Investing Billions - E157 DA Wallach: Spotting Genius in Elon & Zuck's Early Days

Episode Date: April 22, 2025

D.A. Wallach’s journey is one of the most unconventional paths in venture capital. He went from fronting a rock band discovered by Kanye West and Pharrell, to investing in Spotify, SpaceX, and founding a biotech VC firm reshaping human medicine. In this episode, we dive into his evolution—from artist to investor—and what he’s learned from being in the room with Mark Zuckerberg, Elon Musk, and Ron Burkle. D.A. shares why great investing is an act of taste, how he earned his first big break with Ron Burkle at Inevitable Ventures, and why he believes biotech is the most exciting place to invest over the next decade. We also discuss how aesthetic intuition applies to investing, how to think in second and third order effects, and what it really means to be contrarian when contrarianism has gone mainstream.

He was early to recognize that technology was going to have a major impact. And I think he at the time knew Demis Asabas quite well, who had been the founder of DeepMind. And that's a company that Google ultimately acquired. Demis now runs AI group within Google. And Elon kind of opened my eyes to the advances that were starting to take place in that area. I think at the time, the major innovations had really been these things Demis had put together that enabled an AI to play certain human computer games, like video games.

And Demis came out of a game development background, so he really understood that world. And I think to anyone who understood those games and how challenging they might be for a human player, it was really impressive that the AIs were able to start doing things successfully in that space. So it was kind of, you know, the proof of concept that years before had been reached with chess being demonstrated in much more complex games. And Elon rightly appreciated that was just the beginning. So Facebook went viral in Harvard within a day. You emailed him or how did you get in contact with Mark?

Tell me about the story about how you invested in SpaceX a decade ago. Oh my gosh. Well, I got to know Elon socially here in L.A. He lived here at the time. And that was before SpaceX and Tesla were household names. So I think Tesla at that time just had the roadster out and SpaceX had been doing a bunch of launches, but they hadn't yet done their first reusable proof of concept, which was a major turning point for the company. So I was really excited to meet Elon.

I met him at a dinner through friends and obviously was just super impressed by the kind of intrepid stuff he was doing and asked him if I could invest. So he facilitated that and yeah, it was, I think nine or 10 years ago and been a great investment. So, so this was around 2014, 2015 and you guys were talking about AI. Tell me about his views on AI a decade ago. Well, no surprise. I mean, he was a very, very, very, very, very, very, very, very, So, so this was around 2014 and 15 and you guys were talking about AI. Tell me about his views on AI. A decade ago.

Well, no surprise. I mean, he was early to recognize that that technology was going to have a major impact. And I think he at the time knew Demis Hesabes quite well, who had been the founder of deep mind. And that's a company that Google ultimately acquired. Demis now runs, uh an AI group within Google. Elon kind of opened my eyes to the advances that were starting to take place in that area. I think at the time, the major innovations had really been these things Demis had put together that enabled an AI to play certain human computer games, like video games.

And Demis came out of a game development background. So he really understood that world. And I think to anyone who understood those games and how challenging they might be for a human player, it was really impressive that the AIs were able to start doing things successfully in that space. So it was kind of, you know, the the proof of concept that years before had been reached with chess being demonstrated in much more complex games. And Elon rightly appreciated that was just the beginning. And I think at

that point had started to talk to Max Tegmark, who's at MIT and other thinkers who were influential in sort of calling out the significance that AI was likely to have in the years ahead. Elon was already known in Silicon Valley. He had sold zip two. He had started PayPal with Peter Thiel through a merger is, but, but he wasn't anywhere close to how prevalent he was today. What did you see in Elon that made you believe that he could build a rocket company? He had already built a rocket company and it was already launching rockets.

So that alone was already amazing. I think the big uncertainty at that moment was just whether he would be able to reuse the rockets. And as he's always talked about, you know, air travel would be completely unaffordable if you had to destroy the plane every time you flew it. So that key inflection point was demonstrating that you could send a rocket up, bring it back down and then reuse the same rocket.

