circle. So we participated in their seed round that Excel led and then Google Ventures led their round after

that. And so, yeah, I get really excited when I see somebody who is taking a type of media or a format that previously was expensive, was thought to be difficult to use, or could only be put in the hands of the true creatives, you know, that's special 1%, you know, somehow the other 99% the unwashed masses shouldn't be allowed to do it, where distribution was previously expensive or constrained by shelf space and where founders have the desire to create not just a creative model, but an economic platform to support their creatives. I will back up the truck and write a check to that. Before we spent a long time talking about the genesis of the kind of founding ethos around home brew and its activity sense. I'd love to hear major lessons learned while working at YouTube. So this is a

platform again that is totally fascinating to me. It seems to be kind of endlessly growing in terms of even today of how interesting it is and what you can find on there. You were there very early on, you know, running products. So talk about your experience there and major takeaways and how that influences how you think today. It was a fantastic opportunity. I feel so fortunate. that the founders invited me over from Google to join them after the acquisition. So YouTube had this amazing phase one. Phase one was their first 18 months of existence. They went from obviously an unknown site to 100 million playbacks a day, which at the time was huge. And about 18 months in, Google bought them for whatever it was, it's one and a half billion

dollars. I remember Eric Schmidt, the CEO of Google at the time, was doing these town halls within Google to help answer questions because it was a sizable acquisition at the time and YouTube had some controversy around it because of the question of copyright. And somebody got up and said, Eric, one and a half billion dollars is a lot of money. How do you know it was the right amount? And Eric, who's great, pause for a second and said, it absolutely wasn't the right amount. It was either way too high or way too low, and I'll tell you in 10 years. So the answer, of course, is way too low. So I was working on some video stuff, really sort of monetization and video infrastructure as part of the AdSense team. And it was clear the gravitational pull of all this stuff was moving

over YouTube. After three years, Google had grown a lot. I was thinking about maybe doing something else. And I tried to transfer my products over to YouTube and I ended up transferring myself. Chad and Steve, the founders asked me to come over. It was just 65 people at the point of acquisition. And they had a lot of work to do. Phase two, the phase that I was there for, I sort of say that I had three, I was charged with three responsibilities. The first was the durability of the consumer product. This thing was phosphorus. It was burning hot. But could we turn it into a furnace? Could it burn reliably? The second was the copyright issue. We believed we were in the legal right with DMCA and Safe Harbor and what we were doing. It would be very easy just to continue to give content owners

the ability to take down content. But could we actually create an economic incentive for them to leave up fan-created content? I sort of think of it as a micro-licensing engine. And I'll talk a little bit more about that. And the third was, could this huge consumer property could actually make money? Could we make billions of dollars, not just have billions of playbacks? I led product there for about five years and proudly was part of the team that helped solve all three of those. We went from 100 million playbacks a day to over four billion playbacks a day. We built these content ID tools that essentially using audio and video fingerprinting allowed us to help owners of copyrighted content, sports leagues, music label, so and so forth, instantly identify either algorithmically so they didn't

even have to look at it or if they wanted to have somebody check and make sure it was theirs, you know, they had an interface to do that. And then make a decision about that content that fan uploaded. Did they want to take it down, which was fully within the right to do so? Did they want to leave it up and just sort of track it, be like, hey, we just want to know where things are going popular because this helps us decide where, you know, that music artist should plan their tour. Or do we want to put an ad against it and split that money with you, not the creators, but the money with YouTube. So we essentially turned what could have been just a takedown engine into a leave-up engine.

And it allowed, Patrick, let me set the scene for you. You've got this awesome wedding video you made and you're playing a U-2 song in the background. Now, you have two options. You can either use your high-powered connections to try to get in touch with Bono and ask him how much it would cost for you to license that song for your video. Or you can essentially just upload that knowing that. It might get taken down. It might get taken down.

But in this, any other hosting service, it probably would. get taken down. But on YouTube, it essentially, maybe the worst thing that would happen would be at the end of your wedding video, an ad would pop up that Bono would get his, you know, tenths of a cent on, and we'd get our tenths of a cent on, and you'd get your video with the YouTube backing soundtrack. So it's one of the, I think, the most incredible business innovations, you know, sort of of the digital age and, you know, sort of proud to be part of the team to help build it. And then the third was, can we make money in general, right? Which was, for my AdSense experience, I knew that it wasn't just going to be about monetizing the licensed content, the music videos, the stuff that the CBSes

of the world were putting on the site. I had seen how quickly and durably a new class of websites, these community sites, these social networks, places where people gathered, where new voices were heard, where underserved audiences were gathered, how durable those communities were and how much money we were making off of them at AdSense. And so it made perfect sense to me that the YouTube native stars, the people who were creating content on YouTube that you never heard of, but building their following there, would be, if not the tip of the spear, one of the most important cohorts we had. And so we were able to grow a multi-billion dollar ad revenue business, not just by negotiating with the media companies, sports leagues, and record labels to bring

their content online, but by creating a system by which what we call torso and long tail, as opposed to the head of the tail content, could make tens of thousands, hundreds of thousands, millions of dollars a year by working to create original programming for YouTube. Often, you know, with no, no money up front. So we weren't, you know, it only became later that we understood how to license that stuff or even how we, we tried this thing called partner grants. It was very interesting. So I think one of the themes that we were talking about earlier is sort of like measurability

and what you do with that data. So let me give you an example of how that was important at YouTube. We saw a whole bunch of creators who would upload one video a week. That video would fairly, you know, maybe it's them talking in their basement to their followers, maybe it's a character they've created, maybe it's makeup tips. It's something. The production budget is low, but the fandom is high. And we could see fairly reliably when they released it, you know, it would get 50,000 views the first day, 25,000. Like, you could start to see these tails. And maybe if somebody was doing a good job and promoting it or you'd start to see the

