Investing Billions - E31: David Friedberg on How To Build a Billion Dollar Startup

Starting point is 00:00:00 So if you look at what's happened over the past 10 years, you know, a top decile venture performance hurdles, probably three X top decile top 5%. I don't know. Over the past 10 years in the past 10 years, if you bought the top 10 stocks on the NASDAQ, you would have made 10 X. Okay. It's a crazy statistic. So, which makes me kick myself a lot for having not done that, by the way. But think about it as an asset allocator. I look at that return profile and I say,

Starting point is 00:00:40 man, all these guys are supposed to be so smart, outperforming, creating alpha, and only the top 5% can get 3x. And I could have just bought public companies and made 10x using a very simple rubric on how to invest my capital in technology. So the markets will kind of realize that, number one, I would say you probably need to concentrate capital and you need to concentrate managers, and that will evolve in the market. Well, David Freeberg, it's really exciting to have you on the podcast. Thank you, Steve Chasen, for the kind intro. Welcome to Limited Partner Podcast.

Starting point is 00:01:27 Great. Thanks for having me. So I don't think a lot of fans would be surprised that you majored in astrophysics while at Cal, but I think many would be surprised that you started your career out as an investment banker. Tell me about that. And what did you learn as a banker? Well, I went to Cal during the dot-com boom.

Starting point is 00:01:45 So Silicon Valley was blossoming all around me. And I really wanted to shift from pursuing a PhD and going into a life of academics and research into one of impact. And so I wanted to go to Silicon Valley, but I'd never taken a business or finance or accounting class. So the cool job back then in 01 was investment banking. I could learn about the tech industry if I could get a tech-focused investment banking job, which is what I got in 01 working at a bank and focused on tech M&A.

Starting point is 00:02:13 So it's a purely kind of typically sell-side shop. And I'd never, again, taken any sort of accounting class, finance class. So I learned to build models. I learned to use Excel. I understood, you know, balance sheet, income statement, cash flow statement. So I got an on the job crash course in finance, accounting, legal. I was the fairness opinion analyst. So I worked on a lot of public M&A transactions. And so I got experience with SEC work. I got experience with writing fairness opinions. I got experience in all the legal aspects of getting transactions done. And so

Starting point is 00:02:49 it gave me quite a lot of breadth and depth of experience, particularly during the dot-com crash, that 01 to 03 cycle was a really nasty time period. And so I actually got to see a lot of failure and I got to see a lot of companies in fire sales or get sold for less than their cash balance. So, you know, really interesting kind of set of experiences that gave me, I would say, a fundamental understanding of business and finance that, you know, has certainly been useful to me in my whole career since. Do you feel like you may have overcorrected seeing those failures? How did those failures affect you later on as an entrepreneur and a venture capitalist? I don't know. I mean, I would say that I was on the tail end of it and we were involved in a lot of cleanup, but there was a lot of like really interesting technology during

Starting point is 00:03:36 that period as well. And so seeing, I worked on all sorts of transactions from storage companies to networking equipment, to semiconductors, to software, to internet companies. And so there was a lot of different types of businesses. And I think recognizing that even companies that got public failed was a really important lesson. That until a bit, and I learned this every year of my career is just at some point, every company is going to fail. It's just a function of when and how.

Starting point is 00:04:14 And so the ability to continue to perform, I think, is largely predicated on where do you have an advantage that accrues over time? How do you generate cash? How do you build a business that's profitable so you don't have to be dependent on capital markets to continue to invest and build new things? And the importance of innovation. Every business, ultimately, whatever they're doing today is going to be commoditized or worthless at some point in the future. So if you're not constantly innovating, there's eventually a point where your business will de facto die. And so I think those are all really important principles for me to understand early in my career.

Starting point is 00:04:53 But I wouldn't say that I even today have any sort of mastery of them. It's a learning process on how important each of them are. Speaking of building sustainable advantages over several decades, you went to Google, you were there before the IPO in 2004. What did you learn from your time at Google and what was your experience like? I learned a lot. It was an amazing business with an amazing group of people. And it was just such an exciting time to be there.