And I didn't have any kind of special insight on that. I just thought he was amazing and what he had already done was super impressive. And that was the same time that you were, that was about the same time that you were discovered as a recording artist. Tell me about the story of how you were discovered and how you became a recording artist. Yeah, I had been a rock musician in college and I had started my band, which was called

Chester French when I was a freshman. And it basically throughout my undergraduate years became our goal to do this as a full-time profession. And so we got very lucky right before we finished school when Kanye West and Pharrell, two artists who we had loved, um, discovered our music and then offered us record deals. And so I came out to LA just subsequent to that. We, we basically signed our deal right as we were graduating and

moved immediately to LA. And it was, um, it was only a few years later that I started doing investing and years later that I met Elon and those guys. This was 2007 we graduated. So I was for five or six years just doing music full-time and it wasn't until I invested in Spotify that I started to devote more and more

of my energy to business. So you started to collaborate with Spotify and this led to a business career. Tell me about that. It was a totally unexpected series of events for me. Right when we were graduating and coming out to LA, I had facilitated a meeting at Facebook because I knew Mark Zuckerberg from college. And then Jimmy Iovine was the guy who was running Interscope, which was our record label. And Jimmy since then has done really impressive things. He sold Beats headphones to Apple for, I think, $3 billion. But at the time he was still just one of the three or four most powerful record execs.

And so I thought getting him and Mark together had the potential to lead to really cool things. And I went to that meeting with the two of them to introduce them. And at that meeting, a friend of mine named Dave Morin, who worked for Mark at the time, told me about Spotify. And in fact, I think I had heard of it, but Dave said, I can get you an account. And that was a really special privilege at the time because the company was only in Sweden and a couple of other small European markets. And so if you were in the US, you couldn't legally get a Spotify account because the music wasn't yet licensed for usage by US residents. And so Dave

got me the Spotify account and I just became obsessed with it. And then he introduced me to Daniel Eck and a guy named Shaq who was early and instrumental in the company's growth. And through them I had this amazing opportunity both to invest and then to become the artist in residence of the company, which was a role we invented, but basically positioned me as the ombudsman between the company and all of the artists who were out there and whose support we really needed in order to get this thing going. You seem to have this sphere of influence of these amazing people, whether it's Mark Zuckerberg,

Elon Musk, Dave Marin, who started PATH. We're also going to talk, Kanye West, of course. We'll also talk about Ron Burkle later. Tell me about how you find yourself in these rooms and how do you network and how do you build relationships with these high caliber people? My philosophy is just that I always want to be the dumbest guy in the room and I always want to be inspired by everyone around me. And, you know, I didn't get to know Zuckerberg when he was Zuckerberg. I mean, we met when we were both college students. And at that time, he had just launched Facebook. There were a couple thousand users. I think I'm like user 2020 or something. And so it wasn't obvious that that was going gonna become what it became

But it was clear that he was impressive and you know to have something come out like that and catch Wildfire in 24 hours on your campus, you know, my reaction is wow. I want to know the guy so I guess I've just always Followed that mindset which is I want to know people whose work I think is incredible and I want to learn from them and so whenever I've had this opportunity to work with or be around people who I respect in that way I've always taken it and then you know sometimes that leads to a real relationship and other times you have no chemistry with someone or you find out that they're actually disappointing and then you don't want to cultivate it, but

I think my attitude has always been I want to always be inspired by the people around me and I want that to You know raise the level of my own thinking and performance and attitude So Facebook went viral in Harvard within a day. You emailed him or how did you get in contact with Mark? There's one investing category that's outperformed major US and world stock markets over the past three years, private infrastructure. Private infrastructure is expected to double over the next 10 years with the continued development of AI, increased demand for power generation, and the modernization of supply chains. This asset had previously only been

available to large institutional investors, but now you can invest in it exclusively through Republic's partnership with Hamilton Lane, whose co-CEO Eric Hirsch I previously had on the podcast. Again, that's www.republic.com slash h l p i f to invest today. I met him because all I cared about at that moment was my rock band. And what we were trying to figure out was how do we go from playing literally in the basement of the dining hall on campus to like turning this into something real. And so Mark, you know, was kind enough to enable us to sort of communicate with people and contact other students to tell them about our music. And we very early on thought that Facebook could give us a really unique advantage in building a fan base.

You got to remember we were full-time students and so we couldn't just go like jump in a van and tour the country and build our fans that way. Instead, we had to do it over the internet and that was a relatively new concept at the time. I mean, today, obviously, influencers, creators, whatever, everything. And when people are making a TV show, they care about how many Instagram followers the actor has. But at that time, social media was nascent.

MySpace was pretty popular, but it was not really used for spreading media. And so I met Mark because I said, we really should figure out ways to leverage this to grow our fan base. And that was the best idea we had. Now, in retrospect, obviously, I should have thought to loan him some money to keep the servers on for another week, but it didn't occur to me. I mean, we were we were just trying to make our band successful. And Mark had this incredible platform. He even at one point, I think, did an interview with the Harvard Crimson, which is like the campus newspaper. And he had been building a second product.