first day would be 60,000 or 70,000, you could see their fandom growing. And we also knew that when we because of the nature of the content, let's say makeup tips, when we put fashion beauty ads against that they'd probably be getting a $5 CPM or something. So for every thousand playbacks, we'd get $5 from an advertiser and give them the majority of that, take a little bit for ourselves. And so you really start to see almost a predictable revenue curve coming off of any piece of content they uploaded. So we sort of asked ourselves, well, what would happen if they uploaded a second video a week? And why aren't they? And so you go and you talk to some of these creators and they say, well, I'm working at Starbucks to pay my rent. The YouTube money is great and it's been increasing,

but like I need this other job. Or I don't know, you know, it's a lot of work. If I could get another $100, $200 a week, I'd hire an editor. And then I'd totally make two videos because the time it takes me to make one and edit it, I can make two and somebody else can do the editing. All these sort of little barriers, which basically just came down to, I don't have $1,000 free available to forward invest in my business, essentially. So we started doing this thing called founder grants, excuse me, creator grants,

which essentially cash advanced them. At the time, I think there were sort of, you know, $2,500, $5,000 or $10,000 to put into their video creation strategy. And then we just kind of garnish that off of the rev share as they upload a new videos. We wouldn't take it all because they still needed the cash flow, but maybe instead of a whatever it was, you know, 70, 30 split, it was 80, 20 until you paid back your advance type of stuff. And so we took something that had traditionally, you know, the record industry had done, whatever, whatever, whatever, and we just did it at a data-driven global scale in a way. that allowed this huge creator class to start to see that you could go from this being a side hustle to a full-time job, a full-time job to a mini media company, a medium, you know, and then once you had that core video that a million people would watch, you could start

shouting out your friends and directing traffic to your other other videos or doing, if you were doing something on fashion, well, maybe you should be creating this brand under which you can also do some stuff on travel and lifestyle. And we start to see these mini media companies spring out of what was at the time, like 20-year-olds, 25-year-olds, 30-year-olds, who just started out uploading a video a week. It's amazing. So I'd love to transition now into Homebrew, the idea behind Homebrew. We are generalists. There are areas that we are evergreen in, financial services, FinTech, SaaS, marketplaces, commerce, health care. Then there's a bunch of places we get pulled into the future by founders, areas that we didn't have experience in before, but end up building out competencies in agriculture. culture, you know, autonomy, robotics, things like that. One of the things that we probably

over index on compared to our peers, I'd call it sort of founder market fit. We care a lot about how do you describe the problem you're solving and why do you want to spend 10 years of your life solving it? The 10 years of your life question is very interesting because a lot of founders sort of recoil at that question. I'm raising 12 to 18 months of capital. I'm raising, you know, two years of capital. What do you mean 10 years? It's like, no, but you're doing that because you're hoping to have the first phase of a business that it's going to take 10 to 12 years to actually build. The ones that sort of, you know, recoil too much of that question were probably not a good fit for. The ones that have a problem that they think will take 10 years to solve, have a thoughtful way of

what each phase, you know, they need to do to get there while still beginning sort of a bringing a beginner's mind or learning mind to that fit very well with us. They usually have some empathy for the problem they're solving, either because it's an industry they worked in, it's a family business. You know, my dad was a lawyer and I want to change the way law is practiced. Or sometimes it's a very personal issue. If it's in, you know, the healthcare space or things like that, things that they've encountered in their family. And as we move from an industrial economy to a technology economy and every industry is a software industry, I find that empathy and interest to be very important, especially in the, let's call it the predate the PCs part of the economy. So,

So agriculture, construction, logistics, all these things somehow worked before you had computers. I think for a while there was a little bit of a Silicon Valley bro culture that let people look at markets that were large and didn't have a high concentration of 22-year-old Stanford engineers and say, oh, that industry is stupid. Like, that's broken. I'm going to write an algorithm. I'm going to fix it. And in a lot of cases, you could almost feel the contempt for the customer, like dripping off of the keyboard. And I think ultimately a lot of those businesses failed because people don't want to spend time with their customers. They thought that they could solve it from afar.

And it doesn't mean that if you're working in these industries, it doesn't mean everyone's going to be happy with you. You're often cutting out a middleman or changing the way work has been done, giving people a better alternative. But you're doing it out of respect for the customer and respect for the industry. And so, for example, there's a company in our first fund called Building Connected in the construction space. They build a freemium SaaS product, a market network that allows commercial GCs who are doing these tens of million, hundreds of million dollars projects to manage the subcontractor bidding and qualification. It's a part of the process that is fundamental to every piece of construction. But when we invested in this company, beginning of 2014, if you had looked at the quote unquote Tam, the total addressable market for what they were trying to solve, you would have looked at and you would have said $100 million. which is not venture scale. Why was it $100 million? Well, because that's all that the industry was spending on software to solve that problem. Why? Because the only software available was terrible software. Sold at a $20,000 per seat license, which meant you only bought it for one person in your firm. So that $100 million represented 100% of spend, but 1% of the problem value. They knew this because the CEO had worked at one of the construction companies, had been in the seat that was doing the bid management.

and said, this is horrible. Grabbed a technical co-founder who he had gone to school with, so good relationship, but who had not worked in construction, convinced him that this was an idea. And then sent me an email cold. So over the course of a month or two, got to know this team, invested in them. Turns out they were right. They now have over 160,000 businesses on the platform, over $100 billion of new projects going through it each month.

They have a freemium product, so you start using it. and then they upsell you the advanced features. Revenue will grow more than 3x this year. If I had just sort of gone through all the venture tropes, oh, you need a warm intro or I don't want to read your email. I never would have opened their email. Oh, it has to, what's the Tam? If the Tam's not billions of dollars. And of course, these guys could have shown me a slide that says, construction is a seven trillion dollar industry. If we capture just one percent of that, but like, that's bullshit. Like, that doesn't tell you anything. That doesn't tell you anything about the problem size more than market size. So if a problem is large, if a problem is urgent and a problem is valuable. That's sort of like an enterprise notion more than a, you know, sort of like consumer social. But if it's large, urgent, and valuable, you can usually figure out a way to make money. And then in this case, the founder market fit was off the chart. We didn't think that there were going to be a whole lot of other entrepreneurs who woke up one morning and decided they wanted to spend their next 10 years working in the pre-construction value chain. And it'll turn out to be a great

investment. So you mentioned these ideas of my next question was going to be, what defines a good problem. So you've seen now a lot of problems or proposed problems. What are the great ones share in common? I think that's a valuable question, not just for founders, but for anyone working in any business capacity or really any capacity at all. Any other words that you would use to describe or ideas used to describe good problems. Maybe it's on the consumer side, not the enterprise side, but this notion of asking the right question seems to be one of the most valuable things we can do these days. Yeah. So I definitely know sort of the large, urgent, valuable sort of notion is something I use a lot. I'll also ask entrepreneurs about push demand versus pull demand.