Starting point is 00:05:23 In the time that I was there, grew up a lot, right? When I left, there was over 10,000 employees. And when I started, there was under a thousand. So that was a big growth where it's obviously much larger today than it was back then. You know, I'd say one of the more kind of important lessons for me having seen firsthand is how much the founders and the executive team were comfortable with challenging points from first principles. So really asking the questions around why does this have to be this way? Is that, let's keep asking the why until we make

Starting point is 00:05:57 our way all the way to the bottom of the pile of turtles using the, you know, or the tortoises analogy, that there's some reason why things are done this way. And if that assumption somewhere along the way is wrong, we can correct it and build a better business. That was important. Remember, Google started to build their own data centers and build their own servers. Those were very novel ideas at the time. And it was because they asked why. Why did we have to keep buying $3,000 Oracle servers to do web crawling when we could build a server for $300 and it would break in a year, but we didn't need a case and we didn't need all the fancy stuff. We could just throw it away in a year

Starting point is 00:06:33 and we would only have to spend 300 bucks on it. Very important, like first principles thinking. And then I think thinking very big, you know, Google always challenged and the executive team always challenged the assumptions about how significant an opportunity might be or how to think bigger and at scale about things. If we were successful with Gmail and the cost of hard drives continued to decline, we didn't need to charge people $99 a year for 100 megabytes of email storage. We could give away a gigabyte for free. Oh, and by the way, most people wouldn't use the gigabyte. And so really, you know,

Starting point is 00:07:06 saying you get a gigabyte of storage with your email service, which was really novel in 04 when Google launched Gmail, with a big, big point of view that hadn't really been kind of even considered. Everyone thought it was an April Fool's joke

Starting point is 00:07:20 when it was announced on April 1st in 04. It was crazy. So it was really great to see all of the big thinking. You know, Larry and Sergey said, let's scan all the world's books. And people were like, what? That's impossible.

Starting point is 00:07:30 And they said, no, we can do it. Let's go figure out how to do it. And those big thinking, those big ideas, those big audacious concepts as a framing for the team really, I think, personified what I consider to be true leadership in an organization of people, giving people a really big idea of what's possible and challenging them to figure out how we get there from first principles. And I think that's what distinguishes companies like Google and Tesla

Starting point is 00:07:55 from their peers in the market. We had Scott Painter, one of Elon Musk's best friends on the podcast. I got to interview him on Elon. And one of the things that he said is that he started with an idealistic framework. He started to say, what would it have to be like if 50% of the car market in the US was Tesla? What is the limiting factor from that? And then basically start to work against that limiting factor. How was Larry's and Sergey's in terms of their thought process when they went, sat down to solve a problem? What was their thought process like then when he did that, everyone suddenly starts to reframe their thinking. And then you start to say, well, how? And then you start to go to first principles on how to execute, how to actually deliver on that. You know, well, why don't we scan encyclopedias and put them on the internet?

Starting point is 00:08:57 Okay, well, what if we scanned all the books and put them on the internet would be the question. Oh my gosh, how do we do that? Well, how can we do it? Well, I guess we could put an optical camera system and an automated arm that flips pages. Great. And then use optical character recognition to convert it into text and make it digitally searchable. Okay. That actually makes sense. Now there's a path. Now there's a feasibility to realizing that idea

Starting point is 00:09:20 of scanning all the world's books. So I think that's a good example of how to think about framing the bigger opportunity and then going down to the first principles on how do you deliver it. I mean, think about what Oppenheimer did with the nuclear program in the Manhattan Project. It was a similar sort of challenge where so much of the first principles were, how do we do each of these single steps in achieving this really big, big thing? Same with the Apollo mission. I mean, those to me are two big projects that personify the same concept, which is frame a really big mission and then break down and redesign everything from the ground up on how do you actually, from first principle, make it happen. That's how we really achieve great things that have great technical breakthroughs in ways that we haven't, I would say, a lot of of late.

Starting point is 00:10:08 Why does society result in so many small thinkers? Why are there not more great thinkers in the world? Well, there's, I don't know about using the term thinker, but I think that the big concepts are scary because there's so many things that have to go right to get them to work. And, you know, complexity breeds fear because it breeds a higher chance of failure. You know, you have to get each of these things right for the first time correctly, that is a much more scary task, a much more daunting task than choosing another thing to do with my time where I only have to get five things right and I get, call it 20% of the return. I would probably follow the path where I only have to get five things right and get 20% of the return than getting the 30 things right to achieve the bigger outcome.

Starting point is 00:11:05 And I think that that's a general way to frame why we've probably over-invested in software and under-invested in more complex, technically difficult opportunities on Earth in the last decade or two. And I would say it goes back even further. But just to push back on that, if you have, you know, it's essentially a parlayed bet. You have 30 different problems you're trying to solve. Wouldn't the rational and financial best decision be to take the five bets and get 20% of the upside? No, it's very rational, which is why markets accrue to that decision making framework.