People don't remember this, but he had tried to launch a second product called Wirehog, which was a platform for exchanging media. It was like, kind of like LimeWire or something. And so he did this interview with the Harvard Crimson and he said, you know, for example, Chester French, our band, like could use Wirehog to reach its audience or to share its new songs or whatever. So it was just a cool environment where I think obviously Facebook was really early. It quickly eclipsed Chester French in historical significance.

But at that moment, you know, it was like natural for us to try and figure out how we could leverage that. I've heard that face, the Facebook was Mark's like 11th project that he had tried and he was trying it for a couple more days and he was going to move on to something else. Maybe it was wire hog. And that was just another fun project that he was starting that he didn't have these grand visions for at the very beginning. Is that true? I don't know. But what's obvious is, you know, he was always very ambitious guy and he iterated on Facebook when it started working very quickly and that product, you know, just grew like

wildfire. So, Facebook obviously wasn't the first social network, but became the most successful. What was different about Mark and what made him so successful? What's his superpower? Well, I haven't really worked with Mark. So, it's hard for me to say anything that's not, you know, just coming from like a casual observer point of view. But I guess my impression is he's an amazing executive and very scientific, very empirical. So I think obviously Facebook has developed its products and its strategy with a very deliberate and again, empirical approach, letting the data tell it what it should do, where it should go. And if you compare that to MySpace, MySpace was much more culturally oriented,

right? The people behind it were, I think, you know, Tom was like a photographer or something. And so they were building an environment that had a vibe. And it was the vibe that they thought was cool. And it was kind of LA in the early 2000s was like what MySpace felt like. You know, people decorated their pages crazy and there was a lot of self-expression and there were a lot of weirdos. It kind of felt seedy.

And then Facebook came along and it had a user interface that was incredibly straightforward. You know, your mom could use it. And then they were just super rigorous and scientific in their strategy to build the user base and create value for the users. And then obviously along the way, Mark had really experienced and really brilliant people helping him. Sean Parker, who's a very dear friend of mine and a collaborator, was the first president of the company.

And I know Sean both injected a huge amount of technical and product expertise that, that he brought to the table and also financing acumen. So, you know, a lot of things had to go right. Uh, but of course, Mark is really talented and the evidence of that is undeniable. I've never met Mark. I've met his wife. I've met Dustin Moskowitz. I've met a couple of their early employees. One thing that seems to be patterned with Mark and, and, met his wife, I've met Dustin Moskowitz, I've met a couple of their early employees.

One thing that seems to be patterned with Mark and Elon and some of these other super entrepreneurs is their ability to just go where the data is showing them and to think wholly from first principles. Well, first principles itself has become this term that everybody uses that essentially doesn't mean anything, but first principles means that you're also willing to go against the grain, against social norms. In many ways, Facebook in MySpace was like the exact opposite. MySpace was trying to be cool and Facebook was just trying to be right. And I think we've lost something in society where people have the courage to do things

that do not seem to make sense to people at that time and the courage to be disliked. Both of them are highly aspirational figures in our culture today. So I think that Donald Trump is also obviously the heterodox thinker. He's a disruptive guy. So in a way, I would almost take the opposite side of that argument, which is that kind of contrarian, that ability to be super logical in the face of a lot of social pressure. And I'm not saying Trump is logical in particular, but Elon and Mark and the way they pursued

the ideas they had were doing something that they felt from first principles was logical, rational, irrespective of whether or not the capital market agreed with them or whether cultural commentators in the media agreed with them. And it worked and it worked in a big way. So my experience of the past decade has actually been that contrarianism has gone from being actually rare to now being something that everyone is chasing. So what does every family office want in America?

They want to own SpaceX stock. They want to get Stripe secondary. They, these ideas they think are contrarian. Those are fun things to go to a cocktail party, you know, and tell your friend who owns the S and P you've just bought. And so I think the major question I have for this moment is what is contrarian today now that contrarianism is completely mainstream? Where can you actually have an edge by thinking differently when crypto is all the rage, when AI is all the rage, when

life sciences is, you know, hasn't been the rage in the markets for a few years, but it's not a secret. And yet every time I've found something that turned out to be really big, it was something that everyone either was ignoring or hated. And it's hard to find weird ideas today that are hated. So that is always where you're going to find an edge as like a venture capitalist. But I think as capital has flooded the market for private contrarian companies, so to speak, those opportunities have become harder and harder to find. One thing that I tried to build in myself as a muscle and something that I think

is very lacking in society is the courage to be extraordinary. Everybody wants to be great. Everybody wants to be extraordinary, but few people want to be seen as pursuing that. What does that mean on our YouTube? Sometimes are testing 16 different variations of titles and thumbnails. And I know for a lot of people that seems extreme and that seems crazy. And that's okay. That is the culture that we've built and we're willing to be misunderstood.