So is the customer looking for you or do you have to look for them? That goes a lot into what's the cost of acquisition going to be. Does the customer know what they're looking for? Or do you have to educate them? I'll sometimes say, why now? So the future you're describing is clearly accurate. We have an agricultural robotics company in the second fund. It is clear that there's a lot of crops today that are, let's called them mechanically

assisted in their harvests like wheat thresher, so and so forth. There's a bunch of crops that, especially in produce, are still very manual. There will be some human augmentation. There will be some robotic, some mechanics that help make this harvesting more efficient. But why now? Which is the complement to why you. So being sort of to answer the questions, why you, why now are very important. I also think fundamentally in venture, which is different than a lot of other segments, you can't get too caught up in the listing all the things that could go wrong. You have to understand the structural reasons this company might fail. If they're creating new technology, how difficult is that technology to create?

How ready is the market? But if you can manage the risk on both of those, you quickly flip to the, but what happens if it works? Is the juice worth the squeeze or whatever? And then if the answer is yes, we ask ourselves a last question, which is do we want to wake up every morning and put sweat and reputation behind these people? And if the combination to the sort of problem market is yes and the people is yes, then so long as you can find the right risk reward entry point, you're making the investment.

There's a lot of different ways of doing it. I don't think that set of questions or that pathway is the only one that leads you to be a good venture investor. But it's the one that we've chosen and it's the one that I think is most consistent with our portfolio strategy, our brand, the type of founders that we are fortunate enough to work with. What about this idea of the shadow economy? I love shadow economies. So I would define shadow economy as economies that are tough to measure, either by, and sometimes by design, because the folks operating the shadow economy don't necessarily want to signal how large it is yet. So for example, I think a lot of, we're talking about earlier, a lot of these creative platforms end up with tremendous shadow

economies until the platform starts talking about how many dollars are actually going through the ecosystem. The YouTube economy was substantial before anybody ever realized that creators can make millions of dollars. Amazon doesn't release figures on their self-publishing business, but it's possible that their self-published books, you know, if you put them on the New York Times bestseller list, you know, might actually dominate that chart. So I love shadow economies because they have a certain degree of wild west to them, not in sort of gray area, morality, or legality sense, but they kind of grow in the shadows of where mainstream people are looking. And then, you know, once you start realizing how big they are, it's quote unquote, too late.

How does that play out, though, from an investment perspective? So I certainly get the characteristics of the shadow economies, but if you're thinking about putting dollars to work or allocating capital to something operating in these worlds, how does that work? I think, think that's where you have to. So there are many businesses we invest in that follow a traditional venture path. And what I mean by that is it's folks who come from the technology industry. Maybe they're working at large tech companies or other startups. Maybe they've studied at some of the name brand universities or they're accomplished in their fields and now looking to partner with technologists to build new businesses. And they get 10 introductions through their network or they

know you already and they sort of make the rounds and it becomes, you know, who has conviction and then of the people have conviction, who can win the deal. Like those are great. The shadow economy stuff and some of this other things tend to be the outskirts of that. It tends to be people who have built something that's already doing well in some sense. And now they are ready to usually self-funded or, you know, funded off of revenue. And now they are thinking about taking money. They're looking not just for a capital partner, but a thought partner. And so something about what we've done in our background or something we've written or something they've heard of talk about convinces them to reach out to us. I sort of say, you know, adventure is finding needles and haystacks

because there's just two of us, we don't have time to jump into the haystack, but we are very good at building magnets to pull the needles towards us. And so it's when you get that introduction from somebody who says, this is kind of weird, but I think you're going to like it. Or somebody sends you the email that says, hey, I watched that video of the talk you did, so on and I want to tell you about something I'm doing. That has led to great investments for us. It's now sort of a name-brand company, but I'd describe a media audience company called The Skim out here in New York, started by two women ex-NBC news producers who saw, were news junkies throughout their lives, and saw that all the content that they were creating at NBC wasn't watched by their peers,

because there was primarily video content that played at 630 in the evening. And they had a lot of incredibly successful, smart, but also very busy friends. who felt like they didn't know what was going on in the world. And so they quit their job. They were roommates. So they sat on their couch. They opened their laptops. They started a MailChimp account. They wrote up what's called the skim, a daily newsletter summary of what's gone on in the world. And they sent it out to everybody in their Gmail contact list and said, hey, this is what we're doing. If you want to receive this, we'd be honored. Otherwise, we won't bother you again. six, seven, eight months later, they had 75,000 mostly women reading it every day.

They hadn't raised venture money. They started to get introduced to VCs. And every VC said no. They said no because, this was 2013, email is dead as a format. You know, this was pre-newsletter. So which Carly and Danielle, the founders always thought was very funny since they were basically corresponding when they were receiving that information via email. We're passing because nobody uses email.

