Investing Billions - E14: Jason Calacanis on How He Returned 4,000X ($25K into $100MM) on a Single Investment

Starting point is 00:00:00 If you look at venture as not a competition, you will fail. There are people who are super, I can tell you the Sequoia team is very competitive. Every time I go by that office, you know, people are talking about the transition. The last two or three times I was there, Doug Leone was in the office. You know, he's retired. I don't know if that's correct because I see him there. People like Bill Gurley's retired. Every time I see him, he's talking to startups, and he's on the boards of all these companies.

Starting point is 00:00:26 So Vinod Khosla is in his 70s, and he's in meetings all week long. Jason Calacanis, virtually every single person in tech knows you, but a lot of people don't know your full background. You've had a prolific career starting in 1996 as founder in several tech publications. You next sold weblogs for $25 million to AOL. And today you're doing many interesting projects. You have two of the top podcasts in the world,

Starting point is 00:00:59 including All In Podcasts, which is number one, and also This Week in Startups. And you're also founder and CEO of Launch, founder and CEO of Inside.com. You're a venture capitalist. It's an honor to have you on the show. Welcome to Limited Partner Podcast. Thank you for having me. I've been very much enjoying your pod. I'm raising a fund right now, so it's top of mind. And yeah, I started as a journalist here in New York, where I am now doing LP meetings. I'm also LP in 24 funds now, and I add one, maybe two managers a year. So I am like a super, super heavy. My entire wealth is in homes, venture capital, and the stocks that come out of the venture capital funds I'm in.

Starting point is 00:01:40 And that's it. A little bit in equities, but really most of the equities I have are the output of the venture funds I'm in. And that's it. A little bit in equities, but really, most of the equities I have are the output of the venture funds I'm in. It reminds me of the old saying, if you want to be a millionaire, diversify. If you want to be a billionaire, concentrate. So let's jump into that. You said you're an LP in 24 funds. Why did you decide to invest into these 24 funds? Yeah, well, you know, when I was an angel investor, before I was an angel investor, I just would help my friends raise money. And the way I got into it was I had, Sequoia had invested in one of my companies and introduced them to three founders. And I said, hey, you know, my friend's

Starting point is 00:02:17 doing an electric car. My other friend's doing a poker game. And my third friend's doing this micro blogging site. And they're, you know, Ruloff and was like yeah we know Elon we were involved in pay you know we worked together at PayPal I said oh yeah you got to see this thing he's doing it's crazy I showed them Twitter and I showed them Zynga poker and you know I talked to Ev Williams he's like hey you're you're friends with Fred Wilson in New York I said yeah you know his wife Joanne and I worked together on Silicon Valley Reporter and I worked briefly for Acme Ventures, their first venture capital firm, reading business plans for them in 1996. Fred's amazing, but he's in New York. And then Sequoia, Sequoia, that's the best in the world. I think Fred would tell you to go with Sequoia, but I kind of like Fred too. So for me, it's a jump ball. That's like picking between vanilla and

Starting point is 00:03:00 chocolate, like two great flavors. Maybe you get them both to invest. And Twitter famously went with Fred. And then after that, the team at Sequoia said, hey, you know, you're pretty good at this. Would you be our first scout? And I said, what's a scout? And they said, oh, we give you money, you invest it, and then we split it 50-50. And I said to Doug and Michael Moritz and Roloff,

Starting point is 00:03:24 hey, don't you guys get like two and 20? Isn't that how venture capital works? And they said, well, actually, we're Sequoia Capital. We get 30 and three and whatever. You know, they get a little more. I was like, wow, that's a pretty good deal. Why would you give me a better deal? And they said, well, it was not going to amount to much.

Starting point is 00:03:41 These are very small numbers, you know, 25, 50K into companies. And so then I proceeded to put like, I don't know, 600k to work and turn it into 120 million. And every time I gave to Sequoia, Doug Leone would just put his hand on his head and go, 50% carry. Oh my God, 50% carry. But they got me started in angel investing. And my point without being an LP was I didn't think of myself as an angel investor in those early days. I didn't particularly have a lot of capital. Having sold weblogs for $30 million, I had made my first 10. But I never really thought I need to put money into other people's companies.

Starting point is 00:04:17 I should just invest in myself, which I think is generally a good idea. I think that's what Elon does. He doesn't invest in other companies. He just goes all in on his own. And I was kind of cut from that same cloth. But then I realized, wow, I just have a lot of smart friends. I probably should invest in them. And when the opportunity to be LP in funds came around, I was like, you know, I just love this asset class.