We're willing to have people think that we're weird or we try too hard or we work too hard or whatever it is. And that's something that I look for in entrepreneurs. That's something that I look and fund managers, this ability to be okay with not being normal. And I think that's is just not as widespread as it should be. Yeah, I agree. Although if it were widespread, it would cease to be a thing. So, um, and I think, I think it's widespread, it would cease to be a thing.

I think ultimately it's a personality trait. I mean, you either really care what people think about you or it doesn't matter that much to you. Or there's an intermediate position, which is where I'd place myself, which is I really care what the people who are close to me think, but I could care less what the average stranger thinks about how I'm dressed or what I'm saying or what investments I've

made. And in fact, if you have that personality type, you kind of get a charge off of taking the unusual view. So I think investing is a discipline where self-awareness is really valuable. You don't want to be so excited about how contrarian you are that you become unable to see when the consensus is right. And just the way the world works, the consensus usually is right. But in these important and highly disruptive situations, the consensus is usually wrong.

You're very unique as an investor. Part of me thinks that's because of your recording artist's background. How has being a recording artist changed you as an investor? I don't know what it's like to be an investor who wasn't a recording artist first. So all I can comment on is where I see some parallels in the way I approach music from the way I approach music from the way I approach investing, I think the common thread is having a sense of taste and a confidence in your taste.

And that you could just call instinct or intuition, but the truth is when you're making a song or any piece of art, it's just the product of a thousand little choices you make. And you're making those choices constantly. What is the next note in the melody? What chord should go under this? How should I voice the chord?

What's the right sound or texture to use? You have to like expressing yourself through choices. And there has to be something that feels good to you about communicating your vision or your personality through those choices. And so I think everything in life you can kind of depict in that way, because you're constantly making choices. Who do you spend time with?

What do you read? What do you focus on? How do you organize your schedule? As an investor, obviously, the reason someone's paying us is for judgment and to try and make choice to outsource choices to us. So part of what we do is somewhat rote and formulaic, meaning when we're diligent in a company, there are a set of questions we have to answer. There's information we need to find out.

We need to do evaluation. we need to do evaluation, we need to do the same things any responsible investor would do. But at the margins, the thing that is going to make us invest in something or not probably comes down to personal taste and judgment. And I think that it actually is possible to bring a sort of aesthetic point of view to investing. It's hard to put your finger on, but when people and a business plan and a strategy line up in a particular way, there's a kind of beauty to that. And it's a little cheesy to talk about things in business as being beautiful, but that is how I experience it. And when I recognize that, I want to go after it.

And by contrast, things can be ugly. And sometimes even things where the people seem really greedy and smart and motivated. You look at it all together and it just doesn't hang together in a cohesive way. And I've made, you know, I've passed on things that were like that and then they worked. But my experience is usually if it feels ugly,

don't do it. And ultimately I do think that's connected to the aesthetic judgment that you cultivate as someone who creates art. Tell me about the story, how you ended up working with billionaire Ron Burkle and running Inevitable Ventures. Thank you for listening. To join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe.

Inevitable Ventures was my big break as an investor. So we're going to invoke another now disreputable character, Puff Daddy. I had made some music with Puff and we'd even done a music video together. This is, I was unaware of whatever else he may or may not have been doing on the side. And he was a big supporter of our band. And so he brought me to this dinner that happens before the Grammys every year,

which is Clive Davis' epic pre-Grammy dinner. And it was a crazy night because it was the day that Whitney Houston had died. And she died in the hotel where the event was happening. So I went over to Puff's house and we're like watching CNN in his kitchen, trying to understand whether the party was actually gonna happen or not. And an hour before it, Clive Davis decides,

we're going ahead. His argument was Whitney would have wanted us to party. And so we go, okay, we're going. And at that dinner, he sat me next to Ron Burkle. It was the first time I met Ron. And Ron, through his previous venture capital vehicle, which is called A-Grade, and Puff had both recently invested in Spotify.