Starting point is 00:11:41 So, yes, on the whole, it makes sense. The problem is if everyone goes there, then no one's ever going to do the big thing. And sometimes if you do the big thing, the payoff can be actually a lot higher than people even realize. I kind of think about the, there's a great book called The Idea Factory. It's about the history of Bell Labs and the history of the transistor. Like at the time when the transistor was invented, it was really meant to be a replacement for the vacuum tube. And so there was this very narrow market opportunity for what was thought about as the application for the transistor.

Starting point is 00:12:23 No one had even kind of thought through the implications of the transistor and all the industry it would spawn and all the applications that would arise in the decades ahead, all the way to the mobile phone that browses the internet in our pocket. Think about that. And that becomes the ultimate kind of... And an AI model running on that phone that can answer any question that exists in human knowledge banks today. And I can instantly get the answer out of my pocket.

Starting point is 00:12:52 It would be very hard to go from, I'm trying to replace vacuum tubes to reduce the cost of phone calls, to now I have the internet in my pocket and an AI agent that's speaking to me. And so I think what happens is we miss the opportunity to make these big, audacious bets that ultimately yield new opportunity that we're not even thinking about. And that's certainly been the case from the Manhattan Project and the nuclear age that arose to the Apollo mission and everything that arose, all the technologies that came out of the Apollo program to the transistor, which came out of Bell Labs, which was another one of these very large industrial science, industrial efforts with 5,000 plus people working there, working on all this peer research and exploring new domains that at the time were not obvious what the implications were

Starting point is 00:13:41 going to be for them, commercial applications. The entire semiconductor industry spawned out of that brute force effort. And to today, where I would say we have too much capital that drives too many diffuse projects, meaning capital gets allocated into smaller projects because you can quickly make money by investing $5 million in a software business, and you could probably make $50 million in return. That's a nice little 10 bagger. Great. Let's do that. And then let's plow a trillion dollars into that concept. And now you've got thousands of little software companies doing all these little things. Instead, if we took $10 billion and put it on one big project that could change the world,

Starting point is 00:14:29 you know, in a meaningful way, you suddenly unlock all this opportunity down the road, but the probability of failure is high. You got to get 30 things together. And every individual is incentivized to go make a quick buck on some software project. So, you know, it's very hard to kind of see in this market how that happens. But to your point, it's a very rational evolution of the capital markets. You're a venture capitalist. I'm a venture capitalist. There's hundreds, if not thousands, of very smart venture capitalists. Clearly, if this was a rational thing, when more VCs go after it? So I don't know if it's a rational thing. So this company that I just joined, Ohalo, we invested in it for four and a half years and we kept plowing capital in, unsure if we would get the result we were shooting for. And we had to get multiple things right in a

Starting point is 00:15:11 row over time to see if this thing even worked. And fortunately it works, but it took us four and a half years. And there were many other paths that we could have gone down along the way to build a business and make money sooner that we could have said, you know what, let's just do this smaller thing and we'll build a great business and we'll make 20x on our money and it's going to be good. But because we remained committed to the bigger idea, this bigger experiment we had, this big project, we had a shot at it and we got there and the thing worked. So, you know, the rational kind of decision I would say to make money for the team, for the investor would have been to hedge and to say, let's do this other thing that is the higher certainty of good payoff. But if we went for the bigger thing, there's a chance of failure of burning all this money. So went for the bigger thing, there's a chance of failure of burning all this money. So that's the hard thing. That's where the rubber meets the road.

Starting point is 00:16:11 And I don't want to say that no one has conviction. A lot of investors and a lot of VC funds, fund managers, there are many that will have that level of, call it risk appetite. And, you know, but I would say that your job is to make money. So if you see a path to making money, you're likely going to take that path and you're not going to remain committed to that, you know, longer form bet that is very likely going to fail. Today's episode is sponsored by Badaw Insurance Group.

Starting point is 00:16:43 Badaw Insurance Group is run by my close friend, Amit Badaw, who insures me both personally and at the corporate level. Most people are not aware of the inherent conflicts in insurance, where insurance agents are incentivized to send their clients to the most expensive option. Amit has always been an incredible partner to me and 10X Capital, driving down our fees considerably while providing a premium solution. I am proud to personally endorse Amit, and I ask that you consider using Badaw Insurance Group for your next insurance need, whether it be DNO, cyber, or even personal car and home insurance.

Starting point is 00:17:14 You could email Amit at amit at luxstr.com. That's A-H-M-E-T at L-U-X hyphen S-T-R dot com. Thank you. It reminds me of the conflict in asset management. By the time you're on your fourth fund, your $500 million fund, and you still haven't really proven yourself as a venture capitalist. So there's a huge disincentive to take wild bets and to be super concentrated. Typically, LPs want 15% to 20% concentration limits in any one position.