Starting point is 00:04:38 My wife and I referred to it. I was like, wealth bombs. You put $100,000 or $250,000 or $500,000 into a fund, and then 7, 8, 9, 10, 11, 12 years later, boom, bombs start going off and money just goes flying everywhere, and you just try to catch it in a bag. I've been super lucky to be in some of the best funds in the world and then participate with new managers. Sofia Amorosa, who you probably know, nasty gal and girl boss, you know, she told me she was raising a fund. I gave her some advice and put a, you know, a small check in. So, I'll put

Starting point is 00:05:13 $25,000, $50,000, $100,000 into those emerging manager funds in the larger funds, which I have access to, you know, some of the top funds in the world who I have affiliation with, I'll be able to put in 100 to 500K. I just keep moving my money into venture. Like I said, I think it's the best asset class in the world. Money managers call me all the time and they say, hey, I want to manage your money. And I'm like, you know, respectfully, were you the third or fourth investor in Uber? Or did you invest in Robinhood or Calm when they were $5 million or $10 million companies? And no, can you get us into those? And I'm like, yeah, you could be LPs of my fund.

Starting point is 00:05:55 And I just think, like you said, concentrate better than if you want to build outside. Let's unpack that. So a couple of things to unpack there you said wealth bonds that's interesting i've never seen it it really is that that's you're talking about power law atomic type explosions um but you did gloss over something you're like 8 10 12 years talk about the journey the journey to your first carry check i think that's a philosophical point that a lot of people die on if you look at not the distribution of LPs, 99% of individuals cannot deal with the first eight to 10 years. Yeah. I mean, I wrote a book called Angel and

Starting point is 00:06:31 it talks about exactly the stomach you need to have for being a private market investor. When you're a public market investor, you're studying a decade of Netflix returns or Google returns or now Tesla returns. You start to see trends and patterns and predictability. And you just don't have that at the early stage. And then it's kind of rare for a public company to go to zero. I mean, you could lose 80% of your money, but you kind of watch that happen over six months typically or two or three quarters.

Starting point is 00:07:00 And you got plenty of time to jump off the train if you don't like the direction it's going and jump on another train, right? Just you run across the tracks. You don't like the direction it's going. And jump on another train, right? Just you run across the tracks. You know, you don't like what's happening at Disney. You run across the tracks. You put your money into Amazon or vice versa. Most people look at investing and they bring the public market mindset.

Starting point is 00:07:15 And that is very difficult. And then, of course, you have the J curve. So you find out your losers first and then you find out your winners last. And then you find out the extent of your winners. The last two or three double ups become the largest. You have to be able to weather that storm. And unless you've been in Silicon Valley and watched the wealth bombs go off, just like employees, you go to Canada or you hire engineers in India or in Brazil, like a lot of companies are doing, startups and large companies, the equity culture doesn't exist there. They don't understand stock

Starting point is 00:07:51 options, RSUs. Just give me money now. So I think unless you've been in Silicon Valley and you've watched one of your friends take down $10 million with stock options and then buy some great house and a ski house, it's an abstraction. It's visceral. Yeah, and it's very visceral, right? It's also very random. And so that's another thing people have to get used to is the randomness of this. Because, listen, you know, I was on stage with Vinod Khosla

Starting point is 00:08:17 at the All In Summit, and they were talking about how he had the, you know, one of the greatest investments of all time, 2,500x. And I just thought to myself, oh, yeah, you know, Uber was 4,000x for me. Now he put a lot more money to work, you know, I put a minuscule amount of money to work in that famous investment, but that's random. And it's random, but it's not random. It turns out I knew Travis when I was a journalist. He had spoken at one of my conferences when he had scour in 1997 or 98. And he was 24 and I was maybe 27 or 26. And then I knew him when he was doing Red Swoosh.

Starting point is 00:08:52 And we had been friends and done some jam sessions on that. So, you know, when I did invest in Uber, I had known him for 10 years. So there's random. And then somebody at a party, it was just a very charming story. You know, was very upset at the fact that I'd hit the Grand Slam of all time and just said something really deriding me in front of Travis and Travis, I'm gonna stop you right there. You don't know how helpful Jason's been to me on my first two companies. And what a tireless supporter he's been of that. All of that is how he earned the Uber investment. And he earned every penny of it, probably more.