You know, they said via email. or hey, you guys should really focus on, this is great, we love you, but you should focus on getting a lot of Facebook shares. They hadn't even included share this with your network. There was no growth hacking going on. They were growing because women were forwarding it to their friends and saying, you should sign up for this. I remember my wife signing up for this probably in 24-20. Yeah. And so I think we did their first cohort analysis with them. It turned out that like if you stayed with it, you stayed with it. And such and I knew from our time again at YouTube and Twitter that like underserved audiences, gather quickly and stay durably with new sources of content, new

communities that they can be a part of. And millennial women are the most underserved, valuable audience, you know, in the world. Today, more than 7 million people read this game. It's 90% in college or college educated, 80% female. That's almost all US. So on any given day, they are bigger than, you know, they are our top five new site. And we were the last VC they pitched because they were going to stop pitching VCs. We were fortunate enough to invest. And like in some ways, even though that's not sort of the shadow economy, they weren't, from a dollar's perspective, they weren't monetizing yet. They didn't monetize for the first two years. They just wanted to focus on building the product. It was the shadow economy

in terms of if you think about attention. So attention and where is attention going is also a way to figure out where our dollar is going to go. So when people get into e-sports and that type of stuff, the leading indicator of that was eyeballs. Yeah, people are filling arenas, watching Twitch, the hours that they're spending on Reddit, you know, if you can durably figure out where attention is going next, you'll have entrepreneurs that will surely figure out where the dollars come from after that. So, you know, we invest sometimes in shadow economies of attention, believing then that the shadow economies of dollars will follow. So monetization becomes a key question here. And in the really, I encourage, I'll include it in the show notes. There's a great list of,

I guess, categories of things that you're interested in or thinking about that you and your partner are interested in. I got to update that. I try to focus on the ones that have your initials after them. It's three years old. Let me update that before you publish it. Yeah, please do. I mean, it's, I loved going through it. Sam Hinky recently published something like this as well, which I just loved, like ideas he's interested in and wants to work with people on. So one of those is podcast monetization. And this is a broader question about, the monetization of attention. It's again, maybe the primary business model of the last 20 years. I'm going to move beyond that after this question, but I am fascinated to hear what you think

because kind of the thread I'm observing across our conversation is you're a toolmaker. Like you have created incredibly valuable tools for others to then express themselves as a manager, as an investor. Like this is a really interesting thread. Typically, when you ask people about this, they say, well, the monetization of an audience is via ads selling them something. in some creative way or direct subscription costs. Those seem to be the two dominant models. One, what do you think about those two relatively? And two, are there other ways to think about this that are interesting?

If you look at where my income came from, it came from, you know, personally, it came from businesses that were ad-driven. I clearly have experienced the value that comes with ad models at scale. That being said, I have not invested in any businesses that talk about, well, we're just going to get to scale and then we're going to plug in. an IAB standard ad unit. That's the race to the bottom these days. If you're thinking ads, you're thinking sponsorship, brand, high-end premium stuff. The subscription model is great. I am a real believer that people want to pay, but what they want to pay for isn't always sort of the

purely transactional value. They're paying to be part of a community. They're paying to support a brand, a company that they believe in. Sometimes it feels like in media, I call it like fan club 2.0 more than subscription wall 2.0. That's a big opportunity. But we are seeing more and more kind of legs of the stool beyond those. Commerce being a big example. So the merch business grows pretty substantially. Some of those things are physical. Some of those things are digital. So in the esports world selling sort of the skins and, you know, sort of other things that have no real. They're just symbolic statements of value and tribe. But it turns out people are willing to pay for things that bolster their identity, let alone, you know, the idea of being able to sell

more traditional merch or white, gray label products or things like that. One of the most successful sort of YouTube business stories is a company called Ipsi that does a beauty box. So they send out sort of monthly kind of box of samples and full size and stuff like that. And the woman who started the company, the co-founder of it, was a beauty blogger on YouTube. So she was already making good money off of videos and integrated sponsorships and stuff. And then she launched, going to get the numbers, not exactly right, but let's say launched a 995 or 1495 box, much like a birch box or something like that.

This was a few years ago. And day one, her audience started converting because, A, they trusted her. So she wasn't just sort of lending her name to a third party that was going to throw a bunch of crap in a box and try to push it down the sales channel. She was involved in saying, like, this is stuff I want to use. This is the stuff I'm going to show people how to use in next week's video. And so all of a sudden, 10,000, 15,000, 20,000, 25,000 subscribers.

And before you know it, you have a few hundred million dollar top line revenue business that people aren't paying for the content, but they're paying for goods that, A, you know she's curated, B, she's showing you how to use, and C, now you're a part of this like-minded tribe. Those models are all very compelling to me. I think some of the businesses we invest in have no one silver bullet, but they have like legs of the stool, right? So Skim has multi-million dollar sort of sponsorship brand, you know, high-end brand integration. They have a multi-million dollar revenue stream for a subscription app. And they have a multi-million dollar sort of commerce affiliate revenue stream and, you know, a few other. Their three-legged stool will

eventually become a six-legged stool, eight-legged stool. But I think those things all become available to you at different levels of audience, at different. moments in time where you've built up the credibility to be able to then recommend things to your audience, that type of stuff. So I guess I'd say like if I was going to do the conventional wisdom, I would have a down arrow on ads, a slightly up to the right arrow on pure subscription and all the way up arrow on merch, commerce, events. There's a lot of opportunity to continue to sort of bring your tribe together or curate. for your tribe that I think people are very excited to be a part of as spending shifts from

what's on the shelves at Walmart to what's in your feed at Instagram. I'd love to talk about fintech a little bit. I noticed going through your portfolio companies that I noticed one I'm familiar with because one of my cousins, husbands worked there, a business called chime. So I'd love to hear your thoughts on how everything we've discussed so far relate to a very different part of the world, these fintech businesses trying to, a joke to the previous guest. I just had lunch with them the other day, Sabnit Singh, who said he would always see these pitches and venture about, like, you know, disrupting the insurance business or something. He goes, I don't think you get it. Like, the fact that it's been around 100 years might just mean it's a really, really good

business. So what is it about the financial stack that is interesting? And how do you think about identifying good founders and businesses that are trying to improve something in that world? We spent a good amount of time, I'm telling you about how much I love creativity and the work that I've done in virtual worlds and avatars. And then you look at our portfolio and you're like, wow, you've got a lot of money tied up in weird fintech. Like, yeah, well, you know, remember I told you, a left brain and right brain. So anytime that technology allows an industry to start doing a few different things, A, accumulate data, understand and analyze that data in different ways, share data in different ways, create a direct relationship with a consumer in a more

sort of scalable way than you could have before. We think there's opportunity. So our financial services, fintech investments actually span, you know, things like Chime, a direct-to-consumer debit card all the way to Plaid financial API. We just invested in a company called Hummingbird that does money laundering technology and software for fintech and financial services institutions. And so we have stuff that's, you know, plumbing and stuff that's doing close to 2 million cardholders, signing up another 175,000 a month and doing their first TV ads. In all cases, though, we think it's about large amounts of data that can be used in new ways to make better experiences or reduce costs to customers. So Chime was started by their CEO, Chris Britt, had been one of the sort of internal founders of Visa's prepaid card business, and then was at Green Dot.