Starting point is 00:17:46 The problem is you're going out and you're fundraising based on your first two funds that haven't yet generated DPI. So there's a huge counter incentive there. What would need to change in terms of in the venture market or in biotech where you're very involved in order to create? Is it a capital markets solution? Is it a LP type makeup? What would have to change in order to incentivize more long-term thinking? I don't think have to change structurally as a guiding principle is the right thing to say. I do think the markets are efficient. So I do think the markets will evolve. So I do think the markets will evolve. So if you look at what's happened over the past 10 years,

Starting point is 00:18:30 a top decile venture performance hurdle is probably 3x. Top decile, top 5%, I don't know, over the past 10 years. In the past 10 years, if you bought the top 10 stocks on the NASDAQ, you would have made 10X. Okay, it's a crazy statistic. So, which makes me kick myself a lot for having not done that, by the way. But think about it as an asset allocator.

Starting point is 00:19:01 I look at that return profile and I say, man, all these guys are supposed to be so smart, outperforming, creating alpha, and only the top 5% can get 3x. And I could have just bought public companies and made 10x using a very simple rubric on how to invest my capital in technology. So the markets will kind of realize that, number one, I would say you probably need to concentrate capital and you need to concentrate managers. And that will evolve in the market. And maybe there's too much money in venture to allow that to happen. Remember, Google was born out of the dot-com bubble collapse. So there was a dearth

Starting point is 00:19:46 of capital during that time. So there was a concentration of talent that was enabled by this absence of venture capital and this continued evolution of the internet. There weren't a hundred startups getting funded a week during the era that Google kind of achieved, you know, it's runaway flywheel business in that 98 to 03 timeframe, those core first five years. So the best talent wasn't being competed away with, you know, venture dollars to start another company. The talent was trying to hop on board and concentrate intellect and concentrate capacity into one core mission. And they were able to do that successfully because of the absence of capital in the market, I would argue.

Starting point is 00:20:32 Today, there's so much capital in the market. Literally anyone that's got some experience building foundational models in AI can go and start a company and a venture capitalist will write them a check. So there's a diffusion of problem solving taking place. So there's a diffusion of problem solving taking place. There isn't a concentration of problem solving taking place. So I think that as capital comes out of the private markets, which is inevitable over the next couple of years,

Starting point is 00:20:54 you see this concentration opportunity arise where maybe fewer organizations with more people per organization and more capital per organization can concentrate their efforts and focus around solving bigger problems. And I think maybe that trend will kind of start to take place because LPs are only going to put up with underperformance for so long before they start canceling commitments. And so I think there'll be fewer managers and ideally

Starting point is 00:21:23 fewer companies solving bigger problems with more capital. Obviously, it's a flywheel in terms of top companies a few weeks ago, just because it's one of these, to this point, I really want to concentrate my capital, my time, and people into this. So they're having an incredible, they have no problem recruiting this company. And it's an amazing juxtaposition to other companies that are less proven and have less traction, have less of an audacious objective that are competing for talent. You see it at other companies in Silicon Valley that have these runaway type technologies where talent begats talent. Great people start to work there and everyone's like, oh my gosh, I want to work there too. And you've seen this time and time again in Silicon Valley

Starting point is 00:22:23 where talent does accrue. I mean, the power law plays out in so many ways. Power laws, perhaps returns, plays out in, you know, how your capital is returned to you, but also how talent accrues to companies over time. And so, yeah, I think we see that. How was your conversation with your LPs on the production board when you decided to join Ohalo. Take me through the decision-making process. So, you know, we have run a venture foundry since 2017 and have been an investor. So we have made some investments where we're a typical minority venture investor. And then we've run a foundry program where we will start companies from scratch, usually from a thesis that we've developed, recruiting a team, a technical team to run a proof of concept cycle. And as things work, put more capital in and continue to make progress. And so Ohalo is a plant gene editing company. So we use CRISPR technology to do gene editing in plants. But we had some very, the CTO that we started the business with, the founder, Judd Ward,

Starting point is 00:23:29 had these very novel concepts on what he wanted to do. And there were so many things that had to go right for us to even be able to know if this thing worked. And then we wouldn't even know if it would work until they got them all right. And so after continuing to invest in this thing, we've put tens of millions of dollars into this business over the last four and a half years. And we continue to support it. And now, as of this year, not only were they able to do the thing they set out to do, but

Starting point is 00:23:59 the thesis was proven right. And biologically, this big idea worked. It's a game changer in agriculture, like massive, massive increase in yield based on some changes to the plant that are realized through gene editing as a tool. And when you compare the impact that this business can have and the advantage we have and the dollars that can arise if we are correct, and as we deliver the results in the market, it starts to be a multiple of everything else combined. And so much like you see in other portfolios, there's a power law of returns

Starting point is 00:24:42 that much of the value arises from just a handful of companies. I mean, look at the private markets today. Many LPs are sitting around waiting for liquidity on ByteDance and Stripe, SpaceX, and probably one or two other companies. And so there's probably less than half a dozen companies that if they go liquid, it will unlock this DPI number for a lot of venture funds and for the performance that LPs are going to realize. So as I started to see this play out with Ohalo, I said, man, I think this is going to be the one thing that's going to be many, many multiples on everything else combined. We need to make sure that we put more of our capital in and spend all of our time on it.