And they had invested in Spotify through a financing round that I was in charge of putting together. So basically, I had gone to all of the artists and entertainers who I knew, who we thought would be strategic to the company, and helped raise this round. And so Puff was kind of introducing me to Ron saying, look, here's the guy who got us all into Spotify. At that time, it wasn't yet clear that it was going to work, right? So could it, could it turned out to be a bad investment, but that was how I met

Ron and I clicked and started talking about investing even at that dinner. And then got to know each other over the subsequent couple of years. that dinner and then got to know each other over the subsequent couple of years. And when a grade basically spun out of Ron's family office into a firm now called sound ventures, Ron called me and said, I still want to keep doing early stage venture investing and maybe we could find a way to do it together. So to me, that was like my first big break was when Kanye called me and, and told us like, I want to give you guys a record deal.

My second huge break was like Ron saying, wow, I think you could actually be a professional investor and I want to do that with you. And so it was amazing. And Ron was previously partnered with Ashton Kutcher, great investor and a lot of great stuff. And then he went to partner with you. So it went from Ashton to DA. Why partner with you and Unproven Talent at the time?

What did he see in you? I'm not sure. I think I had, you know, I was much less famous, much less successful as an artist than Ashton, but I still was in that same milieu, which is to say people who were kind of bridging the worlds of Hollywood and Silicon Valley. And at the time, that merging of the two cultures and economies hadn't really taken place yet. So, I mean, Ashton turned me on to that, you know, to this idea that you could be an artist and go pursue these tech companies and they would actually

see value in having an artist invest and be a part of their cap table and maybe be able to help them connect some dots in the world of culture. So that was kind of a new idea. And Ron had from his other businesses, I think rightly appreciated that that combination could be very powerful, That media, technology, communications all made sense together and they all fed each other. And so investing at that kind of intersection was a smart way to approach things. Reminds me of a story I once gotten around with Elon Musk, Jeff Bezos, Mark

Zuckerberg, Joe Lonsdale, Peter Thiel, you name them, everybody but Bill Gates pretty much. And at the time, you know, when somebody gets you in a round like that, you don't really ask questions. You're just like, where do I wire? And then I think six or nine months later, I went down to Union City. This is a company called Vicarious, which was one of the original AI companies. And I had a walk with the CEO, Scott Phoenix. And I asked him, I'm like, how did I get into this round? And he actually said, you know, I, I valued your business advice and it is a high compliment, but sometimes you just, you just take the opportunity and you ask questions later.

So you were putting this opportunity where you were running inevitable ventures, you had to level up your skills very quickly. How did you go about learning to be a VC? VC has the advantage that it's not clear what you actually have to learn. So it's an easy place to start as far as investment strategies go. I think what I brought into it already was this network and curiosity and an ability to identify companies that at least superficially were compelling. What I've had to learn from that time, you know, forward were all the nuts and bolts of investing that

I would have learned if I had gone and been an analyst at Goldman Sachs or worked at some P.E. shop or whatever. Ron had a guy working with him named Chris Hollett, who's a very good friend as well. And Chris had some formal training. And so I remember for the first time Chris helping me navigate a financial model and look not just at the financing side of a company and understand how a cap table works and a pro forma and, you know, all the conventions of venture financing, but then also even just kind of cashflow model of the company and

its operation. And so all of that was totally new for me. I at one point actually hired in LA a finance tutor. Like I hired a former investment banker to come to my house once a week and teach me modeling. And I just felt like, you know, look, it's a huge disadvantage to not know these basic skills that any of my competitors can be assumed to have. So I had to level up in that way. And then in venture, you learn through experience. Unfortunately, it can be painful because you learn the most from the companies that don't

work where you're forced to re-examine the process that you went through. And I think one of the well-known observations from the investment literature is that process is really what should be your focus more than outcomes. Outcomes pay the bills, but what matters, particularly in VC, is that your process is the right process. You can run the right process on an investment and pass, and then the company can be successful. And that isn't necessarily a mistake.

It's only a mistake if something worked out really well because your process and your process was wrong and you should have invested in it. So I had to learn that and over time, develop a personal process that I could have enough confidence in and you should have invested in it. So I had to learn that and over time, develop a personal process that I could have enough confidence in to not always be looking in the rear view mirror

and trying to have FOMO about every last day. I mean, I think that's something you can easily fall victim to. We talked about having a divergent view of things. In venture capital, like in any other market, there's a huge amount of trending. And so things get hot and they're the topic of the moment and everyone's all over it and you feel like you shouldn't miss out on it.

And that's where you get yourself in trouble times. It can be the smart thing to join the pack if the pack is right. But typically when something gets really popular, it also gets expensive. And when prices are higher, expected returns are low. So you can easily find yourself crowding into investments that have low expected returns, even if they're great ideas. I think one of the things that separates good VCs versus bad VCs is that they're able to really think about second and third order effects of different trends. For example, you have Bitcoin expected to grow 10 times.