So knew how money is made and transferred interchange and this and float and so and so forth. and his co-founder, Ryan King, was one of the technology executives at Plaxo. So if people remember, I think Comcast and Abime, but people remember sort of like one of the first viral address books. So he understood, you know, how do things spread amongst consumers, especially sort of utilities, right? So Plaxo was like the idea of, oh, if we all have a connected address book, when, you know, I update my email, your address book will be updated. I don't have to send you a, hey, we've moved, you know, so on and so forth.

So he understood how do utility value props, spread virally amongst consumers. And so they wanted to build a debit card that wouldn't try to make its fees off of the consumer. So no overdraft fees, no $5 a month if you're not direct deposit with us. But they felt like so long as they got people using it and spending, the economics would be pretty good. One of the brilliant things they did early on was their choice of test markets, Sacramento, California, and Kansas City. So I see so many companies that are building apps for a 27-year-old software engineer in San Francisco who's making $200,000 and doesn't know what to do with their cash. That's a wonderful problem to be in.

And I'm sure there's lots of good businesses being built around those folks. But that's not a relatable issue for tens of millions of Americans who are underserviced or underserviced or victimized by financial institutions. And so what Chime is built is sort of a easy-to-use financial product that then all of a sudden became really a platform. You can do things like automatic savings and other types of features that previously, you know, you might have to use a standalone startup, link your bank account and have them do the savings for you. Well, no, no, no. Your debit card can just do this for you. And eventually may even, you know, sort of turn into what people are calling kind of a challenger bank. So what do the next generation of banks look like?

it's not Citibank stapling on yet another kind of coolly designed card to focus on millennials, but it's rethinking what are the services and opportunities for the next generation of consumers. We have a whole bunch that actually, I think, sort of fall into that. Millennials do things differently, like Chai, Millennials Bank differently, Skim, millennials consume the news differently, you know, Winnie, Millennials Parent differently. And it's not just saying that, you know, 20-somethings, early 30-somethings do something differently. it's saying that these generations of consumers who grew up with different understanding technologies, different value systems are going to be

durably doing these things differently. We had the chance similar to invest early on in a company called True Accord, multiple time financial services fintech entrepreneur who wanted to do debt collection in what I'd call sort of a better, more win-win fashion. So as opposed to consumer debt sort of falling down this collection ladder, getting sold and resold for decreasing pennies on the dollar and into the hands of more and more abusive collectors. I had heard, you know, sort of an NPR story on this and like company based at a buffalo, you know, was sort of doing all these shady practices. He believed he could use

machine learning across all this data to understand what value proposition and what channel to use phone, email, Facebook, messenger to help retailers and sort of primary owners of that debt collect the debt before it starts going down the devaluing and sort of customer abuse. And he's sort of found it. It actually works. You know, he's doing a really, really nice sort of book of business for folks who before either had to sell the debt off very quickly or write it off. And when we invested, I remember thinking, wow, if this works, like fundamentally, he's going to be able to do arbitrage. He'll eventually just be able to buy this debt and collect it himself if he wants. That's not a path they've gone down.

But there's lots of ways, I think, within this sort of FinTech financial services to think about how do computers help us do things in a better fashion. And that's, I don't claim to sort of come down from the hills with the like two tablets of let me write a 12,000 word treatise on what the future of FinTech looks like. But at least in our first five, six years, we do seem to be pretty good at finding founders who have a very particular point of view on the way the world should work and some combination of attitude and aptitude, you know, to get there. And then, you know, we just kind of sign up to help them make smarter, faster decisions. A couple more questions on the major things that you've seen

change so far in the first three funds of doing this. I'm thinking here about dimensions like consumer behavior, maybe different interesting cohorts. You've mentioned kind of cohorts as a several times is something clearly that you think about, whether there are neglected cohorts. What is changing the most across the first three funds? I know it's not that long, right? It's not that many years, but stuff changes quickly. So rates of change always fascinate me. What are the major trends that you've observed? There's two that come to mind. The first is within sort of the SaaS software, you know, software as a service cloud software. I look in our first fund and a lot of the opportunities were about these industries that predate the PC getting the benefit of high quality

mobile SaaS software for the first time. So I mentioned Building Connected in the construction space. We have other things like that legal marketplaces, so and so forth. So it was essentially the digitization of workflows that hadn't yet been digitized. The wave that we're investing into right now is more traditional types of SaaS augmented with artificial intelligence machine learning. So we have a company called Outlier. That's essentially they call it sort of AI. for your B.I. So as opposed to just having systems that show you graphs, you plug all of those into outlier, and it tells you what you should be looking at or looking for. And because they're able to benchmark across all your data and eventually across all of their customers' data, they can also

tell you when what's going on is anomalous. So the early examples were, hey, you know, they worked with an e-commerce, global e-commerce retailer. Your click-through rates in Mexico are down 5% this week. That essentially means your revenue in Mexico next week will be down 7%, which means the probability of Mexico missing its quarterly target is going up by 12% unless you want to spend another few hundred dollars, whatever, on Mexico ads this week. So they do a lot of interesting work that before the first generation of companies, and there were lots of valuable companies that were created on sort of taking all these numbers and building you dashboards, but still leaving you with having to hire a bunch of business analysts to figure