Starting point is 00:09:27 And he just shut the person down. And, you know, it was very touching for me because if you look at my career, I've done 1,800 episodes of This Week in Startups. I do it four or five days a week, and then I do all in. And I really try to help founders. And, you know, I have a 19 person firm now. And we take it very seriously. When we put our names into those companies, we tell the founders,

Starting point is 00:09:50 which I learned from Ruloff at Sequoia, as long as you want to run this company, we're going to be with you. It doesn't matter if you run out of money, if you're on fumes, if you make, you know, a million dollars a year for 10 years in a row and doesn't grow. We quit when you quit. And when you quit, we invest in your next company. And when Raul sold Reportive to LinkedIn, he was one of four founders there. And I was writing angel checks. I had emailed info at Reportive and sent him, you know, whatever, 50K or something. And he's like, oh, I like your new podcast, This Week in Startups. I listened to all seven episodes like I don't know are you on your first 10 I think you're 13 perfect so yeah lucky number I love being well yeah actually so I said to Raul just promise me you know we made three times our money on on report of four times or whatever so it was it was insignificant I said just make me one promise when you

Starting point is 00:10:40 get tired of working at LinkedIn and you start your next company, please let me be the first call. And so on a Sunday, I get the beep on my phone. When I lived in San Francisco, I live in the Bay, south of the city now. It was him. And I just wrote back to him, what's the idea? And where are you? And he said, phone rings. I pick it up. He said, how do you know I have a new idea? I said, well, two and a half years ago, I told you when your sentence is over at LinkedIn, when you complete your burnout, you know, so where are you? And he said, I'm in Noe Valley or whatever. I said, okay, I'm getting bagels, come by the house. And he came over and he said, hit me with the new idea. He said, we're going to take on Gmail. I said, perfect. Great, big target. How are you going to beat Gmail?

Starting point is 00:11:26 Because it's free, you know. And they got like a billion users. He said, oh, we're going to make it faster. The person with the largest cloud in the world and unlimited resources, you're going to build a faster version of Gmail with a startup. He said, yeah. And he explained to me why and it made total sense. And then I said, okay, hit me with the business model.

Starting point is 00:11:43 He said, dollar a day. I said, okay, let me repeat back what you said to me. You're going to take on the largest cloud computing provider in the world with the largest number of email users, and you're going to beat them on speed. And then you're going to charge a dollar a day, $365 a year, for a product that is currently being experienced for free from countless providers. He said, absolutely. I said, I'm in. Because it's those kind of crazy ideas that actually are outliers. I think maybe put a half million dollars into that. It was one of

Starting point is 00:12:08 our biggest bets in the first fund, $10 million. And I think we own 2% of the company or something at this point. And I think HubSpot's founder, Dharmesh and I are the first two investors. And I think Dharmesh claims he's the first and I claim I'm the first, but we were, I think, his investors in report of. And so we like to stick with founders. I just had a founder come back for a second time, and we're giving them $250,000 or $500,000 for 5% of the company just on the idea. Very few people actually stick it out, and I think that's evident by Travis and Barul. A lot of people deride you or make fun of you for mentioning Uber so many times.

Starting point is 00:12:48 But you have a 4,000 times return. And when you look at power laws, you should be mentioning that 4,000 times more than most VCs talk about their investments. Well, Calm is another good one. You know, people don't know about Calm. Yeah, let's unpack. You have Robinhood, Thumbtack, Calm, Wealthfront. A lot of people, first of all, don't know that you invest in the seed rounds of of all the five of those or pre-seed yeah seed pre-seed so it's changed over time uh the first fund was 10 so i was a sequoia scout

Starting point is 00:13:14 i was the first syndicate on angel list and the first deal we ever did was calm and so we put 50k in from our firm as as we were apt to do, at a $5 million valuation. And then Naval had shared with me the interface for syndicates. And I didn't know that he was just showing it to me. He's like, hey, check this out. So I checked it out, and I just was investing in Calm, so I filled it out. I shared it on Twitter, and then I launched this deal. And he's like, oh, I was just showing you broke the embargo. I was like, do you want me to delete the tweet?

Starting point is 00:13:44 He's like, no, don't worry about it. And the first deal we did was Calm.com, which later Alex and Michael had told me they had met with like 40 venture capitalists. Everybody said no. And the syndicate came up with, I think, $328,000. So it had magnified my investment six and a half, the 50K I had put in. So we put $378,000 in, I believe, and at a $5 million valuation. They later told me they had a crisis of conscience.

Starting point is 00:14:13 Should they take my money? Because they were sure they were going to lose it. But they did it anyway. And the company became worth over a billion dollars. This episode is sponsored by Tactic. Every day, over 300 venture capital funds utilize Tactic for portfolio modeling in order to make up-to-the-minute portfolio construction decisions. Tactic is used for both internal decision-making as well as fundraising, allowing both emerging and established managers to share portfolio data with prospective limited partners. I'm a happy customer of tactic.io and I recommend tactic for both emerging and established managers.

Starting point is 00:14:52 Check them out at tactic.io. T A C T Y C dot IO. Uh, we sold twice in secondary, you know, and, you know, locked in over $10 million in gains for our LPs, which I always do. I still 10% two or three times on the way up. I did that with Uber. Anytime we have the opportunity, I try to lock in some wins.