What are the second order effects? I just had a crypto investor on, he was talking about the Bitcoin economy. What will happen when Bitcoins worth $10 trillion and a significantly higher market cap versus something just being popular, just for its own sake, for example, like scooters. I looked at the space, I had a chance to invest in Bird.

I had a chance to invest in Lime. I ended up investing in a company called Go X, which is to my understanding, one of the only profitable scooter companies to this day, and I just didn't understand it, how this model could work, what the economies of scale, how people were going to solve the theft problem. All these problems were kind of ignored just because of this uptick in short-term upticks. I think people were extrapolating on something that was not sustainable. And of course, it's very subtle between something that builds and grows and solves problems

versus things that are inherently flawed. I think that's totally right. Also, what you're... I mean, the reason anyone's in this business is because you want to get the next Google, you want to get the next Facebook, you want to get the next Genentech, whatever. Those are long-term compounding businesses and where they ultimately end up making most of their income may be very different from what they start doing. So I think there's a difference between betting on one idea or one product and betting on a company. And when you talk, I mean,

you've talked to a lot of investors, when you talk to venture capitalists who have done it for 30 or 40 years, almost 100% of them say the same thing. And that is that it's all about the people. And so that's my experience too, it's true. You know, it's possible that Bird with the right people could have turned in by now to something completely different and taken over the world. And you just never know.

So I think it's hard to extrapolate from the first product, the first idea. Those are forms of evidence about the people that have produced them. And ultimately what you're investing in are people who are going to be able to do that over and over and over again. Going back to Zuckerberg,

buying Instagram was brilliant. Pulling off the move to mobile was brilliant. WhatsApp was brilliant. Like when you saw this guy building WireHog and Facebook, you could have never known that those things would happen. All you could have done would have been to assess him and the people around him, the way they thought, the way that they might be expected to adjust to new circumstances.

And over the long run, it's that ability to adjust and pivot and find clever strategies and openings that makes all the difference. You went from inevitable ventures to going after the healthcare biotech space. What led to your interest in the space? And tell me about your new venture fund? So while I'd been investing with Ron Burkle at Inevitable Ventures, I started to get really obsessed with healthcare and in particular how screwed up the US healthcare system was. And so I started looking at businesses around healthcare delivery. Think of software companies

whose products are used by hospitals or insurance companies, things like that. And then as I immersed myself more in our medical system, what became clear were two things. One, the medical system itself, the care delivery in America changes very slowly. And that's why it's been really difficult for politicians to change it. That's why it's really difficult for businesses to become successful in it. It has a huge amount of inertia in it and weird incentives that kind of keep it that way. But the other thing I figured out was that while that system was adjusting very slowly

to the future, in life sciences, there was a real revolution taking place. And we're still really early in that revolution. Now, what do I mean by that? I mean that the tools that are actually used in medicine, drugs, diagnostics, research tools, medical devices, they were all in the midst of a kind of technological renaissance. And so drugs as one example,

we're going from something that had a very low probability of success like historically Developing a new drug has about a 5% chance of working So who wants to invest in that and what was happening was as our understanding of the underlying biology of health and disease Was improving it was becoming possible to develop drugs that had an intrinsically higher probability of success. And so there were not just these kind of advances in our understanding of biology that were driving this. There were also breakthrough new technologies like mRNA, which we all know from the mRNA vaccines. That was a fundamentally new type of drug,

what in the industry we would call a modality. And so you had these two things happening in the drug world at the same time. One, drugs are becoming somehow less risky because we understand what they're doing and how they're working and which patients they'll work on better. And in parallel with that,

you have brand new technologies that are basically entirely new fields for exploring what's possible in drugging human biology. So that was really compelling to me. And I just decided if I'm going to dedicate myself to one niche of our economy, human medicine is a great one to bet on. And it's one that I find very personally interesting and rewarding. And of course, the products that these companies develop are products that are going to touch people at the most important and profound moments in their lives.

So all of us are patients at some time or other. We all begin our lives as disabled, barely functional infants, and most of us end our lives quite disabled and managing unfortunately chronic and often fatal diseases. And so medicine is one of the most fundamental things we do as a civilization. It's one of the most important things in each of our lives. And when you combine that fundamental significance with the technological tailwinds, I just don't think there's any more exciting space to be an investor. You broke into VC through inevitable, and then you broke into biotech through time. Tell me about how you did that.