out what questions to ask, not just how to answer those questions. So Outlier augments those smart humans by helping them figure out the questions that are the data showing and then allowing the business leads to make whatever decisions they want. So we have a bunch of companies that I sort of think of in that space. It's sort of workflows that were previously digitized now being made smarter or the quote-to-quote knowledge worker being made as smart as the computer. So it doesn't get rid of people. It helps people focus on the work that they should be doing. And we're seeing that in sales and we're seeing that in marketing. We're seeing that in a lot of these data-driven industries. And so I think, being an investor and being an investor in some

of these things in an evergreen fashion, you sort of decide what's the next cycle of innovation within this space, you try to invest into the sort of best of class companies in the first half of the innovation cycle. Then you try to stop investing in the back end of that innovation cycle and just sort of grow and harvest and then start saying, well, okay, what next? So, and that leads me to sort of the second thing that's changed or that we've observed. And this totally goes to, you know, you've interviewed a bunch of ECs and I'm sure some of them are folks who believe that they either can prognosticate or create the future versus luck, good fortune, and then the value of a good brand. We were lucky enough to be early investors, the first year of our first fund in a

company called Cruise, the autonomous car company that GM later bought. So, you know, one of those sort of 18 months later, you a billion dollar. Essentially GM spending 2% of their market cap to protect the other 98%. So people say, was that an area that you knew a lot about, how did you get involved? The reason we got involved was we ended up, forget how we got introduced to the founder, but he was part of Y Combinator. This was before Demo Day. And he sent us a password protected video of him driving down to Demo Day in an Audi that had been sort of, you know, aftermarket installed with the cruise software harbor. And there were substantial parts of his drive-down 101 from San Francisco to Mountain View where his hands weren't on the wheel and his feet

weren't on the pedals. How big a check can I write you? Investing thesis, when good videos show up with password protection, write the check. But so we're, you know, we were, I guess, fortunate enough to get introduced, smart enough to recognize it was an opportunity. And then from there, all of a sudden, people start thinking you're insightful. So you start getting to see all these other autonomy deals. Now, in the interim between the sort of time we made that investment and then the exit to GM, everyone got conviction around self-driving cars. At the time that Cruz had started, Google was doing their project. There were some other things there, but there wasn't sort of mass market conviction. And it was also thought that only large companies could do this. By the time they

exit, all of a sudden you have all these startups raising 30, 40, 50 million dollars for self-jerkers. having this or LIDAR or that. And like as a smaller focused fund, that's a less interesting place for us to be. So we have to sort of skate to the frontier, ask ourselves the question, well, what have we learned? Well, we've learned that small teams can punch way above their weight in this area. There's still a fixed number of engineers who really understand this stuff. And we've learned that there are areas that this is going to be transforming, that people are disbelievers. But when it flips to, if you're right, and it flips to believing, there's a lot of value there very quickly. So we started looking at areas that were sort of, we thought autonomy could

impact that people didn't yet believe in. And we found this company in San Diego called Shield. Shield makes essentially AI for the public sector. Founding team includes two brothers, one of whom was Army Ranger, Navy, was essentially in the military, came back from Tours of Duty in Middle East Afghanistan and said to his MIT brother, I saw my friends, colleagues, killed. I saw civilians killed when people went into areas with incomplete information. You're so smart. How can we get more information about these areas? And so the first product that they developed is a drone that can be deployed from a distance. It goes into interiors and it sends back a bunch of mapping video information so and so forth. This essentially gives you information about an area. At the time,

that was not an attractive area for venture for two reasons. One, public sector is a bad market. It's hard to sell into, it's very political, so and so forth. Because of their DNA, these folks had already figure that out, and were well on their way to the right pilots, the right this, the right that, their advisor turned down a job working for Mattis, all this type of stuff. It was also at the moment where drones are a bad investment, because you start to have all these consumer drone companies not panning out. Essentially, DJI was beating everybody. The short answer why we made the investment, besides being an amazing team, was U.S. government's not going to buy D.J.I. drones. I mean, this was clear even before 2016 election. You weren't going to start.

A Chinese company wasn't going to sell military grade. Second, the last great set of defense contractors were built around an inflection point in platform technology, namely rocket engines, jet engines, that type of stuff. If you believe that the next. great public sector contractor is going to be built on AI, autonomy, computer vision, then you ask yourself the question, well, and you know that that talent is scarce. You ask yourself the question, is that talent at Boeing, Northrop Grumman, Zavaki. They have very, very smart people. I'm sure they have some people like this.

But I think it's fair to say that not all of its talent is there. Where is a lot of this talent gathering? Uber, Tesla, Apple, Facebook, Google. Are those companies going to do government contracting? Our suspicion was no. And I think if the events of the last year have shown, for a lot of reasons, including what their employees want and the fact that they're international businesses, they are not going to do that type of contracting. And so if you get a sort of dedicated mission-driven team who is building really compelling life-saving technology for the public sector, the worst case scenario is they're a very valuable acquisition by, one of the multi-multi-billion dollar contractors.

The best case scenario is they are the next great contractor. That was the bet we made. The Andreessen Horowitz guys did the next round. So that's a little bit of validation there for you. And the least money they've ever had in their bank account always happens the day after they close their funding round. So because they're early into these revenue contracts, they seem to not be reliant upon venture subsidies. Now, they'll continue to raise money here and there, especially if they

want to aggressively forward invest. But in some weird way, a password protected video of a really smart young engineer driving his Audi to an accelerator demo day in 2013 leads to an investment in public sector autonomy and contracting. And then we had to ask ourselves, okay, so what next? So we've got something in the shipping and navigation operating system that's meant to eventually turn into autonomous freight shipping. We've got something in the trucking space that's taking a little bit of a different approach. They're focused on convoying as opposed to totally autonomous trucks. It's the idea that you have a driver in the first truck. And then you have a second and third truck behind that that are autonomous.