Starting point is 00:15:12 I think it's still the greatest syndicate investment ever done. Maybe Cruise. I think there was a later stage of Cruise that might have also done well that somebody did. Probably higher IRR. It was like a one year turnaround. Yeah. I mean, that it did. Probably higher IRR. It was like a one-year turnaround. Yeah, I mean, it became, yeah, I think. That's our mutual friend, Zach Collius.

Starting point is 00:15:31 Yeah, Zach's amazing. So Zach, I have a lot of respect for. You know, working in the early stages, 10 times, 20 times more work. And so, you know, but I enjoy it. So I think as a fund manager, you have to do what you love. And how I pick fund managers is typically what's their unique deal flow.

Starting point is 00:15:48 And then second, I really look for how they make their selection process, how they make the bet. Because you have a funnel, like there's your deal flow, and then there's what you pick. And then I think the third piece is super important is how you support that company after the investment and then build your position in that company, which is kind of the same thing. It's two sides of the same coin. So those are the three things I focus on as a as a, as an LP, what's a good funnel? What's a bad funnel? What's a good selection process? What's a bad selection process? Yeah, that's a great question. I can actually show you, but I'll show you what I, you know, like I said, I'm raising this fund right now. And so let me show you how we do that. We're raising $100 million.

Starting point is 00:16:28 We're halfway there. And if you look at this funnel, we have two podcasts. You mentioned them earlier. This Week in Startups gets a half million listens a year, and All In gets more than that now, so well over 100 million listens a year. And what that's resulted in is our common application for funding now is on pace to do 20,000 applications a year. And what that's resulted in is our common application for funding now is on pace to do 20,000 applications a year. That's really second only to Y Combinator, which I think Gary Tan said they're doing 45,000 applications a year. We sort that down to about, in this fund, we'll be doing 5,000 meetings a year. These are 20-minute, what we call introductory meetings. I don't do those,

Starting point is 00:17:04 obviously. I have 19 full-time people and our third fund was 44 million. So you're probably asking like, how do you have 19 full-time people? The podcasting business has become very profitable for me and the conference businesses. So I take my profits from that and pay for, you know, two thirds of the team with that. You know, 44 million. What would you say your GP commit is this a hundred million dollar fund? How much of your personal capital are you investing in operations? It would probably be just over $1 million a year. So over four years, that would be

Starting point is 00:17:31 $4 million. And then I put in probably in this $100 million fund, I'll probably put a million. So probably 5% if you put both of those in. And then the previous funds, I was always doing the $10 million funds. Do you know the median GP commit in venture capital across the success of funds? Well, usually you have, yeah, usually you have five or six GPs. So let's say there's six GPs in a $200 million fund.

Starting point is 00:17:53 They probably put in a million each, something like that, 3%, 2%. The median is roughly 1.25, 1.5%. It's very low. And that makes sense. Yeah, as your funds get bigger, It's easier to do when your funds are smaller. So I think in the first and the second fund, when they were 10 million, I was going to put 500 in each. It'll be 5%, which isn't a big cash number. But they were oversubscribed. So I

Starting point is 00:18:17 cut myself back because friends wanted to put in 50 or 25 or 100K. So I wound up being, I think, 3% of each of those funds. So you're roughly four times the GP commit in your fund. One of the interesting things about GP commit is that it not only reveals to your LPs your confidence, it reveals to yourself your confidence. I've had deals, we've also co-syndicated some stuff with like Gil Pancino is one of my mentors who was early to the game. Yeah, Gil's great. He was the OG syndicate, you know? Yeah. And I kind of looked at it and I said, somebody asked me, you know, what are you putting in? I'm putting 10,000. They're like, why are you only putting 10,000? And then I'm like, why am I only putting 10,000? So I needed to do more diligence on it myself. So

Starting point is 00:18:54 it keeps, it not only keeps LPs aligned with you, it also keeps yourself aligned with you. Yeah, of course. Yeah. I mean, that was a big controversy in the beginning. And in fact, they went after Gil for this because Gil at the time didn't have a lot of cash. And so he was putting, I think, 5k in personally. And I was investing out of my funds. So I was putting in 25 and 50 people like, oh, you know, Gil's raising half a million or a million putting in 5k. So it's 100 to one, it's 200 to one. And I mentioned earlier, you know, my first was like six to $1 or something. I said, Listen, you have to underwrite this yourself, right? Get in the arena and underwrite this yourself.

Starting point is 00:19:30 Make your own decision and don't worry about his commit. But, you know, there was some truth to that. And I think after he made, you know, a bunch of money because he was so good at it, Gil put in larger amounts. But in the beginning, there were some people putting in, there were some people who wanted to syndicate deals while putting nothing in and you know, Naval really deserves a lot of credit And the AngelList team because they really looked at all these issues and addressed them over time like we made a rule in the early days of AngelList that you had to raise at least a year of runway because Many people raised two months of runway on AngelList and then you had this really bad experience for LPs where the companies would

Starting point is 00:20:07 go out of business two months later. I think they made some rules around the, the, the leverage basically, if you're putting in 5k, maybe you could do 50 times, but not 500 times the investment. Right.