Starting point is 00:25:23 And that's why I'm going to go run it as CEO, because it has that degree of outcome. And so my investors, my LPs are 100% supportive because they know the portfolio. They know what I'm saying. They've been following this business with me for the past four and a half years. And so to actually see the results come about makes them say, you're right. This is the power law playing out. We need to go all in. And I will say that our Foundry project, we've had many that haven't worked that we've put money into, tens of millions of dollars into, and that we've written off. And so, you know, we were asking ourselves the question, does the Foundry program make sense to continue in its current form? And then all it took was one winner. And you're like, oh,

Starting point is 00:26:03 wait, hold on a second. Maybe it does work. This is pretty awesome. Whereas before that, it was like, oh, my gosh, like this thing, this whole thing, you know, may not be working. Is that the inherent issue with the foundry is that not enough shots on goal? So you're not able to probabilistically hit a power law outcome? There's a bigger problem with foundry, which is, you know, who's the founder. And, you know, I have certainly learned this lesson the hard way over the past seven years that, you know, I was very negative on the term founder because I always saw that there were companies, that there were people around at the beginning and then they left. And then the other people that came in and the later

Starting point is 00:26:44 parts of the company created all the value. And then the other people that came in in the later parts of the company created all the value. And then the people that came in after that created all the value. And at the end of the day, the original idea was pivoted away from completely. The original team was completely gone. And so I always question why we use this term sounder. But I don't think that the term sounder

Starting point is 00:27:02 necessarily should refer to the person that started the business or had the original idea. In fact, I think that person with that definition is worthless. The founder is the person who the energy to drive, to innovate, and change the business comes from, and that could be a different person. Every business is persistently failing. The person who persists through the failure and drives the organization with a new vision and a new set of big objectives and organizing principles to achieve those objectives, even through all the failure, even through the hardship, even through the dearth of capital, even through the valley of death, is the person that should be called the founder.

Starting point is 00:27:45 And by the way, multiple people can act like that in an organization and I think can be deemed founders. So I think that every day there's an opportunity to have someone who's called a founder be at a company and every individual could be a founder at the company if they embody those principles. So I take a little bit of a nuanced definition of the term founder, but I think if you're starting a company as an institution and then trying to hire employees to work on it, I don't know if those employees necessarily embody founders like principles. And that's what makes the foundry programs generally challenging, is you've got to know

Starting point is 00:28:19 who the founder is. The kind of people that get hired to work on a quote foundry project that an institution starts are generally not the kind of people who embody the personality and characteristics necessary to act like true founders and so those folks are usually looking for less risk and more security and more comfort and the ability to go home at five o'clock and they don't actually own the outcome because it's not their individual business and so so I think that's really key as to why a lot of institutional foundry programs are challenged very deeply. Do you think that's impossible to disentangle the downside protection with the founder spirit? Yes. I'll also say, I think like, like really great entrepreneurs. I kind of made this comment the other day, but it's, it's like, it's not just that they have a tolerance for pain, but they're pain seeking. There's like a weird trait. It's not weird. There's a trait. People that like to run marathons are not running marathons because they like to feel good. And it's not even the accomplishment of running the

Starting point is 00:29:32 marathon. That's a motivating factor. But there's an orientation where going through the pain of running the marathon is part of the process for them. And I think that that's necessary for founders. And someone who's had persistent success in their career and in their life, they got to a good school, they got good grades, etc., etc., they've always followed the well-worn path. They've done what the system said, if you do X, you will get Y. And someone who is generally going to do X because they know they're going to get Y is not necessarily someone who's going to go do A and not know if they're going to get Y is not necessarily someone who's going to go do A and not know if they're going to get B. That's a very different type of person because part of

Starting point is 00:30:10 the pain is going to walk through thorn bushes and over hot lava and all the stuff that goes on with building a business. And so I think that's like a really critical kind of element. Reminds me of B players hire A players who founded by companies that are run by C players. Yeah, right. C students. I was a C student, by the way. You were a C student at Cal or in high school? I think I was like a 2.7 or 6 or something, 2.7 GPA.