So trying to look for what I sometimes call one or two horse horse races versus 20 horse horse races. you have a small number of teams, maybe only one team trying something. They might be right. They might be wrong. If they're wrong, it's usually the technology can't be built or the market is too small or the market's not ready. But if they're right, they've got a unique head start on pioneering a new market. That seems like the right investments for us to make. A lot of that is like this daisy chain of learning. When you think about the prospective results for your various funds, combining your accumulated experience, but then also the environment in which we find ourselves, and the generic

opinion I hear is things are just way more expensive than they were before. More expensive typically means lower perspective returns. How do you think about that? So do you think that your accumulated experience, you guys are getting better, and therefore that cancels out any concerns around valuation? And what do you think about this idea that the best venture investors invest in maybe fund two, but not fund five? So we sort of start out by saying we're five funds, 20 years and then we shut the lights off. So we'll see what our arc looks like. We're just starting out of Fun 3. And we reserve the right to, you know, sort of change our mind. But that's the way we started. I'm sort of between two worlds on this. One is, picture a map of the eastern coast

of the continental United States. There's a dense map. There's a lot going on. Zoom down to like a very small nook, you know, and let's say the Chesapeake Bay. That's us. So there's all this stuff going on macro this and that soft bank vision fund so and so and so and so and so we have three funds each fund is under a hundred million dollars we make six state investments a year my numerator is always going to stay the same no matter what's going on in the world my denominator is always going to be large enough that if we're good pickers and getting into a handful of interesting companies with power law outcomes the fact that we had to pay one and a quarter million for our 14 percent versus 900,000 for our 14% isn't going to matter, given our strategy.

So that's one mind is I don't care about anything, macro, anything in the world around me. All I have to keep making sure is that I'm finding six to eight great investments a year and ownership trumps price. Then there's the other side, right, which is, wow, this year we're seeing another increase in sort of pricing, market clearing pricing for seed companies. Where is that? The West Coast deals are now starting at a lot of people saying, well, I'm raising three on eight, three on nine, three on 12, you know, type of stuff, which is very West Coast, cut everything back by a third. And a lot of people will get it. We're never the highest check. So when people are working with us, they're trading off some degree of I could take money from somebody else who I'm not as excited to work with. Or I could work with these guys who we've found a point that we each give up a little, you know, but I think my company is going to be more valuable long term because of that. And that's a good place for us to be, I think. With having to understand on this side of where this thing matters, I do have to understand the macro because it doesn't impact so much our initial investment, but it impacts the exit.

So it impacts this question about should we start looking for early partial liquidity and growth rounds of these companies? Does the soft bank check provide me the option to take money off the table? Does it look more like a private IPO? Now, it's very interesting in the soft bank case in particular. They have two, I mean, from an observer's standpoint, it seems like they have two types of checks. They have the established company, the Uber, where it has a good amount of secondary. And a lot of early investors start taking off the table. And hallelujah, they love soft bank.

And then it has the investments where they're buying a third to half of a company, wag, brandless, door dash. They are used, they are clearly sort of have this notion that this company or this category can produce a 10 billion. plus outcome. God only knows the amount of growth that that company is going to have to have in order to be meaningful. Does it become a, we're going to buy a bunch of other businesses that are in the same umbrella. We're going to smash it. I don't know what that outcome eventually looks like. I do know that if I'm a seat investor in any of those companies, but I have friends who are, if you're a seed invest in that company, you're all of a sudden, you're just along for the ride. You're surely not doing your pro rata in a 350 on 350 round. The board, in some case,

is gets cleared out to founders, maybe even a new CEO that they put in place in them. It looks like something very different than the company you invested in and you're, you know, you're hoping that you get some money back. So I sort of have a blog post in me somewhere that says like, you want soft bank to invest in your second quartile of companies, not your best. So I have to think about that stuff because some of my founders are going to have to think about that stuff. And they're going to both want my advice, but I'm also going to have to sort of understand what my interests are. I think amongst those two sides. I can't spend my life in any one of them. I can't spend my life thinking I'm just in this quiet little, quiet little nook of the Chesapeake Bay and nothing that's

going on macro should bother me. But I think it would be low ROI to spend too much of my time thinking macro and theoretically about the landscape in front of me, given that I'm 0.000, 0.002% of assets under management in this weird, a liquid space. So yeah, so I maybe it's a little bit of both and I end up thinking at a company by company basis what macro has in store for us. But I guess if I was going to predict anything, if we were going to, you know, what did you say? This was the 115th episode. So if we came back and I did your 200th episode, I bet I would tell you that we took money off the table in growth rounds in some of our most promising companies because it was a chance to put real money back into RLP's pockets that we had,

you had different types of investors who were really paying forward from a, valuation standpoint, and it was just the prudent thing to do independent of our forecasting for the success of that company. We've come a long way without really talking much about what I think is maybe the most valuable thing that you do, which is this very tight relationship with the founders themselves in the early stages of the business through B, you said. So what is the most common way that you find CEOs or founders need help? And what is the advice that you think is most valuable to them that maybe they're not getting in what can be, I'm sure, sometimes a very lonely existence. Fundamentally, what we're trying to do, we don't sit on these

org charts. They're not our companies. So what we're trying to do is help founders, especially CEOs, make smarter, faster decisions. That sometimes can be bringing them our expertise, connecting them with other types of data expertise, relationships. That's the trees, right? So that the micro level, what we're doing with them on a weekly or every other week basis is talking through the tactical things that we could do to help them move faster, them getting our advice, helping them close candidates, sourcing, recruiting. I think all these companies are fundamentally built on a tripod of product, distribution, and team. So we are deploying resource and expertise against all of those. That is valuable. But what's also valuable is, let's call it the forest, which is essentially just two

things. The things you believe to be true and what you needed to accomplish to get to that next phase, which is usually the next funding. Are we right and are we on track? The other thing is, how are you doing? Are you building something you're proud of? What do you want to talk about? Strangely enough, what's the internet meme? You know, find yourself somebody who can do both. You want A or B. Find yourself somebody you can do both. What we hear from our founders is getting both of those out of your venture investor from any stage, let alone early stage, is pretty rare. Because you either have tactical operators who know how to do one thing very well. And so they can give you advice on growth marketing or give you advice on this and give you the line of that.

but if you get outside of that, if they can't do it with their own hands, they don't know how to help you. Or you have people who know how to help you puff up your story and market you to the next round of VC's, but you don't have a real personal relationship. You're afraid to sort of you have to manage those investors. You're afraid to have real conversations. So your investors are only getting 50% of what's actually going on. And so I don't know. I mean, that's the combination for us.