Starting point is 00:20:17 So they were very thoughtful about that. And I took a lot of notes. I think Naval is, you know, one of the great innovators in venture capital and I owe him a great debt because he taught me about SPVs, and we've done 290 of them. I think we might have done more than anybody as an individual syndicate, as an individual. Somebody told me Gangel's has done a very large number of them because it's a group or something. Anyway, good friends of ours and partners of ours. In terms of on the syndicate model,

Starting point is 00:20:44 I did read your book. I read it again this weekend. I read in 2017 when there was much less content out there, and it was transformative to me. But one of the things that you talk about is writing small checks in a bunch of syndicates. Could you explain why you would do that to start out your LP career? Yeah, great idea as a GP to, or even even an LP to write small checks in companies that have products in market because your failure rate is going to be much lower. You could hit a distribution that gives you a greater chance of hitting a power loss. So if you had a $100,000 bankroll, I'd rather see you put $3,000 or maybe $2,000 into the lowest minimum bet size on a syndicate, put $60K to work, look at those 30

Starting point is 00:21:28 companies, pick the two best, and then put $20K into each of those in a future round. Then you would be concentrating on winners. When I asked everybody, what do you think the number is to hit a power law distribution and hit an outlier in Silicon Valley, the number I most frequently got was 30. Some people would say 20. Some people would say 50. So I think probably 30 is a pretty good number. I have some data for you. So I'm not sure if you listened to last week's episode, episode 12 with Jamie Rode from Veritas. So Veritas is a 10th generation family office. So they're doing something right. But in terms of their strategy, so what they found out

Starting point is 00:22:05 is a very interesting thing. So the average or the meat, sorry, the median return in venture capital is 10%. But the mean is 50% 50 IRR. So if you have invested in every single deal, including Uber, but also including all the crap, crap deals out there that we both know, you would have returned a 50% IRR. So the very, very ambitious goal in venture capital is actually to get the mean, which is completely different. As you said, every other asset class, if you go out and you say, pay me 20, 30% carry for delivering you the mean, people would think you're crazy. But in venture capital, you want to get the mean. So the next thing that they did was very interesting. They ran a Monte Carlo simulation, figuring out what would be the odds of

Starting point is 00:22:48 hitting the mean with a number of portfolios. And they got to this interesting number, roughly 2000 of 6000 credible deals every three years. So roughly a third of the market in order to get 95% confidence of hitting that mean, I want to jump into your portfolio strategy, portfolio allocation. So let's talk about that, because it very unique. So yeah, finishing this funnel here, because it's a perfect segue. And listen, I'm very unique. Those two podcasts, it's the number one startup podcast and now the number one business podcast in the world and one of the top podcasts in the world, just period. All In was number 14. I look at the episode rankings over the weekend and it was the 14th

Starting point is 00:23:25 most listened to episode that weekend. This is a unique moment in time for me. Before All In, I was getting 3,000 or 4,000 people applying for funding, and now that's gone 5x or something. And if I do a tweet now, because my following doubled with All In, if I do a tweet, I have 10 open meetings next week, we'll get 500 applicants for funding. So we have too much deal flow. I talked to my number one opportunity in our entire portfolio, and I said, would you take, you want to take 25K from JCal? Really sexy company. And they said, absolutely, we'll take whatever.

Starting point is 00:23:56 Can you explain why startups are so eager to take money from somebody like a Jason Calacanis? Well, thank you. It's very flattering. What founders are aware of is what Naval called social proof in the early days. And going to Y Combinator or getting Sequoia or, you know, to a lesser extent myself, but probably right behind those two, is probably, you know, one of the best social proof you can have as a founder. Because if I'm on the cap table or YC or Sequoia, you will get the next meeting.