Starting point is 00:30:41 I mean, I was not like... Is that because you were focused only on a couple subjects? How were you a C student? Well, in lab classes, I got an A plus. In classes where you go to a lecture hall and they lecture you and then you take an exam at the end of the semester, I got like C minuses because it just wasn't a good sitch for me to just be told stuff and then to be able to repeat what I was told. But when I was set out to solving a problem like a lab, and then you have to go figure out a way to solve the problem on your own, and you learn through that process,

Starting point is 00:31:09 that was a good fit for me personally. And I think I've seen that with other people where, you know, people that are, can frame the problem and then go and figure out a solution to that problem. Those folks generally want to go do that active, you know, the active learning process. And I get great joy out of constantly learning. I mean, I've never stopped trying to learn about new subjects, new areas of interest. And that's a key part of that learning process for me is getting your hands dirty to find the answer. So in terms of the production board, tell me a little bit about your portfolio construction and how has that changed over the last six years? I was naive because I started two companies after Google. And one I was the CEO of, and we had a successful exit. And then the other one,

Starting point is 00:31:59 I was the chairman and it ended up going public via SPAC before SPACs were a four-letter word. So, you know, it generally had a good outcome for everyone. But I was, like I always said, I'm never going to let a company fail. I had an angel investing portfolio where I just wrote checks and I made like, I don't know, like an 11X or 12X multiple on that portfolio of angel investments I've made. Fairly diffuse, by the way, when I don't do anything.

Starting point is 00:32:24 Sometimes they'll call me and ask me a question and I'll help them and support them, but I've just written checks. The companies that then I started making direct investing in and being active in, when I started to see failure, I early on made the mistake that I've heard a lot of people make, which is I don't want to allow it to fail. That's not an option. I can't let that happen. As an investor versus being an operator, you have to be more disciplined. You have to allow the things that are failing to not consume your time and capital. And you have to focus on the things that are doing well, where you can be useful and continue to concentrate capital.

Starting point is 00:33:07 I remember I went to an LP meeting for, I won't name the firm, but it's a very large Silicon Valley firm that's been around for a while. You know, one of the top firms in terms of AUM in the Valley. And they showed an analysis that they had put something like 40% of their capital in flat rounds or down rounds to support portfolio companies that needed help, needed a bridge or needed support in a recap or something like that. And net on that chunk of the portfolio, they locked money. On the rest of the portfolio where things were up rounds and things were going well and they put more money in, they made a lot of money. And if they had taken the 40%

Starting point is 00:33:50 that they put into flat rounds and down rounds and put it into the winners, their portfolio performance would have doubled. And it was a key lesson that they were sharing with their LP base at this LP meeting I was at. How many companies roughly was this 40%? Hundreds. Tens? Hundreds. Very statistically significant. Very statistically significant. And it was a really important lesson that I didn't listen to.

Starting point is 00:34:15 Because when I went through, you know, my own investing track, I am so convinced that I cannot let things fail because that's how I operated as an entrepreneur. It's very hard to change your mindset to then say, I am going to keep this thing alive because if we can pull this one thing off, I know we can get there. And then we'll have this breakthrough and here's another chunk of money. Okay, if you guys do this one thing, boom. And that's a very bad pattern. It doesn't work as an investor. It works as an operator. And as an operator, you have more dimensions of freedom to do things like don't pay anyone and go close this one big deal and all these things that you can pull off, cut the lease,

Starting point is 00:34:54 don't pay bills, all these things that you can do to make sure the company doesn't die and to make sure it succeeds. As an investor, you're not running the business. So all you can do is write a check. That's your one toggle switch. Write a check or fire the CEO. And if you fire the CEO, you got to go hire a new one. So suddenly you got to go do a lot of work.

Starting point is 00:35:13 And so I think for years, I made the mistake of making sure that nothing failed, which was a naive approximation for my success as an entrepreneur. And since then, I've realized in watching my friends that have done this well and funds, I'm friends with a lot of GPs and seen how others have behaved as well. When folks concentrate capital in the winners, it is a far better use of time and energy and capital than trying to be a good supportive partner on the things that aren't working and seeing if you can get them to live. So I've followed that model.

Starting point is 00:35:48 And that's why at this point, I'm going all in with my time and my capital in one business in our portfolio that I think could be a multiplier on our portfolio value. And, you know, not trying to be diffuse and make sure that everything succeeds because, you know, I think those things have to discover the life of their own lives. Is there a use case where companies can be turned around from the investor seat?