Sure. I've got this incredible asset in our firm, which is my partner, Tim, who I partnered up to start the firm with. And Tim has a background that is very different from mine. He was a physician scientist for the first part of his career. to start the firm with. And Tim has a background that is very different from mine. He was a physician scientist for the first part of his career. And so both practiced medicine

and ran a large division of rheumatology at the University of Pittsburgh. And then he was also an NIH funded scientist who ran a significant lab doing basic research. And then in the middle of his career, Tim completely pivoted and went into big pharma. And you know, you're sort of a Judas when you do that in academia, because all the academics think, oh, industry, you know, that's sort of the, yeah, you're like selling out, nothing

good happens over there. What Tim found was in fact, the scientific work being done in big pharma was every bit as good, if not better than what he'd experienced in academia. And then he had an amazing run in big pharma, first at Pfizer and then at Novartis. So much so that he ended up running all of global pharmaceutical development at Novartis. So that was the most senior scientific role in the company. And from those experiences, Tim had been through basically every win and loss that you could have inventing and developing new drugs. And I thought when I met him, you know, what an incredible opportunity to work with someone who has lived through so many successes and failures and therefore is going to be conditioned

to appreciate both the potential in early stage projects that we might look at as investors, but also who's going to be able to see the risks and see them very clearly. In biotech investing in particular, everything is probabilistic. When you look at a company with a set of new projects they want to go after, nobody, no matter how smart, no matter how experienced, has a crystal ball and can tell you whether they're going to work. The best that you can do is try to assess the probability of success and then build a portfolio that manages that risk through diversification.

And so that's what we set out to do. And that's what we've been doing for a few years. We not only invest in drugs, we also touch those other areas that I alluded to, diagnostics, research tools, medical devices, healthcare delivery businesses. Our intention is to finance the companies that we think are going to invent the next kind of era of human medicine. And we think we're on the doorstep of that era.

The signs are everywhere. AI is a big new contributor to what's possible in healthcare delivery. And we just wanna be in the right place at the right time. And we know this is the right time. We think it's the right place and we're hopefully building a reputation and a practice that leads the most talented entrepreneurs to seek us out and partner with us.

You've constructed portfolios and traditional venture, and now you're constructing it in biotech and healthcare. How does your portfolio construction differ going after a different asset class? In biotech and life sciences in particular, as I said before, the intrinsic probability of success of any individual company is not going to be as high maybe as it would be with a software business where you already have early signs of traction. So we're never just extrapolating the growth rate of some consumer business really.

We're almost always looking at a body of data, experimental data usually, on a project, say a new drug or a new medical device. And what we need to do is we need to interpret that data and form our own judgment about how likely it is to work. And therefore what the expected value of that investment might be when you combine it with the valuation and so forth. So you start there and then you have to recognize the other fact, which is that you can't lose more money than you invest.

So the most primitive starting point for risk management is build a portfolio where you can afford for any individual company to fail without it blowing up the overall portfolio's performance. So we start by targeting roughly an equal weighted portfolio. And from there, we will double down or triple down on investments where we over time gain more confidence in the perspective return profile of that opportunity. Biotech in many ways is an oligopoly with the quote unquote biotech mafia, the Orbitmets, the Third Rocks controlling a lot of the market.

How do you compete against the biotech mafia? We don't really compete with those firms and we have a lot of respect for those firms. And in fact, we want to collaborate with and we need those firms because they're the ones who take the companies that we discover and initially finance and add fuel to the fire and take them into late stage clinical development and ultimately into the public markets. So we're not competing with them in the field when it comes to the way LPs would think about us. We also are not a direct alternative to any of those groups. They're managing several billion dollars each.

And that defines what their strategy is, which is to say for them to get off the bench, they have to be able to write a 20 or $30 million check. And so as a small player, we just fill a fundamentally different niche in the marketplace. Our job as we see it is find overlooked gems in the private market. Those might be opportunities that are not geographically in the hot spots. So they might not be in Boston or San Francisco or San Diego. And that's a reason that bigger players may have overlooked them. They're generally going to be smaller than the companies those firms are backing.

So we're getting a year or two years earlier. And then we try to be divergent, you know, and that's more a personality thing like we talked about before. So in biopharma, there is also a lot of trending. People get really obsessed with a particular target or they get really obsessed with a particular disease area. And that then appears to be the low hanging fruit for the investors. And everyone crowds into those opportunities.