Starting point is 00:24:26 And the next meeting is really important because the precursor to getting an investment is getting a meeting. And founders are well aware of this. And so there are a number of founders who have collected three of the four besties. There's one, Samdeep Madra, who has all four of us on his cap table. I think he's the only one. Cafe X has three of us, the robotic coffee machine. And so that just opens a lot of doors. And when I was a Sequo of us, the robotic coffee machine. And so that just opens a lot of doors. And when I was a Sequoia founder, the first thing that happens after you close your Series A with Sequoia is like DAG Ventures or another firm. There were all these firms that specialized in watching the deal flow of the top two firms at the time, Kleiner and Sequoia. This is in the

Starting point is 00:25:00 2000s and I think in the 90s as well. And then being the preemptive series B. I believe deal flow is destiny. It's what I tell my team. And if you have incredible deal flow, then the companies you select and your criteria becomes more discerning. And so I have a database and I've built software that processes these 20,000 applications every year. With this fund, it'll probably double. So by the end of it, we'll have the same deal flow as say Y Combinator. And it really doesn't matter because Y Combinator, I think Gary said there, if they have 45,000 applications, which rings true to me, 1% of that would be 450. And I think they do 200 startups a class now twice a year. So

Starting point is 00:25:42 they're accepting exactly 1%. We're doing 150 investments a year. So we're also 1%-ish. And so we have an army of researchers and analysts sorting through this deal flow. So if you have deal flow and people want you to be on their cap table, then the only thing left really as a venture capitalist, and it's very hard to get deal flow. Every single LP discussion I have, you know, I asked them how they get their deals and, you know, then you get a big pause and yeah, you know, we're, we're new fund. We're first time fund. I'm meeting with people. I have a network and you know, it's like, okay, I can look at your LinkedIn contacts or something, but you have to hustle in the early days. And then at a certain point, you go from being a hunter to a sorter.

Starting point is 00:26:29 And so we qualify sort all these, and we have access, as you said, if there's 6,000 deals that are credible a year, whatever it is. I think probably, I would say YC, Sequoia, and Launch probably have some significant percentage of that data now. And so let's say we have some significant percentage of that. now. And so let's say we have some significant percentage of that, now our job is to sort. And the way we sort is I have 12 criteria at the early stage that I've identified as indicative of future success.

Starting point is 00:26:57 I've trained these researchers and analysts. So the researchers basically sort them. The analyst gets on the phone call with them. The researchers might join them on that call. It's gets on the phone call with them. The researchers might join them on that call. It's a 20-minute introductory call. We do, like I said, 3,000 of these a year. And then an associate or a principal or a managing director will then take the second call. If they hit about three of those criteria of why we should invest, then we have a 25 criteria of why we shouldn't invest. And those are red or pink flags, as we call them

Starting point is 00:27:26 internal. Their accounting is a nightmare. They got cap table problems. They're in a very, they've pivoted five times. We call that meandering or lost in the wilderness. So we've identified characteristics that we think could equal failure, like a solo founder, or they're outsourcing their technology development. And then we have criteria we really like like their business model is high gross margin their builder founders and so what happens is I'll be on the road like I was doing a speaking gig in Tokyo and somebody sent me this incredible company Stone Algo and it had five of the criteria anything over three we want to take that second meeting and so Stone Algo is Kayak for buying diamonds.

Starting point is 00:28:07 It should exist in the world. It had one reason we shouldn't invest, which is their business model was not in our core five. They were cost per click as opposed to a marketplace model, which we're fixing with them. And we were able to find this company before other investors know about it, buy five or 10 percent of it. And so that's our mandate.

Starting point is 00:28:22 We want to be the first investor in the company, and then we want to be the first institutional type investor to hit 10% ownership because ownership matters. When I was investing in Robinhood and Uber, I owned under 1%. But then when Calm came along, we owned 5%, Superhuman 2%. And then when we had Grin, a breakout startup, we owned 16% of it. That became a unicorn. When we had Density, a breakout startup that became a unicorn we owned I think 6% and that's when you really start to build the large positions that matter and so the criteria of how we move people through the funnel is very important then we have a programs team and then we have direct investing so unlike say Y Combinator, we have a direct investment team. So we will make those 500K checks, 250K checks into startups, you know, like Raoul's with Superhuman or Robinhood or, you know, those kind of companies we were able to invest in.

Starting point is 00:29:18 If they don't want to come to the accelerator, the number one criticism of our model by LPs is, oh, it's spray and pray. And so Ron Conway was known as the spray and pray investor, making tons and tons of investments. And people didn't like that strategy, even though he obviously is a legendary investor with great returns. What we decided to do hearing that is to attempt to do follow-on investing. And so because people want us on their cap table because of social proof, we don't have to fight for a spot. And at the seed stage, as you know, you're passing the hat anyway. It's only at series A, in my experience, that people start getting sharp elbowed and certainly series B where they just want the whole round. So, you know, Andreessen Horowitz is going to come in, give a term sheet. It's us. Everybody has to give up

Starting point is 00:30:01 their pro rata who came before us. We're Andreessen Horowitz. I'm Mark Andreessen. I'm the goat, whatever. You know, that kind of sharp elbow nonsense happens later. I'm a big fan of many hands make for light work and being collaborative. And so we are very happy when our companies go to Y Combinator or, you know, if they go to Sequoia Arc or the new Neo Accelerator. And so then we do follow on. And so I'll show you just a peek under the hood here. And while you're doing that, one thing I wanted to highlight that's really nuanced and very interesting is that you do a small check and then you get an option for 10%. So essentially what you're doing is you're arbing the social proof that you're giving to the startup and you're getting future allocation. One of the dirty secrets of VC is, especially at the