Starting point is 00:36:12 Yes, if you are putting in a CEO that you can directly manage, but I don't think so from an investor's seat. I think it's operationally necessary to be in there and operate the business. So private equity firms that do turnarounds, they're typically able to do it with scale, meaning you can't do it with a business that's not generating significant revenue, significant customers, and there's traction. There's something, some base to work from where you can chip away things to uncover gold. But if you're trying to get through some valley of death, I don't think so. The CEO ultimately determines the fate of the company. And if you can't replace the CEO, it's very difficult to do that. And of course, VCs are not typically actively replacing CEOs for better or for worse. So let's talk on Ohalo. So I know you're in semi-stealth mode, but what is the problem set that you're going after around food security?

Starting point is 00:37:17 Half the land acres on Earth, or about a third of the land acres on Earth, excluding the ocean, is used for agriculture today. Pasture land is a good chunk of that, but the rest is growing crops. And so if you think about what we're doing as a species is we're converting sunlight, water, CO2, and stuff in the soil. We're doing molecular conversion using these machines called plants. And these machines called plants suck up molecules and convert them into things that we want. And they're really efficient because they run off the power of the sun.

Starting point is 00:37:52 So they're natural solar cells. And so we have these amazing machines. Those machines are super inefficient today relative to their potential in terms of their conversion efficiency and making stuff. You know, like in the US, the average yield on corn, you're getting about 175 bushels per acre. In China, you're getting 110 bushels per acre. In Kenya, you're getting 70 bushels an acre with the same soil and the same climate conditions in those three areas. And in the US, while the average is 175, there are farmers who regularly get over 300 bushels. So there's

Starting point is 00:38:25 a huge difference in terms of the potential on how efficiently we can produce calories and nutrients that humans need. And this is also a potential huge carbon sink. We can take a lot of carbon out of the atmosphere. So we can be more resource efficient. We can make food at a lower cost. We can be more efficient with our land. We can take carbon out of the atmosphere. All we have to do is get the right machines in the soil to do the right things. And so that's what genomics unlocks. They're understanding that all these machines are programmed by a software called the genome. And the genome of that plant, as of 10 years ago, can be reprogrammed, can be edited using CRISPR systems.

Starting point is 00:39:06 So that's the high-level kind of philosophy of what's possible. And we're not the only company in that sense. What we have come up with at this business is this crazy concept about five years ago on a specific set of edits we could make to a plant to get it to do something that would massively increase its yield, how much biomass it accumulates, how much it grows. And if we could unlock that growth potential, we would have a step change of not just 1% a year, which is the average gain in yield that we see in agriculture for the last 100 years, but potentially 50% or 100% in one year. And that's what this team has unlocked is using this gene editing technology that emerged a decade ago, picking the right edits to make, and then getting the plant to grow back

Starting point is 00:39:52 into a plant. And then seeing this outcome that we had theorized, all of that has now been proven with this business. And that's why I've gone in full time. So that's the general kind of framing of the big opportunity. Are you the technology? Are you the genes? Are you production? Are you the farms? Are you vertically integrated?

Starting point is 00:40:12 Tell me a little bit about the business model. So the business model is the farmer is the customer. And we make seed and plants that the farmers can then use to grow stuff. And so we edit the genome of the plant. And when I say this, it's not like haphazard editing. Remember, you're just taking a gene that's already in nature. And if you were to breed a plant, meaning you cross it with another plant and look at the genome, the next generation, you would see mutations in the genome naturally arise. So the edits that we're making are things that would naturally arise through plant breeding or evolution. We're just accelerating them by doing them

Starting point is 00:40:49 specifically and quickly using CRISPR rather than waiting millions of years for them to arise via nature. And so we make those edits and then we make seed and we sell it to farmers and farmers put their crop on the ground and they grow stuff and suddenly their economics improve, they double their profit and food costs go down and water use goes down and carbon sequestration into biomass conversion goes up and land use goes down and all the benefits that I think over time will arise, including returning acres to a more biodiverse state and making food cheaper and making calories more available and so on. In the last two years, since COVID, we've unfortunately seen a reversal in global malnutrition statistics. We were at 600 million people living on less than 1500 calories a day just before COVID. And now we're back up to over a billion people living on less than 1500 calories a day. So we do have a calorie

Starting point is 00:41:43 deficiency issue globally, even though we make enough So, you know, we do have a calorie deficiency issue globally, even though we make enough calories to feed everyone. We have to get high yielding crops in the right markets that people can survive. Climate change is challenging a lot of these regions on being able to grow efficiently. So there's a lot of socioeconomic benefits that arise from being able to do this across multiple crops.