I think the two most important phases for us, people sometimes say, oh, tell me about your favorite company. And for a while, I mean, I hate that question because, you know, once we make the investment, we're on board. It's like, what's your favorite child? It's like, I'm just trying to help this kid become the best version of itself. The only thing I had ownership of, you know, truly or decision in was conception. You know, now, now we're going with it. But I did find that the two most emotional phases for me that I really enjoy are the first 90 days after an investment, because that's when you're building the trust and context, even though I sort of talked earlier that like, oh, you know, we want to make sure that people know what it's like to work with us and it's not just pitching.

Like, there's still some pitching that's going on. They're trying to convince us. we're trying to convince them. First 90 days, okay, let me prove to you that I can deliver against what I said. Let me show that you can tell me whatever you want to tell me and we're going to have good conversations. The other part, though, is kind of midway between the series A and series B when things are working out. So because we technically step off the board at series B, there's this sort of point at which you start to realize like, oh, this is going really well. Awesome. Oh, my relationship with this founder is going to change. Sometimes they ask us to stay on, we'll do it. But for the most part, our throughput model relies on us stepping off the board.

It's also the point at which CEOs, especially first time CEOs, realize, oh, I might do this for a long time. This is working. And I can't do this by myself. So if I don't have a management team yet, wow, I got to build out a management team. I can't just put more stuff on my shoulders. And some of the things that were working before are now straining. I have to figure out the things like not everything that got me here is going to get us. The things that got me from five people to 50 people are going to have to change to get from 50 people to 500 people. And you also find these really interesting things. You know, everybody, sometimes folks will talk about the culture of their company, right? Oh, we value transparency. And you see that that was when it was six of you, five of whom had

worked together before. And it was all about spinning, you know, you're sitting in one room, spinning your chairs around and like sharing what's going on. Great. Then all of a sudden it becomes 50 people, 500 people. And the CEO has to figure out what transparency means at those levels. And you sort of have this litmus test for was it a, was it a tactic or was it a value? Because if it's a value, you have to figure out how to make transparency work at 5,500 people. If it was just a tactic, then you sort of put it aside. So it's a bunch of conversations, not just about the mechanics of, okay, where's the next funding coming from?

Let's look at the sales efficiency ratios. Let's look at your product roadmap. It's this moment and time of, wow, this is working. What of so far are you going to pull forward and what do you have to leave behind? And sometimes that includes people. My closing question for everybody is for the kindest. thing that anyone's ever done for you? I think the kindest thing that people can do is what I'd call bet on you early. So extend some of their own capacity, extend a willingness to sort of bring you to

their table or give up their seat at the table for you. And so one of the things that comes to mind for me is there's a fellow venture capitalist. He works at August capital, David Hornick. And he was a lawyer turned VC. And his earliest VC years were when I was at Linden Lab. And I remember he came in. He met us, ended up not investing us at the time, but we sort of maintained a little bit of a relationship. And he started this great kind of unconference event called the lobby about a dozen years ago. And it was the idea that the best conversations happen in the lobby of every conference, not in the meeting room. And it became this two-day, three-day sort of invite-only conference, and it's a bunch of user-generated sessions. So the programming is essentially created by the

users, and it's off-the-record conversations. And you go and they can span very professional things, but also very personal things. And he invited me, I've gone, well, I've paid for all 12 years, and I've attended 11. There was one year that was sort of a Google emergency. But he invited me to the first one. I was kind of just, you know, as a mid-level product manager, I don't think I'd even gone over to YouTube yet. So I was just doing some ads and stuff. And there was a bunch of bold-faced names to the left of me, bold-faced names to the right of me. And it allowed me to sort of get out of my kind of tunnel vision of just being within this big company, learn about a lot of people, talk about a lot of people. And, you know, a few years later, I sort of thanked him. I said,

you know, I didn't deserve, you know, to be at that first one. And he sort of like stopped me. And he said, like, you deserved to be at that first one. Just the world didn't know it yet. It's like, but I did. And I always think about that because, you know, I've ended up with like, through being in the right place at the right time. And as my comms lead at YouTube said, because you don't say stupid stuff and you have kind eyes, I'd get put on the road a lot. I'd try to explain the hard decisions we were making to reporters. So I ended up with a set of relationships which like turn into you know at least within not like celebrity but like within a small sliver of like the san francisco internet economy i think it also benefits from having a

name that's memorable like if my name was like adam smith i don't think people would remember me but i've ended up with a little bit of social media following a little bit of people who care of what i think about and so every time i can use that to put a spotlight on somebody who quality of character is greater than reputation so far, just because either they're young in their career or because they are comfortable spot. We call this a value investment. Yeah, yeah, value. Yeah.

So I love paying that forward. And I was pretty good at hiring people who were young in their career, but with a really high ceiling, a lot of them are now doing amazing things, running product at we work and, you know, starting companies and all this type of stuff. And I guess fundamentally, as a seed investor, that's kind of what I'm doing too. there's investments that other people want to be in and we're just fortunate enough to be chosen. And then there's investments where we've put the person in business because we're the one who took the risk. And I'm sure both over time will provide, you know, sort of equal returns. But I'd

sort of be lying if I didn't say that the ones where we've sort of put them in business will always have a special place, sort of not just cap table and LP letter, but like emotionally. Fantastic. Well, this has been really interesting. You've had obviously really unique career and set of experiences. So thanks for all the time sharing it with us. Oh, thanks. It's great. Hey, everyone. Patrick here again. To find more episodes of Investor Like the Best, go to investorfieldguide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month.

You can also follow me on Twitter at Patrick, underscore Oshag, OSHAG. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.