Starting point is 00:30:46 pre-seed, the best way to diligence a company is to be an existing investor. So you get so much more information when you're in there. So you're able to arb that and you're able to really take advantage and pile into the winners, but not at the series A's, not series B. You're not saying, hey, I invested at the series D, look at how great I am. I'm the best investor in the world. You're investing at the seed round. So you still have a lot of the alpha there. So if you look at this Google sheet, we get asked about portfolio construction. I like sharing information because it, and people think I'm stupid for sharing

Starting point is 00:31:15 information, you know, like the, the angel book, people are like, well, you gave away all your secrets. Well, you know, we're in a dynamic industry and it's a collaborative industry. So I really like to share what we're doing and then have people tell me, you know, oh, you're an idiot. Here's what's wrong with it. So if you look at the sheet, you'll see, you know, this hundred million dollar fund, which we're about halfway done raising. And it has 325K investments for 7.5 million. The accelerator will do 150 of those at 100K for 15 million. We'll do 50 directs at 500K each for 25 million. That'll be the first half of the fund.

Starting point is 00:31:47 And then the second half of the fund is follow-on for those. And a lot of people will go to two of those three. So you'll be a founding university company, and we'll direct invest in you. You'll be an accelerator company, and we'll also direct invest in you. So there'll be about 400 names here in this portfolio. And we use software to monitor them. And then we will put the bulk of the dollars into the top 40 and it's a competition that inside our portfolio and as you very very very astutely found out over

Starting point is 00:32:15 pointed out you you know what you've invested in after you've given them the money that's something that people have been saying for a long time here in Silicon Valley and so when we give them that 25 or 100K check, we get to get monthly updates from them, and we have the right to invest in the next two rounds. So when we do those deals, we ask to invest in the next two rounds, and we have that as a side letter. And actually, Y Combinator copied that. And so we copied a lot from Y Combinator, like multiple founders go further than solo

Starting point is 00:32:40 founders, having a developer on the team writing the code as a founder goes further. So, you know, I just absolutely think Paul Graham has probably had the most innovative impact on the startup ecosystem than anybody. And Naval would be a close number two. I think those two individuals have done the most innovative things. And I took a lot of notes from them. I think they're amazing. I don't know why people are so contentious in the industry to give them their flowers. Sounds like you guys, you and the YC guys are friends again. I think,'re amazing. I don't know why people are so contentious in the industry to give them their flowers. Sounds like you and the YC guys are friends again. I think Y Combinator always likes to be perceived as the underdog, even though they're not the underdog. Obviously, they're the 800-pound gorilla in all this. They're the establishment.

Starting point is 00:33:19 But I think it's fun to be the outsider underdog. And I love Gary Tan. I've always been a huge fan of his. He was one of the first guests on This Week in Startups. I think Altman's amazing. And I think Paul Graham is just extraordinary. So nothing but great things to say about them. Our companies go to YC.

Starting point is 00:33:34 We invest in YC companies. People think that we compete with them on the accelerator, but I think it's only happened three or four times in hundreds of companies that somebody said, should we go to Y Combinator or your accelerator? And I tell them, do both. Get both stamps in your passport. I mean, literally, if you could go to both and dilute,

Starting point is 00:33:51 we take 6%, they take 7%. If you diluted 13% and had both of us, you would easily make up for that in future rounds. So anyway, that's the portfolio construction. So the real key to this is having software and a very large team. The management fees will not carry the team. It's just too much.

Starting point is 00:34:09 But I'm investing my own money in this, and I'm playing for the carry. And that's worked out pretty well for me in my career so far. The software is the key. We build our own custom software to manage these inbounds, to move them through the process. And then we record all the calls, transcribe them, those introductory calls, and then we summarize them with AI. And then we have those criteria I talked about, the 12 reasons to invest, the 25 reasons to not invest. So in the coming years, we will be able to look at our database and say, hey, we passed on this company. Sequoia did invest in Series A. Pull up the call. Let's pull up the reasons we said we wouldn't invest. And let's look at that dialogue and be self-critical. And really, the sins in venture

Starting point is 00:34:51 are the sins of omission, not commission. I'm very focused on getting better in selection and training an army of people to be really good at that. And so that's why I don't hire GPs from the venture pool, because they're lazy and entitled. And, you know, you just see it in your peers, I'm sure. Taking four or five months off, they disappear for a month in December. You know, they disappear for a month or two in the summer. They leave the arena for four months a year. So I just hire kids out of school, you know, and I just train them on my methodology, which is to work 50, 60 hours a week and be a service company.