Starting point is 00:42:03 You've went from being a banker to working at Google to starting companies to being a VC and now back to being operator. What is it like to be back in the role of operator and what are the pros and cons of running a business versus being an investor? I really like the fact that I can make decisions and drive outcomes.

Starting point is 00:42:23 My experience over the last seven years has been marred by frustration being a board member that's not active as an operator. This is a challenge a lot of VCs that come from entrepreneurism face is you're used to building stuff and now you have to tell people what you think without being able to do anything.

Starting point is 00:42:43 That's a very different environment. I'm a creative person. So if on a given day, I'm not making something or creating something or changing something, I personally, psychologically am challenged on the impact I'm having. And so for me, being able to motivate an outcome each day on a series of things that I think are helping set us

Starting point is 00:43:06 on the right course and achieve our objectives. I've had a lot of board experience where I've suggested doing something and the CEO doesn't agree and they do something different. Things don't work out. And I bang my head on the wall and I'm like, why didn't they listen? And you know, you can't, it's like having a child. You can't always be telling them what to do and how to do things. You can provide some framework and provide some experience and, you know, share your lessons learned and share your advice. But, you know, they're going to decide to do what they want to do. So for me, this is different being able to step in as CEO of this business.

Starting point is 00:43:37 And remember, the production board owns a majority of the company. So it's not like there's a set of founders or investors that are running the business today. It's always been a business that we've been very close to. So it's a very natural fit also to go in because I've been very active with the business from the beginning. And so now to be able to go in and help on a day-to-day is very rewarding for me. And I just love seeing the impact of the change. Do you think on a neurological basis, you've missed the quick feedback loop of being a founder? Do you believe there's something like that where as a board member, you have to wait every quarter to see results? Correct.

Starting point is 00:44:17 And on the other hand, obviously being an investor, you're able to see a lot of different things. You get more variety in your life. Are you still staying involved in other companies? And does that still bring you joy as an operator today? Yeah. So I'm on a few boards. The TBB portfolio, I have two partners. And so we're splitting board responsibilities on our existing portfolio. Risa stacks on a number of their life sciences boards and Barat's on a number of their consumer boards. And then I'm staying on two of our agricultural technology company boards, Laboro and Pattern Ag. So that's my active board work. And so I'll continue to support those companies as a board member. I do think that I can be valuable as a board member. The level of impact I can have

Starting point is 00:45:08 is different when being a CEO. But as a board member, I can say this objectively, I'm not like super tied up and ego wise on this, I think I can add more value than some other random VC sitting in that same seat for these particular businesses. So that's where I kind of try and play a role and stay on the boards where I can be, what I would say is uniquely valuable with my experience in the markets and the types of business that they're operating. Well, David, this has been one of the most interesting podcasts. What would be your message to founders, operators, investors?

Starting point is 00:45:41 What wisdom can you impart to the group from all your diverse experiences? I think that folks need to be more risk-seeking and less risk-averse as investors and as operators and more willing and comfortable and able to join existing teams and concentrate attention and capital in big, challenging ideas that can have a big outsized impact if they are realized. Not every opportunity should be hedged away to make money. I think we have to accept that we need to take big risks that have high probability of failure and concentrate a large amount of capital in a few of those. And if we have a

Starting point is 00:46:25 portfolio of those big bets, all it takes is a handful of them working that, you know, obviously it makes up for everything else. But I think it's really important from a return perspective, if you just look at the last 10 years, that we need to expand our horizon away from software and applications and front-end stuff that can make money very quickly and really try and take on more challenging, technically difficult businesses that can accelerate outcomes for humanity. And so I would just encourage everyone to be much more risk-seeking. If we're going to have a venture landscape, if we're going to have a venture capital market that's going to perform as an asset class and a startup ecosystem that's going to perform from a returns perspective, we have to have big outsized bets on big outsized ideas. So, yeah, I would just encourage everyone to continue to be risk-seeking.

Starting point is 00:47:22 I know it's hard in a low interest rate environment, but. Further to your point, you have a lot of LPs. I interview them and they say every single fund needs to have 30 companies and they're in 30 funds. You essentially have 900 portfolio companies. There's absolutely no reason why you need to have 900. You start to hit power law pretty predictably at about 200, 300. David, this has been really informative really, really informative and a pleasure and look forward to meeting sometime soon.

Starting point is 00:47:49 I know you're busy with the company and we'll support you from afar as well. And thank you for jumping on the Limited Partner Podcast. Thanks for having me. By popular demand, the Limited Partner Podcast has officially launched our newsletter

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Investing Billions - E31: David Friedberg on How To Build a Billion Dollar Startup

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