And you can take as an example, the GLP-1 drugs like ozempic. I mean, there is no question now with 2020 hindsight that that was the biggest opportunity in biotech over the past 10 years. But let's go five years back in time. And you could ask, well, how many of these big biotech specialist firms are putting a lot of energy into metabolic disease drugs. And the answer is that almost nobody was. People viewed that as a dead end. They thought it was a place, you know, as a graveyard of prior investments. And so why would you pay attention to it? And you could look at the market sales for drugs in that category, and they're very small, but that was because there weren't any good products. So that just is one demonstration of the fact that what is working right now is probably a contra indicator of what

you should invest in. You should try to avoid riding the current wave or the last wave. And you always have to be thinking about what's going to be happening in five years. And we are early stage venture investors. So that is the mindset we bring to our investments. We, you know, we're trying and we can't do that with great reliability. I mean, who knows what's going to happen in five years, but what we can do is we can say, does a given technology empirically from first principles look like it could address this patient population, this patient need out there? And if we think it can, it really shouldn't matter what other people think, whether that therapeutic area is hot, whether that target's hot, whether that modality is hot. We should just follow the science and our own best attempt at a rigorous analysis wherever it leads us.

Reminds me of the Peter Thiel quote, the next Facebook will look nothing like the last Facebook and it'll just be completely different, non-orthogonal. Just today we've talked about Mark Zuckerberg, Elon Musk, Ron Burkle, Ashton Kutcher, all these luminary characters. What benefit, how has it benefited you as an investor to be around people that are at the top of their field? Does that rub off on you or is it just kind of a cool story? I've tried to learn as much as I can.

And I should say, I've also learned a lot from people who aren't famous and great teachers and great entrepreneurs who we've worked with. And going back to an earlier point, I've also learned a lot from failures and things that haven't worked. I think those are the best learning opportunities because you can actually sort of reconstruct how you thought about something and figure out where you were wrong. And when things work, when someone is super successful,

the tendency is to explain their success with their most visible attributes. And in fact, a lot of highly successful investors, entrepreneurs might have been successful in spite of their most visible attributes. And in fact, a lot of highly successful investors, entrepreneurs might have been successful in spite of their most visible characteristics, not because of them. So I guess what I would say is I feel lucky to have been around these people. It's given me some pattern recognition, some intuition for what that kind of success looks like.

I'd say maybe one kind of heuristic, I heard this from the fellow who used to run Bailey Gifford and I forget his name, but he's a really clever investor. What he said was he looks for companies and people who don't remind him of anyone else. And that lodged in my head and resonated as very true. And I think you could use that to characterize the folks you mentioned. They're all very unique. And if you met them, you wouldn't instantly think of five other people you know who are just like them.

And so just as Peter Thiel's advice that you mentioned was that the next Facebook won't look like the last Facebook, I think the next great entrepreneur, it doesn't look like Elon Musk, it doesn't look like Mark Zuckerberg. They look like them and it's going to be their unique personality and talents that will explain their success. My favorite types of experiences to learn from are almost mistakes. An example of that is you're walking down the street,

you're jaywalking with your AirPods, you're not looking around and you almost get run over by a car. Those are always the best when you don't actually have to pay the cost, but the lesson is learned for many years. I'm not even sure that I know what almost mistakes I've made. I mean, you see, look, one thing we do, and I'm not sure how many other firms do

this, but I think it's really important is every time we make an investment decision, we explicitly track what happens to the companies. So I've had both types of lessons. One, you pass on something and it works. And then you have to say, well, did I miss something? Was my process right? And then other situations where you invest in something and obviously works, and then you have to say, well, did I miss something? Was my process right? And then other situations where you invest in something and obviously you're in it, so you know how it worked out and it may fail.

And you know, they're both painful. I like the second type of mistake less, because if you're doing this right, you're guaranteed to miss things. You know, you're guaranteed to miss things that will work. So that's forgivable. What's harder to stomach is when you're really confident in an investment and then it totally fails. And it maybe fails for reasons that you didn't see.

The benefit of that, again, though, is that you have an opportunity to learn something from. How should people follow you? You can follow me on Twitter or X. I'm just, I think, x.com slash DA Wallach. And I've also recently started writing more. I've had for the past decade or two a tendency to write an essay every three or four years. And now I'm trying to make that more like every three or four weeks or every couple of months. And I'm doing that on Substack. And so I'm just dawallick.substack.com. DA, it's great to connect and look forward to sitting down live very soon.

Thanks, David. Thanks for listening to my conversation with DA. If you enjoyed this episode, please share with a friend. This helps us grow and also provides the best feedback when we review the episode's analytics. Thank you for your support.