Starting point is 00:35:28 We're a service financial services company. We are like the Amman Hotel. If you work for me, you have to do a fixed 50 or solid 60 a week because that's what I work. And if you don't want to work 50, 60 hours a week, you're not going to last. My team will fire you immediately. I think we just triggered all of our audience between 16 and 25. We should have had a trigger warning. No, we triggered 60% and the other 40% are right now applying saying, I want to work for this lunatic. If you want to

Starting point is 00:35:56 get rich, come with me. If you want to learn how to be a world-class investor, come with me. If you want to go to Coachella both weekends, go work at another venture firm, you know, period, full stop. The worst thing you could do first five years of your career is seek work-life balance. It just sets you up for failure the rest of your career. I think those first five years are really critical. If you want to be a mid, go for it. It is a competition. And if you look at venture as not a competition, you will fail. There are people who are super, I can tell you the Sequoia team is very competitive. Every time I go by that office, you know, people are talking about the transition.

Starting point is 00:36:35 The last two or three times I was there, Doug Leone was in the office. You know, he's retired. I don't know if that's correct because I see him there. People like Bill Gurley's retired. Every time I see him, he's talking to startups, and he's on the boards of all these companies. So Vinod Khosla is in his 70s, and he's in meetings all week long. Yeah, Vinod's never going to leave, in my opinion. In terms of venture capital, I think everybody talks about the world as zero-sum and non-zero-sum, but that's an oversimplification. What part of venture capital is zero sum and which part is non zero sum? The early stage is not zero sum. There's plenty of room on the cap table when the company's, you know, in an accelerator or doing their seed round.

Starting point is 00:37:15 It's very, very, very rare that a seed round gets taken by one person. And the founders have, you know, a lot of authority now. And they will choose ever since Larry and Sergey said, you know, Google and Kleiner are going to split the round. And you're not going to dictate Sequoia or Kleiner. We're telling you how we're going to do this. That was the starter's pistol. It accelerated with Sean Parker's mentorship of Zuckerberg and, you know, explaining to him how to control the investors. And then Paul Graham, of course, had a big impact on that. In fact, Y Combinator arguably, you know, created an adversarial stance with investors and really aggressive tactics of, you know, the convertible notes going up a million dollars a week. And so every week you

Starting point is 00:38:03 take to due diligence, it's costing you money, you're getting a lower percentage of shares. I think that was peak YC aggressiveness. Sam was like, please don't do that. So but you know, listen, it's great. They're lunatics. And they push people with this demo day to, you know, not do diligence and, you know, handshake protocol and everything's high pressure. You know, I think it's fine. I mean, if you can get away with it, I don't think it's particularly healthy, some of those things. So I advise people to not feel pressure. And it is zero sum when you get to the series B and C, the founders of those companies, when they do their series B are like, what's the highest valuation, the best deal for me, how much can

Starting point is 00:38:39 I sell in secondary? And what's the least amount of rights I can give. So, you know, late stage funds, I think will continue to make quicker money on large checks, but with lower IRR perhaps. So I think it's a fine place to exist, but you, it's a different asset class. The late stage is a different asset class. The early stage is an asset class to your point, you know, what JP Morgan's Goldman Sachs, they don't have access to the seed round of Uber to seed round of Robin Hood, and they will never will for all the reasons we articulated. I think it's also important to note over 40 years, the mean return has been 50% IRR. It's insane. The reason very few people are aware of that is because nobody gets nobody gets the winners. Very few people know that get the winners and the ones that get the winners don't want to talk about it. Fair point. It's a good segue to thanking you for jumping on the Limited

Starting point is 00:39:31 Partner Podcast. I think a lot of people don't realize how hard of a worker you are, how much thought you've put into your portfolio construction. They just see you talking up your five unicorns, a deck of unicorns. But I think those are very hard fought and hard won. So I really appreciate you, Jason. Thank you for jumping on the podcast. I lean into that a little bit, by the way. It's a little bit of a joke. I do lean into it. But the thing I learned as well is you're only as good as your last investment, and I think, or your last fund. And so I focus relentlessly on that. I'm really focused on this next batch of companies and how to help them. So you're only as good as your last fund. And so I focus relentlessly on that, you know, I'm really focused on this next batch of companies and how to help them. So you're only as good as your last investment.

Starting point is 00:40:10 Thanks for listening to the Limited Partner Podcast. If you like this conversation, please like, subscribe and review on YouTube, Spotify or Apple. Thank you for your support.

Investing Billions - E14: Jason Calacanis on How He Returned 4,000X ($25K into $100MM) on a Single Investment

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